United Global Limited ("UGL" or the "Company") is placing out 42.8m shares at $0.25 each via placement. The IPO will close on 5 July 2016 at 12pm and be listed on 8 July at 9am. There is no public tranche. Based on the IPO price, the market cap is around S$70.7 million.
The Company is an established independent lubricant manufacturer and trader in lubricants and fluids. UGL operates a manufacturing facility in Singapore and supply products globally to customers in over 30 countries. It started operations in 1999 and now has in in-house brands such as "United Oil", "U Star Lube", "Bell1" and "HydroPure".
You can find more information about UGL at its website
here.
Key Financial Highlights
The revenue has been somewhat "stagnant" but it is heartening to see that margins has "improved" over the last 3 years with EPS doubling to 3.6 cents (from 1.8 cents).
The EPS for FY 2015 is Singapore 3 cents post IPO. This translate into a historical listing PER of 8.3x on a fully diluted basis, which in my view, is reasonable.
It is interesting from the above charts that trading is probably a "tough business" and the growth is coming from the manufacturing segment.
Forecast for FY 2016 (based on information as of 31 May 2016)
Actually i would have projected a higher EPS for FY2016 but in the prospectus, it was mentioned that the directors observed the following trend:
- Sales volume in manufacturing segment to increase moderately while trading segment to decrease. (Net impact is good as manufacturing has higher margins)
- Average selling price of products to be less than FY 2015
- Cost of sales and operating expenses to be stable
- Marketing and advertising costs to increase
- Overall profit margin to decrease marginally with sales for the first 5 months at $35.4m
- Revenue and profit may not at the level of that in FY2015
Based on the above, i assume the revenue come in at around $90m and if the net margins stays at around 6.2%, the profit will be around $5.6m. This will translate into EPS of around 1.98 cents, translating into a prospective PER of around 12.6x.
Use of proceeds
The purpose of the listing is to enhance its corporate profile and enable UGL to tap into the capital markets for funding business growth. The use of proceeds are as stated below:
What i like about the Company
- Established track record of more than 17 years with products certified by automotive or engine manufacturers such as Daimler, Volkswagen, Volvo & Porsche
- Increasing profit margin and profits increased from US$3.3m to US$6.2m with CAGR of 38%
- Diverse geographical and extensive network of distributors
- No pre-IPO investors "cashing out" of the Company
- Strategic cooperation with PLI, CNOOC and UNT Oil provides greater access into Indonesia, China and Malaysia respectively. The strategic with CNOOC for the PRC started in 2015 and may reap more benefits in future
- Directors "reducing" their pay checks for FY2016 from prior years
Some of my concerns
- Sell products to customers generally on a "cost-plus" basis, meaning while it can pass on any increase in price of raw materials, it has little pricing power
- Operates in a highly competitive market as barriers to entry to manufacturing segment are relatively low
- Dependent on a few major customers, suppliers and distributors
- The Company didn't state the intended "dividend policy" even though it took out US$20m over the last two financial years
- A lot of related party transactions where PLI is owned by Ety and her siblings as well as entities such as SMI, PLI, LNT, AEP, UOS, etc. I don't really like to see such RPT transactions as it is difficult to monitor and control them from investor's perspective.
- With 15% in the hands of public, the Company continued to be "family-owned"
Valuation
AP Oil is one of the peer comparison and it is currently trading at historical PER of around 9.4x PE. While UGL seemed attractively priced at historical PER of 8.3x. Assuming it trades up to that of its peers, this will mean a price of around 28 cents. However given the lower guidance for FY2016, if it trades based on forward PER, then UGL is likely to be worth less than its IPO price of 25 cents
My Chilli ratings
Since there is no public tranche, my IPO ratings is probably meaningless. While the Company is established with some nice tie up with CNOOC, it is probably too early to tell if that will work out. However, i don't like the potential conflicts arising from related party transactions, lack of dividend guidance and the FY2016 profit guidance.
Given the small float of 42.8m shares, it is also not difficult to place out the shares to friends and family of the founding family. I would expect the shares to be tightly controlled and likely to open above its IPO price if market sentiments continue to improve next week.
How it perform over the longer term will depend on how the tie up with CNOOC works out and whether the Related Party transactions is a non issue.
Based on the reasons above, I will give it a one chilli rating. Do note that I am vested.
Happy Oiling
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