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Sunday, 15 April 2018

SLB Development Ltd

SLB Development Ltd ("SLB" or the "Company") is offering 8m shares at $0.23 each for the public and 230m shares via placement. The public offer will close on April 18 at 12pm and starts trading on April 20. Based on the IPO price, the market cap will be around $210m.

Principal Business

SLB Development Ltd is a diversified property developer that was "spun out" from the listed Lian Beng Group. In case you don't know, Lian Beng is one of the big local construction firms along side Chip Eng Seng, Koh Brothers and Lum Chang.  "新" Lian Beng used to be part of the "developer" arm of Lian Beng but has since decided that the time is ripe for it to "step out" of its parent's shadows and moved vertically upwards to "developer" status - meaning to own the land bank and the units to be constructed and sold.

Post the listing, Lian Beng will continue to own 74% of SLB and the balance will be held by the public. 

Competitive Strengths

According to the prospectus, there are 4 key competitive strengths:
  1. Established track record - A 17 years track record in SIngapore's property development under the Lian Beng Group
  2. Established network of business relationships with other developers - SLB has formed JVs with Oxley, KSH, Koh Brothers and Heeton Holdings. According to SLB, forming JVs with other developers will continue to be a core strategy
  3. Venturing overseas - The Company currently has one big project in Gaobeidian in China
  4. Led by experience and dedicated management team - Lean management team facilities efficient and quick decision making to secure land-site or building
Financial Performance

I have always shunned the construction / developer sector because the earnings are lumpy and unpredictable. This is the case for SLB as well as you can see from the financials over the last 3 years where profits fluctuate quite widely. Based on the enlarged share capital and the post invitation EPS of 1.65 (page 79), the PER based on FY2017 is around 13.9x


Besides the portfolio above, SLB has the upcoming pipeline of property developments to be launched in 2H of 2018.

According to the prospectus, the estimated development profits for these projects is about $135.6m (page 70)

Let's see if we can find the RNAV of the Company by looking at Appendix C of the Prospectus.
According to C-7, the unaudited pro forma NAV = $91.96m  
Amount of cash raised less the listing expenses = $51.38m (page 33 of prospectus)
Development profits not taken into balance sheet = $135.6m (page 70)

RNAV = (91.96 + 51.38 + 135.6) / 931m shares x 100 = 29.96 cents

The IPO price is around 77% of the RNAV, implying investors are buying in at a 23% discount to its RNAV. 

Use of Proceeds and Future Plans

The Company intends to use the IPO proceeds to fund existing projects and for working capital purposes. 
  • $18m for acquiring new land sites
  • $18.7m for funding pipeline projects
  • $15m to repay bridging loan with OCBC

What I like about the Company
  • Listing at the right time - The Company is listing at the time where investors believe the local market is turning the corner. Timing is critical in property investing and the Company is being spun out at an opportune time to take on a new identity of its own
  • Ability to tap into JV network - It seemed like SLB has managed to form close working relationships with the other "smaller" developers in Singapore. The listing will also enable SLB to tap the capital markets and take on bigger projects by co-sharing the risks and rewards
  • Parent company can help ensure costing is reasonable when bidding for projects - The biggest challenge of any developer is to bid at the right price for new land bank and having a parent who specializes in the construction of these projects will enable SLB to bid at the "right prices" when factoring in the construction costs and the potential selling prices
  • IPO price is at a 23% discount to its RNAV - It is usually rare for prospectus to include "forward looking statement" and page 70 includes the projected estimated profits from the projects. Assuming the valuation and estimation is accurate, the price-to-book is around 0.77. This is the pertinent issues faced by developers whereas REITs trade closer to its book value and construction companies a bigger discount

Some of my concerns
  • The property development space is pretty competitive - There are many competitors in this space. The bigger ones are like Capitaland and City Developments while the smaller ones can range from Oxley to World Class Global
  • Expansion via JVs - While JVs is a way to mitigate developmental risk of projects, there is no assurance that JVs will work out amicably. Look at the disputes between Pontiac Land and Perennial regarding the Capitol project. Hence, JVs to me is a double edge sword, it is like leverage, it can work for you or against you.
  • Still a family run business - Lian Beng will hold a 74% in the Company and the management is still helmed by family members. The close linkage with Lian Beng can be a positive and a negative as well. SLB will feel more "obliged" in awarding the construction contracts to Lian Beng and other construction firms may not be willing to take on projects from SLB unless they feel that they are not "disadvantaged" in the bidding process
  • Directors are not subscribing to the shares- According to the prospectus, none of the directors are subscribing to the IPO
  • Earnings are unpredictable - Given the sector, developmental profits are always unpredictable  
  • Big IPO Issuance of 238m shares - One of my concerns is the sentiments and the issuance size of 238m shares may have an impact on post listing performance. Having said that, i understand the demand from investors for the placement tranche is robust. SAC Capital also have a good track record of "first day pops" in their IPOs. You can search for the IPOs managed by SAC Capital here
Peer Comparison

I have used some of the peers above (including those which the Company has JV with). As you can tell, Lian Beng is trading a better valuation but that is also because it has other elements such as Construction business etc, which historically suffers from low price to book. Investors who don't mind such exposure can consider the parent company for "better value".

Assuming however, if SLB trades to its developer peers, the valuation discount should narrow. Given the unpredictability in earnings, perhaps using PER may not be the best measure. If i use the price to book of 0.9x to 1.1x, that would imply a trading range of between 27 cents and 33 cents.

Mr IPO Chilli Ratings

I hesitated for a long time what ratings to give to this IPO as it is not so straightforward.

If i look at the attractiveness of this sector and the size of issuance, i will give it a one chilli rating. Subscribe only if you like it.

If i take into account the track record of SAC Capital as well as the better valuation relative to its peers, I believe the IPO deserves a higher 2 Chilli rating.

If i combine the two and factor in the current US markets and IPO sentiments, then it is a 1.5 Chilli Rating for this IPO.

Note that Mr. IPO is vested. Happy IPOing

Polling Time!

Take the poll here.


Anonymous said...

Mr IPO, what do you think the opening price will be?

Mr. IPO said...

My guess is 25-27

Benjamin Teoh said...

Very quiet at Mr Ipo page for SLB IPO....
MR IPO, your placement from sac or ifast?

LCT said...

Any potential upside beyond IPO

Meng said...

Doubt so, already quite richly valued compared to other developers. See oxley. But first day/or 3days pop is all we need to run with placement shares.

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