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Monday, 28 May 2018

Jawala Inc


Jawala Inc ("Jawala" or the "Group") is offering 18m shares at $0.25 each for a listing on Catalist, of which 17.6m shares will be via placement and the balance 0.4m shares for public offer. The offer will close on 30 May 2018 at 12pm. The market cap post listing is $29.6m.

Principal Business

The Group is a forest resource company based in Malaysia with a focus on industrial tree plantation in Sabah. The main business is the management of forestry resources, and the planting and extraction of timber. 

Jawala currently manages a licensed area of 11,043 hectares in the Sapulut Forest Reserve for 100 years starting from 12 Aug 2015. Upon expiry, the Chief Minister has discretion to grant a further extension of the license for another 100 years.

Financial Highlights

The Group is profitable in FY2017 and 1Q 2018 revenue and profitability has also grew significantly compared to the prior quarter. I have no idea how to project the performance since i am not privy to the financials

The Group is listing at a historical PER of 62.7x but that may not be a fair reflection as Q1 2018 has shown a much higher profitability. Without any guidance, it is tough to project what is the valuation at which the Group is listed. Using the Q1 EPS multiply by 4 also doesn't sound quite right either.

Prospects

I have no idea what the future prospects hold but i guess what the Group is trying to tell you is that the value of the "wood assets" is on an uptrend

Future Plans


The Group is raising ~$3m to develop the plantation site and for working capital, the balance $1.35m is for listing expenses. Not sure if it can execute what it wants to do unless the funds are generated internally. The amount raised from the IPO is probably not sufficient to execute all its plans.

What I like about the Group
  • Profitable Group - The Group has a Q1 profit of RM4m and that is significantly higher than Q1 2017. However, i am not sure if this is one time profit or it is sustainable
  • Sustainable forest management  - While i don't like companies cutting down forest indiscriminately, the way to go is to ensure the wood is being harvested in a responsible manner
Some of my concerns
  • Change in government may led to change in natural resources policy in Malaysia - While the license has been granted, a change of government may have unintended consequences and impact the Group. I am not sure why the Chief Minister has "discretion" to grant another 100 years but this discretion may be removed in due course
  • Valuation of natural resources is challenging - I am no expert in this field and even then, the valuation of such assets is definitely challenging. I am not sure if you remember the Sino Forest scandal but it is definitely not easy to value such assets and having management you can trust is absolutely critical 
  • Non big 4 auditor - With no due respect, my preference is for a big 4 to be the auditor of this Group
  • Why bother having a public tranche given the small issuance size - While i am always a proponent of company offering some shares for the public, but given the small issuance size, it just doesn't make sense to waste time and money on a public tranche as the total amount raised is low. This is also a pretty small cap company.
  • All the shares are held by Datuk Jema Khan - He holds 84.4% of the Company and the balance is held by the public. Trading post listing will be limited as the shares will be tightly held
  • IPO sentiments is weak - The local market sentiments has been pretty weak for a while now. While the number of shares issued can be tightly controlled, it doesn't solve the overall negative market sentiments
Chilli Ratings

While the Group is turning profitable, I will give it a miss due to the concerns raised above. It will be a zero rating for me.  

Happy Jawalaing

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