OTS Holdings Limited

OTS Holdings Limited ("OTS" or the "Company") is offering 41m shares for IPO at 23 cents each, of which 40m is via placement and only 1m is available for the Public Offering. The Public Offer will close at 12 noon on 15 June 2021 and start trading on 17 June 2021. Based on the IPO price of 23 cents, the market cap is $49.22m.

Principal Business

The Company was established in 1993 and develops and owns a portfolio of consumer brands in the ready-to-eat and ready-to-cook meat products in Singapore and Malaysia.  OTS currently has more than 1,100 stock keeping units ("SKUs") across 13 main product types under 6 house brands.  You can see samples of the brands and products below.

The Company has a vision to develop a growing portfolio of established consumer brands and to become an innovative market leader in the region.

Golden Bridge and Kelly's are the flagship brands and have become established household brands for ready to eat and ready to cook meat products. The Company also started El-Dina and Kizmiq, targeting the growing hala food market.

OTS also believes it is one of the largest meat product manufacturing companies in Singapore.

Financial Performance - Financial Year ends 30 June

The revenue has been growing at a CAGR of 20% while the profit growth was even more impressive at 58% CAGR from FY2018 to FY2020. The HY2021 revenue and profits continue to improve significantly with gross margins improving from 28.3% to 31.5% and net margins from 5.4% to 13.6%. The Company (page 110) attributed the improved margins from economies of scale achieved from higher production output.

If you look at page 101 of the prospectus, you will note that the HY2021 revenue was driven by increased sales in General Trade (defined as sales generated from convenience stores, provision shops and wholesalers and the growth also came primarily from Malaysia. The revenue grew by more than 200%. The Company (page 109) attributed the higher demand from Giant Malaysia as well as new and existing customers' preference for food products manufactured in Singapore.

Revenue for HY 2021 (1 July 2020 to 31 Dec 2020) grew by 44% and EPS (on a fully diluted basis) grew 262% from 0.37 cents to 1.34 cents. 

I would expect the second half of FY2021 to continue to be profitable for OTS given that Malaysia was in various modes of lock down throughout the first half of 2021 and Singapore also implemented a lock down from May to June.

If I assume the second half to be better (given it has Chinese New Year combined with lock downs), then it would be conservative to use 1H EPS x 2, which is 1.34 x 2 = Singapore 2.68 cents. If I take a more aggressive view that this year's EPS will be at least double of last year, which is not unreasonable given the growth seen in HY2021, then the EPS will be 1.66 x 2 = 3.32 Singapore cents. That would translate into a prospective PER range of 6.9x to 8.5x based on the IPO price, which in my view, is very fair. 

In addition (page 44), the NAV per share is 13.28 cents, and that translates into a price to book of 1.73x. 

Dividend

The Company intends to recommend and distribute dividends of no less than 50% of its net profit for FY 2021 and not less than 40% of its net profit for FY 2022. Assuming I take a more conservative 40% x EPS of 2.68 cents = 1.072 cents. Considering that FY 2021 will end on 30 June 2021, the Company is really generous. That will translate into a dividend yield of 4.6%. If I assume a higher EPS of 3.32 cents, the yield will become 5.7%. 

What I like about the Company

• Long heritage and flagship brands - the Company was set up in 1993 and its flagship brands are Golden Bridge and Kelly's, which have become established household names

• Experienced management team with innovation in mind - The management team is highly experienced in the ready to eat and ready to cook meat product manufacturing with an innovative mindset with regards to future trends such as plant-based products.   

• Growing Halal and Plant-based Market - the Company is growing its presence in the halal market and intents to launch its new plant-based products early next year

• ERP system to drive Regional expansion - The Company has adopted an ERP system that enables it to track and monitor every aspect of its process and products with speed and accuracy, This will allow OTS to expand its presence beyond Singapore and Malaysia into Indonesia and Philippines. Part of the IPO proceeds will be used for overseas expansion, including setting up costs in Philippines

• Company seemed to be at inflection point - The revenue and profit for HY2021 seemed to indicate that the Company is at the inflection point to enjoy robust sales and improved margins from economies of scale. The utilisation rate has been increasing steadily (pg 152).

• Food services are essential services - Unless the manufacturing is hit by Covid, it will remain open as food manufacturing is considered essential services in all countries. Food products and services are resilient as it is considered a staple and you will need them regardless of the economic cycle

• Dividend paying - the Management is pretty generous as it will be sharing the FY 2021 profit even though the listing is in June 2021. The yield is pretty attractive at between 4-6% and that is likely to be paid in 2H 2021 (I haven't even annualised it).

Some of my concerns

• Canned food is bad for your health and brand awareness may not be high  - I frankly don't eat a lot of canned food and in my view, it is really bad for your health. It is like instant noodles, eating it once in a while is okay but not for daily consumption. If not for the IPO, I would not have known this brand as I usually picked Ma Ling for my luncheon meat. My home chef (aka wife) also has not tried the Golden Bridge products before and funnily enough, she picked up a packet of Omn! Luncheon Meat (plant-based) to try today

• Competition is strong and consumers have many options - There are many competitors in this space, both locally and from abroad. For example, just in the luncheon meat segment, there are many other brands such as Ah Ling, Ma Ling, Mili, SPAM and Tulip. In addition, the plant-based products are also getting competitive with many VC based companies trying to "conquer the world" with meat alternatives

• Increased revenue and profitability driven by Covid - With Singapore and Malaysia in lock down modes for extended periods of time, the consumption of canned food has increased, especially in Malaysia.  In addition, some of the revenue in FY 2020 was also driven by "stock piling" efforts from the government. The question is whether this growth rate is sustainable in a new normal or whether the Company can build on this momentum to expand its market share and penetrate new markets such as the Philippines

• Owners owned and Small public float - The public will hold 19% of the Company post listing with the Ong family holding around 75%. The shares will likely be thinly traded after the initial period. While it is easy to "push up" the shares if a Reddit situation occurs 😁, the reverse is true if there is no interest in this stock after it is listed

Listed Peers

 

I don't recall any direct peers in the same line of business as OTS and have compiled the comparables below. In terms of market cap, the closest will be Hosen and Khong Guan, whereas JB Foods is a nice indication of where OTS might be heading towards. 

I think the IPO is attractively priced (reasonable valuation) with a good dividend yield, assuming my agar agar EPS projection is correct. (Please be warned that I have no clue what the projected earnings will be). 

Assuming a fair market PE multiple of 10x, the fair value will be between 26 to 33 cents. 

Assuming a fair dividend yield of 4%, the fair value will be between 26 to 32 cents.

This Company definitely deserved a 3 chilli ratings from me for going through the trouble of having a public offering of 1m shares, being reasonable in their market valuation as well as a generous dividend even though the year is almost over. 

Hoot ah.... I understand from sources that the placement trache for this IPO is very hot. I also hope that they will not do a Econ Health style balloting. 

Do note that Mr. IPO has been allotted a decent number of shares under the placement tranche and he promised to try some Golden Gate luncheon meat if he makes money.

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