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IPO Chilli Ratings

IPO Chilli Ratings
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Pasture Holdings Ltd

Pasture Holdings Ltd ("the Company" or "Pasture") is a pharmaceutical products and medical supplies and devices company based in Singapore. The Company is offering 20m placement shares at $0.25 each via placement. The IPO will close on 7 June and list on 9 June and the market cap based on the IPO price is $33m.  Since there is no public offering, my coverage of this Company will be limited but I will highlight what potential investors may be keen to know. The Company supplies pharmaceutical products and medical supplies and devices to businesses and governments. The various products and services are listed below. The Company spent a fair bit of real estate (on the gatefold) to share the following: It has a tie up with McKesson (private label supply agreement) for medical, surgical supplies and devices that will expand its product portfolio  and distribution network It has a global footprint serving over 50 countries and targeting new markets such as India and Middle

HRnetGroup Limited

HRnetGroup Limited ("HRnet" or the "Company") is offering 89.482m shares for its IPO of which, 85.682m shares are via placement and 3.8m shares for the public offering. The IPO will close on 14 June at 12pm. The Company will have an over-allotment option of up to 11.1m shares in the event of strong demand.  The IPO will close on 14 June 2017 at 12pm with a market cap of approximately S$900m. Finally, we see a mainboard listing on SGX after so long! SGX must be heaving a sign of relief.

Principal Business

HRnet is one of the largest Asia-based recruitment agency outside Japan with a strong dominance in Singapore. The Company operates in 10 Asia growth cities with a highly diversified base of over 2,000 premium clients. The Company said it has "104" clients out of the Fortune 500 list.

Some of the key brands under HRnetGroup are as follows:

Financial Performance

The Company has grown its revenue strongly from S$324m to S$365m over the last 3 years and net profit has grown from S$37.9m to S$48.4m over the same period. The EPS, based on post IPO number of shares, for FY2016 is Singapore 4.06 cents.  That translate into a listing PER of around 22x. 

What i like about the Company
  • Largest Asia-based recruitment agency in Asia Pacific (ex-Japan) - The Company currently operates in 10 Asian based growth cities and is the highest revenue generating company in the Asia Pacific. The Company has a strong base in Singapore where it generated 57% of its revenue. This will provide the stable base from which it can expand overseas

  • Well diversified customer and revenue bases - That helps reduces the dependency and over-reliance on key policy matters. It is interesting to note that no single sector account for more than 16% of the Company's revenue
  • Strong track record - The Company has grown strongly over the last 24 years. Revenue grew from S$94m in FY2006 to S$48m in FY 2016 over the last 10 years. In fact, the Company led by Peter Sim, has been growing the Company and leading it to greater heights over the last 20 years. It is hard to imagine that he started out as a civil servant and he has done very well for himself, including bulldozing its competitors over the last 10 years!

  • Strong cashflow business - This is a highly cash generative business with positive cash flows from operating activities of more than S$53m in FY2016. In fact, i don't think the Company really need to list other than for the fact that the founder is 60 years old and listing can help ensure he builds a lasting legacy to either sell or pass on to the next generation
  • Dividend paying - HRnet intends to pay out 50% of its net profit after tax for FY2017 and FY2018 as dividends. Assuming EPS grow by 7% from 4.06 to 4.34 cents, that will translate into a dividend of Singapore 2.17 cents, implying a relatively decent yield of 2.4%
  • Strong list of pre-IPO and cornerstone investors - It is good to see Heliconia, as well as asset managers such as Aberdeen Asset Management, Affin Hwang, Credit Suisse and en-Japan, FIL, TechnoPro etc agreeing to be cornerstone investors. This bodes well for the Company and will probably help ensure there will be strong market support post its listing. The fact that HRnet went bookbuilding at between 80c to 90c and closed the book at the top range of the bookbuilding range means that demand for the IPO is extremely strong.
 Some of my key concerns
  • High valuation - Investors should be aware that the issuance is at a huge premium over its NAV as well as at 22x PER. This is an asset light business and investors are paying for the human capital that generates the profits
  • Ability to retain talent - The ability of the Company to retain talent is critical as that is where the profits are generated. While the prospectus mentioned that they have a strong incentive scheme that aligns the interest, nevertheless, this is a pretty mobile and relationship business. There is nothing to prevent employees from leaving the Company and starting a new recruitment business elsewhere
  • Tightly controlled company - With 73.35% controlled by SIMCO Global Ltd and the balance held by cornerstone or strategic investors, the public only hold 8.85% of the Company. Investors will have expect that liquidity will dry up over time and to trust the management to instill good corporate governance at the Company
  •  Execution risk - It is always easy to sell the North Asia story but definitely not easy to "carry it out".  The ability of HRNet to execute its stated strategies in North Asia will be the key risk for me
My Fair Value 

It is not easy to find local comparables in this sector as HRnet is a market leader in Singapore and Asia. In fact the study from Frost showed that it is a better run company vis-a-vis its peers in Asia. It is also interesting to note that en Japan Inc and TechnoPro are taking cornerstone stakes in the Company. This is probably a strategic investment for them, with a view to acquire HRNet in future should the Sims decide to cash out. 

This is definitely not a value buy but an opportunity to invest in such quality company is also hard to come by in Singapore. In this regard, there should be a "scarcity" premium. Assuming an EPS of 4.34 for FY2017 and a PER range of 28-32x, the "fair value" should be around Singapore 121 to 138 cents. 
Assuming a lower PE range of between 22-25x, the fair value should be 95 cents to 108 cents.

My Chill ratings

Given that it is priced at the top end of the range, with a strong set of cornerstone investors and richly traded peers, i believe HRnetGroup will debut very well. I quite like the Company for the reasons provided and would have given it a 3 chilli rating if not for the rich valuation. It is a 2 chilli rating for me and investors who apply at the ATM should be able to exit at a good profit.   

Happy HRing


kehyi said…
I think you forgot to mention: IPO price is $0.90 ...
Anonymous said…
Mr Ipo

Are you vested heavily in this Ipo? ?
Believe there is a slight type here... "Revenue grew from S$94m in FY2006 to S$48m in FY 2016 over the last 10 years."

Aside thank you for the IPO posts you have done over the years! Want to tell you I and many others appreciate it a lot.

Hope for many IPOs to come and seeing many more reviews from you.
Mr. IPO said…
Limited placement shares. Broker offered me 4,000 shares even though I placed at 150,000 shares demand.
Mr. IPO said…
Thanks for pointing that out. Appreciate you reading every line of it, makes me want to "add value" in my posting. Lol.

I enjoyed sharing my thoughts and meeting interesting people along the way. My little journey here has been extremely fruitful as well and knowing that I have helped in one way or another provides the extra motivation to continue. ^_^
TiOnG said…
hey just wanna say thanks for your efforts all these years!
Mr. IPO said…
You are most welcome!
Anonymous said…
Hey Mr IPO,
You're like the shepherd's oil lantern on a dark rainy night, leading the lost lambs( amateur investors who are unsure whether to tikam or not) on their way home to the safety of their pen. I have tendency to be more drama, but that's just my way of appreciating your sharing...
James said…
Looks like demand is high, hoot arh!!
Anonymous said…
Hey Mr IPO,

What do you think the debut price will be? Haha
Unknown said…

Can you share the survey results for HRNet IPO ?

First of all thank youfor your effort in updating and sharong insights to us all.

I had been following you for more than 2 years, but had only recently muster the courage (and enough dough) to start dabbling. I was a little lucky to get 2 lot of Kimly, which i am still holding. Did not manage to get Sanli, and bidded for HRnetGroup.

May i ask if it is the norm to bid for IPO and sell them to gain fast profit or it has value to hold certain stocks, such as more than 3% dividend yield. I am assuming those than open below bid price are also holdable to breakeven? Thank you.
Mr. IPO said…
Thanks! Didn't know I am now a shepherd 🤣
Mr. IPO said…
100 marks if sentiments bad 108 if bullish?
meng said…
Just to add on a few other points:-

1. I agree with Mr IPO that the valuation is not cheap. However, with the over-allotment option, I believe the banker will be able to perform price stabilisation. This will also give added comfort that the price will most likely be above the IPO price. The question is how much higher.

2. For the retail investors who are going to try their luck at the ATMs, if you are successful with 2,000 shares or 3,000 shares, assuming it trades at a premium of 10%, it will still give you a decent return on your capital after brokerage and commission cost.

3. Another point to note is that the company has pretty high "Other Income" derived from government grants and subsidies. They amounted to S$11.4 million (FY2016), S$8.1 million (FY2015) and S$4.4 million (FY2014). This government grants and subsidies represent more than 20% of the net profits for FY2016.

4. Interestingly, they also included their EBITDA number and EBITDA margin on page 52 of the prospectus. This additional information provided is not that common in prospectuses and this business does not have high depreciation or interest expense (and that they do not have any principal banker), thus the EBITDA numbers are pretty close to the profit before tax numbers for FY2014 to FY2016.

5. Dividends. As disclosed in the prospectus, in FY2016, they paid S$84.8 million in dividends, S$51.9 million as dividends in FY2015 and S$21.9 million as dividends in FY2014. Questions are whether these amount are acceptable or there are other reasons. They have also stated their intention to recommend and distribute dividends of 50 per cent of the net profits after tax (excluding exceptional items). Assuming the profits for FY2017 remain the same as FY2016's, on an enlarged share capital base of 1.022 billion shares, the yield will be approximately 2.2%.

6. 123GROW Plan. As at 31 December 2016, there are approximately S$7.24 million in outstanding Loyalty Fund Credits and typically, approval will be granted to employees who want to use their credits for purposes that are in the nature of self-improvement or investment, or for other significant personal purchases or funding needs or to subscribe for shares pursuant tot he GROW plan. Interesting.
Mr. IPO said…
Sorry - am traveling
Mr. IPO said…
Done. But a bit late 😌
Mr. IPO said…
It's all really up to you. Whatever floats your boat, no hard and fast rule. I sometimes cut loss when it opens below the ipo price, a lot depends on sentiments. Whether you hold for the long term depends on the fundamentals of the company.
Mr. IPO said…
Meng - Thanks for sharing your thoughts. One of those few who actually read from cover to cover ? 🤣 EBITDA is quite rare as you pointed and this is typically used by Private Equity firms. In this case, it is also very relevant as there are no machinery or fixed assets. The earnings are generated by human capital.
meng said…
Hi Mr IPO,

Hahaha, the prospectus is too thick to read from cover to cover. If you include the appendices, it will be more than 400 pages long. Basically, i just zoomed into a few critical sections. As you rightly pointed out, the asset of this company is human capital. However, when you looked into the financial analysis section, you cannot find any explanation on their staff salaries or any numbers to help link the salary expenses to the topline. This should be an important information as the rewards (in whatever form) will tie back to how much they have exceeded their targets, thus i commented that the 123GROW Plan is interesting.

With the cornerstones investors and i believe the bankers will over allot so that they can perform the price stabilising, the relatively small free float, and the positive market sentiments towards IPO for now, I believe this IPO should open above S$1.
roykim said…
Given that they are sitting on c.$100m cash and they are raising another c.$200m cash. They would be able to utilise $300m for M&A. This is so as their business model does not require intensive capex. The $200-300m used for acquisition would translate to inorganic growth in bottom line. ie. $10m to $15m. This comes to around 5.5cents in pro-forma EPS assuming utilisation of cash in hand. Based on the offering price, I reckon it is trading at c. 16x P/E. Given the sentiment in the market (bull market being intact), this is a relatively cheap valuation. On day 1, this could be easily $1.10 (implying a modest 20x p/e).
Anonymous said…
Didt get any from open ballot
Meng said…
Based on the current price, looks like the market thinks that it is fairly price at 90 cents.
Anonymous said…
Sg needs more pple like Your goodself