No Signboard Holdings Ltd

No Signboard Holdings Ltd ("No Signboard" or the "Company") is offering 65,734,500 shares for its IPO on Catalist, of which the vendor is selling 15,734,500 New Shares and 50,000,000 Vendor Shares. The bulk of the offering are via placement with only 2.5m shares are available for retail investors via the ATM. The offering price values No Signboard at $129.5m.

The IPO will close on 28 Nov 2017 at 12pm. You can find a copy of the prospectus here.

Principal Business

It is ironic that 无招牌 or No Signboard is actually a brand now. The restaurant was founded by Madam Ong Kim Hoi and they could not even afford a proper sign and just painted a plank and patrons soon referred to it as "无招牌". See the Straits Time article here. You can also read about how they started and their early struggles as well as their expensive fancy cars here.

I was a fan and patron of their "white pepper crabs" at Oasis (hmm that reveal my age) and subsequently from their Geylang outlet. However, that has recently been displaced by the white pepper crab from JB Ah Meng.  

The Company currently owns and operates 3 restaurants under the "No Signboard Seafood" brand in Esplanade, Vivocity and The Central @ Clarke Quay with one restaurant under a franchise agreement. Hmm.... i never realise the one at Geylang is under a franchise?! Let's see if we can find out more later 🤔 

There are two lesser known business lines:

• In-house Draft Denmark brand of premium beers sold at 150 points of sale in Singapore
• Powered by No Signboard ready to eat meals intended for distribution via vending machines

Future Business Plans

The Company listed its future plans as follows:

• Establish a casual dining concept targeting younger and family oriented consumers with two restaurants coming on in 2H2018 
• Develop the beer business by expanding its range of beers and setting up its own brewery
• Distribute its "ready meals" through vending machines and supermarkets
• Expand through franchising, acquisitions, joint ventures of strategic alliances

Financial Highlights

The revenue has been stagnant over the last 2 years and the 9M 2017 revenue indicate the trend is likely to continue. However, the profit margins has been improving during this period to 38.7% for 9M2017.

Based on the historical pro-forma EPS of 1.52 cents, the Company is being listed at a fully diluted PER of 18.4x. Assuming profit level for FY 2017 remained at 1.79 Singapore cents (using 9M 2017 divide by 3 x 4), the PER will be 15.6x and the dividend yield will be 1.9% (30% x 1.79 divide by 28 cents).

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Investors should know that the NAV per share of the company post listing is 4.90 cents (versus the IPO price of 28 cents). As such, they are buying this business at a premium of 471.4% (see prospectus page 32 and page 60) or price to book of around 5.7x

Shareholders

The Company also placed out 59,265,500 Cornerstone Shares (new shares). Cornerstone investors included :
Hedge Fund - Asian Opportunities Absolute Return Master Fund
Wealthy individuals - Goi Kok Ming (son of the Popiah King, Sam Goi) and David Lam (founder of Goodpack)
Asset Managers - Lion Global, JP Morgan Asset Managment, LB Asset Management and
Family Offices - Qilin Asset Management and OSC Invesments Capital. 

Cornerstone investors will control 12.8%, with the Lim Siblings taking 73% and the public holding the remaining 14.2%.

As you can tell from the shareholders list, this issuance will be tightly controlled. Given that it has been placed out well with public holders forming only a small % of the offering, the share price is likely to debut well.

Use of Proceeds

What I like about the Company

• Well known brand - The No Signboard Seafood brand is well known for its white pepper crabs and delicious seafood. The Company is currently using this "brand" to expand into quick meals
• Highly cash flow generative - This is a highly cashflow generative business with $8m in FY2015 and $7.3m in FY2016. This high cashflow will allow the Company to expand into other business lines
• Experienced management team - The team is led by Sam Lim, the CEO, and being in the F&B line for 20 years, he should have weathered through the different economic cycles. 
• The Company is almost debt free - Post the IPO, the Company will have $24m cash and about $1.1m of debt. This is probably due to the high cash flow generated by the operations 
• Intention to pay dividends - The Company also intends to distribute at least 30% of its net profit after tax as dividends in 2018 and 2019 to shareholders
• Strong cornerstone investors - One good thing about this IPO is there are no pre-IPO investors cashing out and all the other cornerstone and directors are coming in at the same IPO price. The cornerstone investors can help ensure that the price stays "above water" by limiting the free float in the market

Some of my concerns

• Declining revenue and stagnating profitability - The revenue has been declining for the last 3 years with profitability fluctuating between $6.5m to $9m. The future prospects doesn't seem exciting. Other than the new causal dining concept, it is tough to visualise at this juncture, how the beer and ready-meal business is able to scale up significantly. As you have seen from the results, the Company has not been able to expand beyond its "No Signboard Seafood" heritage 
• Owners are cashing out - The owners are cashing out of this IPO. While some may see this as "giving investors" a chance to invest in the business, the fact of the matter is that the owners are selling out at a high valuation and "de-risking" themselves while holding on to a 73% stake. Investors are now taking on the risk of expanding the business into beer and ready meals segment.
• Overseas expansion failures - The Company tried to expand to Hong Kong, Jakarta and Macau and the experiences had been humbling. They have not been able to crack the markets beyond Singapore. I hope the lessons learnt from these experiences will come in useful when they use the shareholders' funds to expand overseas but the prior forays has been less than encouraging
• Future prospects is unclear - The beer business is newly acquired and the ready-meals business are untested. As you can see from the pro forma statements, acquiring the beer business has been dilutive to its earnings. I am also not sure why the Company is venturing into beer brewing business as it is highly competitive and dominated by a few big brands that distribute brands such as Heneiken and Tiger
• Other conflict of interest - Besides the "loss of crown jewel", the other potential conflict of interest is the Ma2 Shop that operates vending machines selling ready meals in Singapore. The vendor has a 51% stake in Ma2! (see the write up on Mattar Road No Signboard below)
• Unproven track record of OCBC - It is surprising to see OCBC back in the IPO game as they have not been able to gain any meaningful toe-hold into this business. Let's see how No Signboard perform in the coming months before we decide if OCBC is back in the IPO business (For avoidance of doubt - i was referring to OCBC being the sole lead in the Catalist segment) 

Why is the "Crown Jewel" - Mattar Road No Signboard Seafood Restaurant excluded?

• Loss of crown jewel - I was frankly quite "disturbed" to discover that the restaurant in Geylang is actually owned by the relatives of the founders. This is probably one of the most profitable outlets under No Signboard. The franchise arrangement is new as it was only established on 1 Nov 2017. The franchise fee is only $12,000 a month with no revenue sharing. I will be appalled if No Signboard intend to build up its franchise model using the current arrangement. I would also have preferred they cleaned up this arrangement or acquire the Geylang outlet prior to its IPO. The most "funny" part is that the Company was then "granted" a license to use the premises of Mattar Road No Signboard Seafood Restaurant at $12,000 per month! That effectively means that franchised outlet is not paying any franchise fee at all... now it leaves a big question mark in my head!! Assuming each outlet produces a net profit of at least $2.6m (and my gut feel is that the Geylang outlet is one of the most profitable outlet), it effectively allows the crown jewel to enjoy the benefits of the "brand" without having to pay any royalty fees. The fact that the Company has the right of first refusal to future sale of this outlet is of no comfort to me! Can the Independent directors address this concern please? 

Peer Valuation

RE&S Holdings debut with a bang at 35.5 cents, opening at 61% above the issuance price of 22 cents. It has since dropped down to 30 cents. Can No Signboard do the same?

The closest peer to me in the same line of business is Jumbo. Jumbo is famous for its chilli crab. Perhaps the next one to list is the famous black pepper crab at Joo Chiat? 😂

Assuming it trades to Jumbo valuation of around 18-22x PE, the fair value range will be between 32 cents to 40 cents. 

My Chilli Rating

From my write up, you will know that i used to like the white pepper crab so sentimental value do play a small part. I like the "almost" debt free business that is highly cash flow generative. A few big questions marks for me will be the ability of No Signboard to scale up its business beyond the 3 restaurants. The previous venture overseas has been a disaster! I also have a big question mark as to why the Mattar Road No Signboard was "excluded" and being allowed to use the brand for free with no franchise fee and no revenue sharing at all. 

As such, i will give it a 2 chilli rating for the debut and i am going to deduct one chilli for the longer term due to the perceived lack of governance on the Mattar Road outlet and the poor track record of expanding its business beyond the local shores.

Happy White Peppering 

Polling Time - Are you going to eat the White Pepper Crabs?

You can do the polling here