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Wednesday, 5 December 2018

Medinex Limited

MediNex Limited ("Medinex" or the "Company") is offering 30m Placement Shares comprising 26m New Shares and 4m Vendor Shares at $0.25 each for a listing on Catalist. Since there is no public offering, i am not going to spend too much time and effort on this... as i am on holidays. πŸ˜‹ The IPO has closed and will be listed on 7 Dec with a market cap of $32.80m. 

Principal Business

The Company is a Singapore-based medical support services provider, specialising in providing professional support services to medical clinics. Services include setting up of clinics, facilitating applications of licenses and business support services such as account and tax agent services, etc. 

Financial Highlights

The beauty of this IPO is at least the Company is profitable. Based on the adjusted EPS of 1 Singapore cents, the PE is around 25x (29x if the service agreement is in place). 

Assuming EPS grow to 1.7 to 1.8 Singapore cents for FY2018, the PER will be between  around 13.8x to 14.7x.

The Company intends to distribute no less than 70% of its net profit after tax for FY2018, FY2019 and FY2020.

What I like about the Company
  • Company is profitable and likely to pay dividends - One good thing about this IPO is that at least it is profitable and the revenue and profitability is on an uptrend. Doctors are probably bad book keepers, so with IRAS cracking down on doctors evading or under-reporting their income, there will be an increase in demand for their services over the longer term. The Company also intends to pay 70% of its profits as dividends.
  • Healthcare sector is more resilient to a downturn - You need to see a doctor in good time and bad and doctors need such support services as well. The support services are usually quite sticky and recurring in nature
Some of my concerns
  • HC Surgical selling vendor shares sends a wrong signal - The IPO is via placement and i am not sure why HC surgical is "cashing" out at this point in time when sentiment is not exactly strong. While the amount is not really significant, it sends a wrong signal to the market
  • Poor market sentiments - The Company is listing at a terrible time where market sentiments is bad and prices are volatile globally. This would have a negative impact on the share trading post listing
  • Ease of competitors entering the market and the scalability - It is not difficult for someone to replicate the services to be provided and the Singapore market is limited in size. 
Chilli Ratings

Since there is no public tranche, there is really no motivation here for a chilli rating. The Company is either courageous or desperate to list under current market sentiments and HCS is probably "desperate" to be selling some vendor shares. The valuation is fairly priced at around low teens PER (it is not a true healthcare company per se) and the intent to pay out 75% of its profits as dividend will probably help "support" the price.. I would probably have given it a one chilli rating (or better) during better times but it is hands off the IPO market for me for now... 

Saturday, 27 October 2018

MeGroup Ltd.

MeGroup Ltd ("MeG" or the "Company") is offering 16.5m shares for its IPO on Catalist for which 15m shares will be via placement and 1.5m shares via public offering. The IPO will close on 29 Oct 2018 at 12pm and starts trading two days later. The market cap based on the IPO price is $27.3m

Principal Business

MeGroup manufactures noise, vibration and harshness components primarily for the automobile industry in Malaysia. It also owns and operates automobile dealerships in parts of Singapore. The dealerships include Honda, Mazda and Peugeot brands. 

Financial Performance

While the dealership business forms the bulk of the revenue, it terms of profitability, it is a stable but low margin business with a gross profit of only 6.7% (see table below). On the other hand, while the manufacturing enjoys high gross profit margins, its performance can be inconsistent, where it suffered a loss in FY2017 due to fire incident.

The Company is listing at at PE ratio of around 9.2x based on the enlarged share capital.

What I Like About the Company
  • Growing car hub with lower cost base - being located in Malaysia, the labor cost is still relatively lower than other regions and that can be advantageous if the car manufacturing industry grow in Malaysia. While the political uncertainty in Malaysia can weigh down on the industry, Mahathir is a big advocate for a new national car! See link here. This bodes well for the manufacturing business but probably detrimental to its car dealership business 
  • Growing economy bodes well for car ownership - If the new government can eradicate corruption and improve the economy, then it will bode well for the Company as car sales will likely improve as sentiments improve
  • Relatively stable business - Other than the dip in revenue and profitability in FY2017 due to a fire incident, the business of MeGroup seemed pretty stable. 
Some of my concerns
  • Family run business - The Wong family comprises the CEO, Mr. Wong Cheong Chee who is 70 years old, and the 3 children, Wong Keat Yee, Wong Sai Hou and Wong Sai Keat. The Wong family will continue to control and run the company post listing but family run business always run the risk of internal squabbles and not hiring the best person needed for the role 
  • Small cap and Thinly traded - The company will have a low market cap of $27m and the ownership is tightly held by the founders and a handful of investors. As such, only 13.9% of the Company will be held by public investors. Investors who subscribe to this IPO will probably need to be wary of the thin liquidity in future
  • Malaysia exposure - the entire business is derived from Malaysia, hence the political stability and business environment is critical. Given the listing in Singapore, investors here will be having a direct exposure to the Malaysian ringgit as the revenue and dividends (if any) will be translated from MYR to SGD.  
Mr IPO ratings

The weak market sentiments and looking at IPO performances for the last 12 months, i think investors are probably better off giving the IPO market a miss. The listings from Malaysia such as Jawala, Aspen as well as the recent listings are all in the red. I would give this Company a miss (zero chilli) and keep my cash in bank till sentiments improve. 

Polling time

You can access the poll here

Saturday, 20 October 2018

Temasek T2023 - S$ Bond

Temasek is issuing a 5 year S$ bond at a fixed interest rate of 2.7% p.a. S$200m is available for the public tranche and investors can start applying from S$1,000. The bonds pay interest twice a year and will mature in 2023. The offer will close on 23 Oct 2018 at 12pm. For more information, you can visit

Not sure why Temasek need to show the 4 big ethical groups (Chinese, Malay, India, Others) with "HDB" as backdrop in its offering circular given that it is not a political entity. This is probably to indicate that the retail bonds is for everyone in Singapore (especially those from heartlands?).... In any case, this is the first time the long "over-due" Temasek bonds is available to retail investors here. 

I applaud Temasek's efforts to do this for the retail investors, frankly they don't have to do this as it is much easier and faster just to have an institutional offering (if they really need cash, which they don't). In fact, even HDB is not issuing bonds to retail investors! My own view is that the government or MAS should encourage and make it easier for local T-related corporations to issue bonds to retail investors. 

I will not elaborate on who Temasek is and what they do as these information are easily available. In one short sentence - Temasek was formed by the government in 1974 to manage its investments and its portfolio value has grown significantly since inception to S$308b as of March 2018.

 Default Rates of Corporates

If you look at the table above, Temasek's bonds are rated AAA by both S&P and Moody's. This rating is better than many sovereign ratings! The risk of default, per the table above, is zero. Hence, investors who buy in this bond and basically sleep super soundly at night. πŸ’€ (if insomnia is a problem)

If you are still not convinced about its credit worthiness, the key credit ratios looked pretty healthy from all angles.

Conclusion- they don't really need to issue the retail bonds. 

What type of investors would be suitable?

Given we have determined that default rate is nil, the AAA rated bond is suitable for retail investors with zero risk tolerance and is currently investing in government-linked securities or Singapore Savings Bonds.

Singapore Saving Bonds ("SSB")

The Oct 2018 SSB is paying an average of 2.22% if you hold it for 5 years. In this regard, the 2.7% offered by T2023 is slightly better. Hence if you are considering putting money into the SSB, you might want to try your luck at Temasek T2023 bond.

Investors with higher risk tolerance and is willing to accept a higher return for a lower rating should look at other options. If they are accredited investors, they should look at bonds issued by Temasek-linked companies such as Singapore Airlines or if they can't afford the $250,000 per pop, they can evaluate the Astrea IV Class A-1 bonds that has a face value interest rate of 4.25%. You can refer to the write up on Astrea IV here

For investors who die die must subscribe to T2023, what would be the other considerations?

What are the considerations for investors in T2023 Bonds?
  • You can use your CPF to apply for the bonds - Investors who have no use of the CPF money can use them to apply for the bonds from the CPF OA and "arbitrage" the difference. I will consider doing this since i have a lot of cash sitting inside the CPF Ordinary Account doing nothing anyway
  • You are unlikely to get full allocation - Similar to Astrea IV, you are unlikely to get full allocation as the issue will be over-subscribed. You should get something if you apply but you are unlikely to get full allotment. I would hazard a guess that if you apply for $5,000 or less, you may get what you asked for but anything in excess of $5,000 will likely be cut back
  • Post market liquidity will be marginal - If you have no use for the cash for 5 years, then this will not be a concern, However, if you think that you may need the cash a few years down the road, then you will need to be aware that liquidity may be low as most bond investors are "buy-and-hold" type of investors. The trading volume is likely to be low post issuance
  • A rising interest rate environment may result falling bond prices and US Fed is likely to increase rates in the coming months. Will that have a knock-on effect on interest rates here remained to be seen but the risk is there
Will Mr. IPO be subscribing and what is the chilli ratings?

The placement tranche was "hot" and oversubscribed. I will give it a 3 chillis for the risk-free status but 1 chilli for the 2.7% return as the return is too low for my risk profile

My cash can be put to better use but i may consider using CPF to apply since it is earning a better return than 2.5%

How to enhance my "return" if i intend to apply for the T-Bond?

My friends attended the public seminar on Friday and it was well attended. While there was no refreshment, the "door gift' was a $20 Suntec voucher. That alone is worth 74% of the bond interest of $27 if you intend to apply for $1,000 T-bond. πŸ˜‚

I have already told you how to "enhance" your bond returns, so now it is polling time! You can poll here.

Saturday, 22 September 2018

Vividthree Holdings Ltd

For Information Only

Vividthree Holdings Ltd ("Vividthree" or the "Company") is placing out 51.8m shares at $0.25 each. The IPO has closed and will be listed on 25 Sep 2018. The market cap based on the IPO price is $83.50 million

Principal Business

The company is founded in 2006 and currently has a presence in Singapore and Malaysia. It is a virtual reality, visual effects and computer-generated imagery studio focused on content production and post-production. 

As part of its business strategies, vividthree intends to build up its digital IP through development of VR products and other immersive experiences. It also intends to expand overseas and make strategic acquisitions. 

Competitive Strengths

Financial Highlights

The Company has been profitable for the last 3 years where revenue grew from $3.9m to $7.06m and net profit as of FY2018 was $2.17m. The EPS based on the enlarged shares is 0.81 cents.

The pro-forma EPS is 0.86 cents and that translates into a PE ratio of 29x. The NAV per share is around 3.82 cents.

This is basically a human capital business. The margins are high but the ability to win deals and retain talents are equally important. 

What I Like about the Company
  • Increased use of VR technology - The use of visual effects is very common in movies nowadays and vividthree was involved in computer-generated imagery works in "Ah Boys to Men" series. The challenge will be winning the projects and the lineage to MM2 Asia should help
  • Creating IP content - The Company will produce thematic tour shows based on IP rights acquired or licensed from 3rd parties. On that front, vividthree is developing a VR thematic tour show based on the film "Train to Busan", which was very well received. This would be the most "exciting" segment if they are able to execute well
  • Profitable - While the listing valuation is high, at least the company is profitable and able to operate on the standalone basis.
Some of my concerns
  • Competitive landscape - The VR business is highly competitive and the ability of vividthree to expand beyond its "ah boys to men" fame will be important for its regional expansion
  • Thematic tour shows not proven yet - The company reminded me somewhat of Cityneon's expansion into different thematic sets by Avengers and they are doing the same with VR thematic shows, starting with popular movies such as Train to Busan. If it is successful, it will create a name and market for itself 
  • Transfer pricing - The Company will have business with its parent, MM2 Asia. While the relationships helps open doors, there could be potential transfer pricing considerations as MM2 Asia is involved in movie productions as well. The ability to deal at arm's length with MM2 Asia related projects will be important. 
  • MM2-related listings - MM2 Asia has been very successful in acquiring and then listing its different business units. Unsual Productions and Vividthree is a series of such spin outs. While i don't want to draw parallels with how Ezra spun out its different units previously, I genuinely hope this "spin out trends" doesn't continue as MM2 Asia is arbitraging the difference between the valuation at which they acquired the companies and subsequently listing these entities 
Mr IPO's view

From MM2 Asia to Unusual Productions, Melvin Ang has a group of "strong" supporters behind him. I envisage the support for vividthree will be similar. Even though the valuation of vividthree is high at 29x, i believe the mm2 "fans" will continue to support him.  

As such, despite the weak sentiment, my "anyhow" guess is that it will be 2 chili rating opening. Good luck to those who had received the shares. 

Tuesday, 7 August 2018

Synagie Corporated Ltd - Balloting Results

Synagie Corporation Ltd ("Synagie" or the "Company") announced that its public offer was 4.3x subscribed.

The balloting table is below for your reference. Investors who applied for 100,000 to 499,999 shares was allocated the bulk of the IPO.

I have to admit that I am surprised to see Nikko Asset Management being named as one of the anchor investors in the placement tranche. Not sure which of their funds has bought into Synagie. 

Commenting on the response from investors, Mr Clement Lee, Chief Executive Officer & Executive Director of Synagie Corporation said: "We wish to thank our investors for their support and for believing in our business and its growth potential. Being listed on SGX provides us with a new platform that will give us better access to the capital markets and help enhance our position as a leading e-commerce enabler in the region."

 Good luck to those who have applied!

Sunday, 5 August 2018

Nikko AM SGD Investment Grade Corporate Bond ETF

I don't really cover ETFs but as requested, here you go . . . 

New Issuance

Nikko Asset Management launched a SGD investment grade corporate bond ETF for retail investors. The offer closes on Aug 17, 2018. Trading will start on 27 Aug 2018.


During the offering period, the minimum investment is 50,000 units and the ETF will track the iBoxx SGD Non-Sovereign Large Cap Investment Grade Index, a proprietary index developed for Nikko AM. 

Market Making

Flow Traders Asia and Philips Securities will be making market for the ETF post listing and have to make market 85% of the time with both bid-ask trades. While the spread can be as wide as 2%, it is expected to be tighter at around 30-50 bps (my guess).  

Great for retail investors - Diversification

The ETF is great for retail investors, as these investment grade bonds are, ironically, available only to accredited investors at a minimum clip size of $250,000. With the ETF, you can achieve diversification with as low as $1,000. In addition, there is low correlated with Singapore equities, meaning that investors in ETF will achieve some level of diversification. 

Being denominated in SGD, the Fund poses no currency risk for local investors.

 High quality bonds

The bonds comprise a large allocation to statutory boards such as HDB and LTA, and 
corporate bonds issued by blue chip companies, such as DBS, UOB, Singapore Airlines, Keppel Corp and Capitaland. The bonds itself must have a minimum issuance size of $300m to ensure there is sufficient liquidity.

Expected Yield

The expected yield of the ETF at issuance is around 3.22% (gross) and with expense ratio of 0.3% per year, the net yield is around 2.92%. The expenses will be capped at 0.3% by Nikko AM.

Fund Details

What I like about the Bond ETF
  • Affordable - Finally we are able to assess a portfolio of investment grade bonds rated from BBB- to AAA+ for as low as $100! You can buy the ETF like stocks through the exchange
  • Diversification into a portfolio of investment grade bonds. You are not exposed to any single issuer risk. 
  • Risk adjusted returns - If you believe the ratings can be relied upon, the ETF offers good risk-adjusted returns of 2.92% net
  • Capping of expenses - The bond needs a minimum size to operate efficiently. The good thing is that Nikko AM has capped the expense ratio at 0.3%, hopping that it will attract a decent fund size
Some of my concerns
  • Annual dividend payout - The dividend is only paid out only annually. Unlike bonds traded through the OTC market, where you are entitled to the interest (borne by the buyer) up to the date of divestment, the ETF or retail bonds has no such concept. Meaning that if you have held the ETF for 200 days and decide that you need to sell for liquidity, you will need to "forfeit" all the accrued interest as the interest is usually not reflected in the bid-ask spread
  • Increasing interest rate environment means that the ETF will be subject to pricing pressures whenever there is a rate hike. This is because the ETF will be fully invested and can only reinvest at a higher rate when the bonds mature. If the manager decide to switch out of the existing bonds prematurely, then it may be subject to market risk too
  • Liquidity risk - Given that this is a permanent ETF, there will be no redemption of capital.  In other words, Manager has to stay invested at all times as it tracks an index and investors can only sell to market makers or through the market if there is sufficient liquidity. Investors will have to bear that in mind if they want to subscribe for the ETFs
What are the alternatives for retail investors?

The sad truth is .... limited!  Hyflux Perps was sold to retail investors because they couldn't sell them to institutions. Hyflux Perps wouldn't get an investment grade in any case. The current batch of retail bonds are issued by property firms, and they would also fail the rating tests. 

Alternative 1 - One of the alternatives for retail investors is the Astrea IV Class A-1 Bond. You can see my write-up here.  
  • Asset-backed securities (Not corporate bonds)
  • 5 years maturity, scheduled call date on 14 June 2023
  • Rated "A" by both S&P and Fitch
  • Pays semi-annual coupon every June and December
  • Exposure to 36 PE Funds (592 companies)
  • SGD denominated
  • Interest rate at launch 4.35%
The price since my "3 chilli ratings" has gone up from $1 to $1.045 (4.5% higher) but the current net yield is still trading at a better projected yield than 2.92% net. 

Alternative 2 - Singapore Saving Bonds. 

You can refer to the website here. The benefits for SSB are:
  • AAA rated
  • Pays coupon every 6 months
  • Average yield of 2.44% if you hold for 10 years (2.17% if you hold for 5 years)
  • No frictional costs and gets back full principal on demand (the following month)  

My Chilli Ratings

I am going to give this ETF a "one chilli" ratings - Buy only if you like it. (*note that bond and ETF chilli rating has no pricing expectation as prices are not expected to "pop") 

You have to decide for yourself if you like the key features and whether you have any liquidity needs in the short term. This product will be suitable for conservative investors who have spare cash (already maxed out on SSB) and is happy to earn a yield more than the SSB and fixed deposits, but also aware that there will be frictional costs if they want to exit. 

Alternatively, you can consider the Astrea IV Class A-1 Bonds if you have no need for the cash until 14 June 2023. At least you can enjoy higher interest rates, get paid twice a year and be assured of being repaid the full principal amount at maturity. The only downside is that the price has gone up by 4.5% and there is no liquidity to buy ... 

Happy ETFing

Polling Time

You can do the poll here.

Synagie Corporation Ltd

Synagie Corporation Ltd ("Synagie" or the "Company") is offering 43m shares at $0.27 each, whereby 39.2m will be via placement and 3.8m shares through the public offer. The IPO will close on 6 Aug 2018 at 12pm and starts trading on 8 Aug 2018. The market cap at the IPO price is $70.7m

Principal Business

According to the prospectus, the Company is Singapore's fastest growing e-commerce start up and one of the fastest in Southeast Asia.

Synagie provides e-commerce solutions in the Body, Beauty and Baby "BBB" Sector and help brand partners execute their E-commerce strategies though cloud-based platform that leverages on technology such as Cloud Computing, Big Data Analytics and Artificial Intelligence. There are 3 main business lines:

For the first time, the business model for this e-commerce company is not difficult to understand. You can see how the 3 main businesses "integrate" with Synagie in the picture below.

Investment Highlights

The key investment highlights are presented above. 

Financial Highlights

The pro-forma revenue is $12.2m with loss of $2.3m. My own gut feel is that the Company will need at least 2 years to break even.

What I like about the Company
  • Large untapped market potential - There is a large untapped market potential in South East Asia for e-commerce
  • Scalable business model - The business model is highly scalable as all brand holders (especially those with offline stores) would like to expand the model to online without cannibalizing the offline stores  
  • Ability to attract good brand partners - The Company seemed to be able to attract branded BBB products owners to collaborate. My key concern is whether the Company can expand beyond BBB products into higher margin "tech" products where Insurtech for e-commerce is more common and profitable
  • Interesting shareholders - Despite the long list of pre-ipo investors, there are some familiar faces such as Centurion Private Equity (Loh and Han) and Alan Wang. Let's see if they are able to help support the company post listing. 
  • Big 4 auditor - Deloitte is the auditor for the Company and it is good to see they have invested in a good set of auditors
Some of my concerns
  • Execution risk - The key to the Company is how they execute their strategies beyond the inflection point from Singapore into the region 
  • Long list of Pre-IPO investors - The Company has been financing its operations from outside investors. The pre-ipo investors (as shown on page 76 of the propsectus) is a long list of around 135.3m shares and owns 51.7% of the Company. There might be selling pressure when the moratorium is over after 6 and 12 months
  • Company still loss-making - Despite the revenue growth and acquiring a profitable Insurtech business, Synagie is sitll loss making. Investor will have to be patient as the Company grow its revenue at the expense of profitability
  • Staff costs is high - The 2 key founders, Clement and Olive are quite well paid for a start-up company (They are both in Band B). Contrast the staff cost of $2m (page 98) against its gross revenue of $8m (page 95) means that the Company would need to accelerate its revenue even faster to break even
My Comments

I have previously shared with you that i don't really know how to rate IT companies. hahaha. I rated one of its competitors, Y Ventures, here with a one chilli. It debut well on the first day, then tanked for a few weeks to a low of 15c before it start moving up. One year on, it is >100% above its IPO price.

The morale of my story - the chilli ratings can be right in the near term and very wrong in the long term (or it can be right all the way πŸ˜†). So always do your own homework. In any case, Y ventures was profitable at the point of listing but Synagie is not.

Chilli Ratings

On one hand, i feel that the local investors (including myself) do not know how to appreciate "loss-making internet based companies" and the poor market sentiments is not helping. On the other hand, i feel that the Company is well positioned to tap the e-commerce market space but investors will have to be patient.

Similar to Y ventures, I will give it a one chilli for the debut (probably zero if i wasn't vested πŸ˜…) and whether it can become another Y ventures will be the story for the future.

Happy Synaging!

Polling time

You can participate in the poll here.

Saturday, 21 July 2018

DLF Holdings Limited

DLF Holdings Limited ("DLF" or the "Company") is offering 18.5m Placement Shares at Singapore 23 cents each for the IPO. There is no public tranche, hence i will not spend too much time and effort on it. The IPO will close on 23 July 2018 at 12pm. Based on the IPO price, the market cap is $27.9m

Principal Business

The Company is a Singapore-based mechanical & electrical ("M&E") engineering services and solutions provider. The core business is in the provision of project management services and turnkey contracting services. 

Financial Highlights

According to the prospectus, the Company has an order book of around $6.4m which will translate into revenues for the next 1 to 3 years.

The EPS based on the post placement shares is 2.77 cents. That translates into a historical PER of 8.3x. Assuming the service agreements are in place, that PER will increase from 8.3x to 10.3x. The NTA per share is 2.78 Singapore cents.

Competitive Strengths

According to the prospectus, the strengths are:
  • Ability to undertake Turnkey Contracting Services for the hospitality and commercial industry
  • Provide value engineering and ensure seamless integration of M&E systems
  • Established track record and reputation
  • Experienced and dedicated management team
  • Network of customers in hospitality industry

Post the listing, the Company continued to be tightly controlled by Manfred Fan and Wong Ming Kwong with a combined stake of 79.3%.

What i like about the Company

I like the fact that the Company is profitable and the revenue and profits are trending up. The Company made $3.3m last year, unlike some of the loss companies trying to list on Catalist. While the IPO sentiments are currently weak, the issuance size is really small, hence if the placement is controlled well, it should debut well given the small float. 

Some of my concerns

The Company is operating in a competitive landscape where there are many M&E companies in Singapore and the space can be highly competitive. I am not sure about the sustainability of earnings and it ihas not promised to pay out dividends anyway. The two founders made between $250,000 to $500,000 each year. The valuation at 10.3x PER is fair but not "value-for-money". 

Chilli Ratings

I would probably have given it a 1 chilli rating for debut and give it a miss as it is not a stock that i will hold for the longer term.

Tuesday, 17 July 2018

Koufu Group Limited - Balloting Results

Koufu Group Limited ("Koufu" or the "Group") announced that its IPO received strong support from institutions, high net worth and retail investors. The public offer was 17x subscribed. 

Mr Pang Lim (庞琳), Koufu's Executive Chairman and Chief Executive Officer, said, "This
is a strong vote of confidence for our Group and a recognition of our established track
record and growth plans. We would like to take this opportunity to thank our investors for
their support, as we strive to bring the business to new heights and continue to keep to
our core values: "Better Food", "Better People" and "Better Life" as we grow in Singapore
and overseas."

Koufu also announced that it received strong indications of interest for the Placement Shares where the placement tranche was around 6.5x covered. I would view this as a strong order book. The over-allotment option of 18m shares were also exercised, meaning that DBS will step in to stablise the market where necessary. 

The balloting table for the public offering is below. If you apply for 100,000 shares, you will have a 50% chance of getting 10,000 shares.

It is also good to see that the 3 independent directors, siblings and kids of the founders also put in substantial placement orders.

Dymon Asia Equity Master Fund, a hedge fund, also subscribed for 2.6m shares in the placement tranche. 

My Views

It is a good set of placement and IPO results that showed strong support from the board and management's relatives. With the over-allotment being exercised as well, i believe the debut will be decent. 

Happy Koufuing!

Saturday, 14 July 2018

Koufu Group Limited

Koufu Group Limited ("Koufu" or the "Group") is offering 97,008,000 shares in the IPO at $0.63 per share. 90.675m shares will be through the placement with the remaining 6.333m via the Public Offer. There is an over-allotment option. The offer will close on 16 July 2018 at 12pm and starts trading at 9am on 18 July 2018.

Principal Business
Koufu is one of the largest and most established operators and managers of food courts and coffee shops in Singapore, with a history dating back to 2002 with one coffee shop and two food courts. Fast forward to 2018, it has outlets all over Singapore.

口福 means it's one good fortune to feast on good food. The business philosophy has also been to integrate modern management discipline, retaining traditional coffee shop culture and providing patrons value for money dining options in a comfortable environment.

The Group manages 48 food courts, 1 hawker centre, 14 coffee shops, 1 commercial mall, 83 F&B stalls primarily in Singapore but has also established a small presence in Macau.

I like the way the Group uses different brands to differentiate itself. For example, the Koufu food courts are located in the heartlands or educational institutes whereas it uses a more premium brand at Marina Bay Sands or commercial malls.

Financial Highlights

The revenue for FY2017 is around $217m and the profit after tax is $26.8m. The sales and profits has grown marginally from FY2016 to FY2017. It will be interesting to see if the trajectory will improve in the new few years. The financial statements are audited by KPMG.

Based on the adjusted EPS of 4.83 cents, the historical PER is around 13x. Assuming there is no growth but profits remained the same, the dividend per share will be Singapore 2.415 cents. This imply the yield is around 3.83%.

If you look at the pro-forma cashflow statements, you will notice that in 2017, the owners sold the assets and financial assets worth $75.63m and then distributed $97.3m of dividends to themselves. This is consistent with the Kimly IPO, where they pursued an "asset light" strategy and continue owning the coffee shops.

Use of proceeds

The Group intends to use the proceeds for capital expenditure on its proposed integrated facility, refurbish and renovate new and existing F&B Outlets as well as expand its business. 

What I like about Koufu
  • Resilient business and cash flow generative - The business is highly cash flow generative and the value proposition provided by Koufu ensures its business will be resilient through economic cycles as evidenced by the Group surviving SARS and the GFC since its inception. People will eat in food courts in good times and bad, hence it is rather "recession-proof".
  • Ability to attract and retain quality stall operators - The Group was able to attract quality operators and 29 of them have been with the Group for at least 5 years and they operate more than 130 F&B stalls across its network. The good relationship is critical for the Group to expand locally and overseas
  • Experienced management team with proven track record - The husband and wife team have proven themselves over the years to be able to navigate the F&B industry. it is also good to see that they are not paying themselves rich salaries post the IPO. They have taken a drastic pay cut but this would be "offset" by Incentive Bonus and dividends. 
  • Dividend paying mindset - The Group intends to recommend and distribute at least 50% of its net profits after tax generated in FY2018 and FY2019
  • Integrated facility to drive productivity and costs - The establishment of an integrated facility will help drive the next phase of growth, enhance productivity and operational efficiency, as well as increase profitability through central procurement, preparation and distribution of food products

Some of my concerns
  • Saturated and competitive local market - The revenue and profitability has been growing at a slower rate over the last 2 years. The Singapore market is probably quite saturated and highly competitive but it is good to see that the Group will continue to expand if suitable locations are found. Post IPO, the Group will open a food court in Sengkang Hospital and has plans to open two new Koufu food courts. The competitors are Food Junction, Food Republic, NTUC Foodfare in food courts, Broadway, Chang Cheng, Kim San Leng, Kimly, S-11 and Kopitiam in coffee shops. 
  • Overseas expansion unproven yet - While i am heartened to see that the Group has successfully gained a small foothold in Macau, the overseas expansion by local SMEs have never been smooth sailing. The Group wants to expand to PRC, Malaysia, Indonesia and Australia. Having said that, having a strong base in Singapore will allow it to experiment and grow overseas and they have successful done that in Macau. 
  • Dilution in pro forma NAV per share to new investors - The pro forma NAV is about 13 cents versus the IPO price of 63 cents. New investors will have a 79% dilution in pro forma NAV at listing. The price to book is around 4.9x
  • Owners are cashing out pre and post IPO - Looking at how the investment properties and other investments have declined over the last 3 years, the owners have been "reducing its investment properties" from its balance sheet from 2015 to 2017 and paying dividends to themselves. See page 84 and 85 of the prospectus. The justification is "the group does not intend to hold long-term lease hold interests of more than 30 years due to significant capital outlay arising from such long-term leaseholder properties. Seriously - cannot be more truthful than that ?! The real reason is to transfer the assets to themselves and pursue an "asset light strategy" similar to Kimly Holdings. They are also selling 45.845m vendor shares at this IPO with an over-allotment option 
  • Lack of strong cornerstone investors and weak market sentiments - The 3 cornerstone investors are primary family offices and hedge fund and collectively, will subscribe to 21m shares and own 3.8% of the Group. They are, however, not subjected to any lock-up. The weak local market sentiments are probably not helping as well. 
Peer Comparison

Koufu is actually a "pure-play" food court operators. The last listed food court operator, Food Junction, was privatised a few years back by Auric Pacific.

In terms of closest listed peers that operates food courts and/or coffee shops, it will be a mixture of Kimly and Breadtalk, which i have listed above. They are trading at rich valuations with an average of 36x PE and 4.6x Price to Book. My write up on Kimly is here.

Assuming Koufu trades at a more conservative 14-15x PE, the implied fair value will be 67 to 73 cents.

My chilli ratings
I like the "recession-proof" and cash flow generative food court business and it allow for economies of scale through a central kitchens. If the IPO was launched during good sentiments, I would have given it a 2 or 3 chilli rating but current market sentiments is weak due to the "trade war" and the prolonged market corrections. The World Cup is also drawing the gamblers away from the stock market. Hopefully with the end of World Cup this weekend, life will get back to normal.

I will give it a 1 chilli rating for the debut and a 1.5 chilli rating for the longer term due to its relatively “cheaper” valuation and dividend paying nature. Do note that I am vested.

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