For information only. Not spending too much time as the placement is already closed with no public tranche.
Samurai 2K Aerosol Limited ("Samurai 2K" or the "Company") is placing out 20m shares at $0.20 each for a listing on Catalist. There is no public tranche and trading will commence on 16 Jan 2017 at 9 am with a market cap of $20m. The link to the prospectus is
here.
Principal Activities
The Company is headquartered in Malaysia and is a high performance aerosol coating specialist for automotive refinishing and refurbishing industry. Samurai 2K manufactures, distributes and markets products under its own brand.
According to the prospectus, the Company has a 27% market share in Malaysia and 5% market share in Indonesia in 2015.
Products segments and brands
The picture above shows what the aerosol is used for and the Company is probably alluding that its products are mainly used on motorcycles (
Trains are not included). The brands include Samurai, Ninjusu, Bushido, CanArt etc. Seems like the owner is a fan of Japan. The products are manufactured in Johor and distributed to more than 4 countries.
Market Share
With a focus in this region, the addressable market share for two wheelers seemed large enough for the Company to continue its growth trajectory here.
Financial Highlights
The Company generated RM 30.6m revenue and a net profit of RM 5.4m for FY2016. Net profit increased by 3x from FY2014. What i like about the trend is that it is increasingly gaining revenues and inroads into Indonesia in FY2016.
However, while 1Q 2017 showed the revenue trend to be increasing, what is worrying is the net profit and margin dropped quite significantly to RM291k and 3.6% (shown by the red box above). The cause of the drop is due to huge increase in admin expenses The increase in admin expenses in Q1 FY 17 was attributed to increase in staff cost and legal and professional fees for the listing, which i assume is one-off.
Future Plans
The Company intends to upgrade its production facilities, focus on R&D and increase spending on marketing and branding as well as expand through acquisition.
Valuation
According to the prospectus, assuming the service agreement is in place, the Company is listing at a historical PER of 13.5x. The NAV per share is around 19.2 sen (or S$0.06) at today's exchange rate versus the IPO price of $0.20.
The gross profit grew by 65% in Q1 but the profit dropped due to increase in admin expenses which some like staff cost are recurring while others like listing expenses is probably one-off. The listing status will also attract higher compliance and directors fees.
I am not privy to the financial forecasts. Assuming EPS hovers plus or minus 20% for FY17, the EPS in Malaysian sen will be between 4.32 (1.32 Singapore cents) to 6.5 (2.08 S cents). A PER multiple of 11x will imply a price of around 14 to 23 cents.
What I like about the Company
- I like companies that have its own brands and products and some patents. At the end of the day, the brand will help the Company differentiates itself from competitors
- The addressable market for motorcycles is large in this part of the world (SEA) and if Samurai is able to gain market share, it will bode well for the Company.
- Strong growth trajectory in both revenue and profitability over the last 3 years if the Company can execute well in Indonesia and potentially Vietnam.
- Well diversified customer base
Some of my concerns
- Currency translation risk. While the Company cost base is in ringgit, it obtains some of its materials in US$. In addition, it derives most of its revenue from Malaysia and Indonesia as well. The movements of MYR and IDR against the SGD will have implications on the reported numbers given its listing status here.
- It is a small cap stock with market cap of $20m and investors will "forget" about this Company over time. I looked at the stock performance of the last 10 Malaysian companies listed on SGX and frankly, the results is not encouraging. They suffer from lack of trading liquidity and low share price post listing.
- It operates Indonesia with a susidiary that is only 67% due to regulations. The 23% not held directly may cause issues if things do not work out between the parties
- It didn't "promise" to pay any dividends as part of the listing
- Given its small cap status, it is not surprising that the ownership is held by a few individuals. While it creates alignment of interest, the flip side is also true where investors can't really do much to "change" the Company and management is critical.
- It is a competitive market with strong competitors such as Nippon Paint.
My Chilli Ratings
The small cap status allows the Company to be able to place out the shares to close circle. If well executed, it will debut ok given the current positive market sentiments. Over the long run, as we see in many small cap Malaysian companies, the liquidity dries up and the share price crashed.
My ratings is meaningless since there is no public tranche. If there is a public tranche, i will probably give it a miss for reasons mentioned above.
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