Mooreast Holdings Ltd.

Mooreast Holdings Ltd ("Mooreast" or the "Company") is offering 38.85m shares at $0.22 each for a listing on Catalist where 38.05m shares will be via placement and the balance 800,000 shares for the public. The market capitalisation based on the IPO price and 259m shares will be $57m.

 

The IPO will close on 22 Nov 2021 at 12 noon and commence trading on 24 Nov at 9am.

Principal Business

Mooreast is a total mooring solutions specialist, serving mainly the offshore O&G, marine and offshore renewable energy industries. The operations are primarily based in Singapore and they provide rigging equipment, marine supplies and related services to their customers. 

The Company has 4 main business segments - (A) Mooring Division, (B) Renewable Energy Division, (C) Rigging and Heavy Lifting and (D) Marine Supplies and Services Division.

The Company has tried to position itself around servicing the renewable energy but if you look at the revenue breakdown by business segments below, the renewable energy segment forms only 9% of FY2020 revenue and the main bulk of the business is still derived from mooring. Having said that, the primary use of the IPO proceeds is to help Mooreast scale into the renewable energy sector.

Financial Performance

The Company's revenue has been increasing steadily from FY2018 to FY2020 and profit net of tax fluctuating between $2.8m to $3.8m. It has a tough first half as revenue from Mooring Division decreased due to on-going impact of Covid 19 where the award of new projects were delayed. This highlight the cyclical and unpredictable nature of this revenue stream as I would expect a recovering oil price to boost revenue. It also means that revenue and profitability for FY2021 will be lower than the prior year unless the 2H recovers strongly. 

A slightly more detailed profit and loss statement is included below for reference.

The Company is listed at a PER of 17.2x based on its EPS for FY2020 and the pre-invitation shares and 23.3x if we use the enlarged share capital and assuming the service agreements were in place.

Business strategies and future plans

It is interesting to note that future business plans are focused around developing and growing the renewable energy division as well as expanding and upgrading the facility in Jurong to undertake fabrication of floating and related steel structure for offshore wind farm.

Ownership structure

The Company is tightly held with 73.6% held by the founder Sim and his wife as well as EDBI at 11.4%. The public will hold the remaining 15%.

I spend quite some time to understand what EDB is trying to achieve here (page 113-114 of the prospectus). In a nutshell, it is as follows:

EDBI is owned by EDB and its presence on the cap table is good as it helped open doors to local corporates and at least there is an institutional investors looking at the commercial aspects of the company. They invested $10m into Mooreast via 2 convertible note structures on 2 Nov 2021 - CN1 and CN2.

Despite investing just before the IPO, they are getting a sweet deal as CN1 converts at a 25% discount to the IPO valuation and CN2 has a 5 year term that earns 9% per annum until it is converted or redeemed. CN2 automatically converts into the shares if Mooreast is "upgraded to the mainboard" within 42 months and the conversion price is at 30% premium to IPO. If the Company is not upgraded to the Mainboard within the agreed timeframe, EDBI may require the the CN2 to be redeemed at 120% of its invested amount. If converted, the shareholding in the Company will increase to 17%.

What EDB is trying to achieve here is to mitigate its risk whereby half of its investment is invested at lower cost (than public investors) while the other half is earning a 9% interest (a guaranteed return). The high interest will "encourage" the Company to apply for mainboard status as quickly and once it moves on the the mainboard.  

Net net, I am neutral on this arrangement even though at face value, it seemed to get a better deal than retail investors. Having said that, it does have the benefit of motivating the Company to be upgraded to Mainboard as quickly as it can, which will benefit retail investors.

Use of proceeds

The majority of the IPO proceeds will be used to develop the facility as well as to develop the renewable energy division.

What I Like about the Company

• Price of crude oil is recovering strongly - Despite the industry being severely hit by Covid in early part of 2020, the price of crude oil has rebounded strongly and should the recovery trend continues, it will benefit Mooreast as higher oil prices will allow their clients to spend more on capital expenditure 

• Institutional Presence of EDBI is assuring - EDBI is a commercial entity. They are not doing this for charity so their presence helped allay the concerns on the commercial viability of this business and also advanced EDB's interest by opening doors and growing the Company 

• Management team is experienced and heading in the right direction - The team has been working together for a while now and is highly experienced in this sector. The pivot towards renewable energy sector is also timely and in line with the macro trends where more countries will be building windfarms and cut down on the traditional oil and gas

Some of my concerns

• Oil & Gas is in a long term cyclical decline - Despite the recovery in oil prices, this is a challenged industry as evidenced by Keppel exiting the oil rig businesses by selling to Sembcorp Maine and pivoting to clean energy. With many SWFs and ESG investors shunning investments in this sector, this sector is on a long term cyclical decline. As such, investors will need to be convinced that Mooreast is able to successfully pivot to the renewable energy 

• Competition is strong and too early to tell if Mooreast will succeed in the renewable energy sector - While Company is scaling up its manufacturing and technical capabilities in the renewable energy sector, it is too early to predict if Mooreast will succeed as revenue from this sector for FY2020 remained subdued

• Shortage of skilled workforce - The Company is heavily reliant and was affected by the increased labour cost and the lack of skilled foreign labour. This will continue to affect the company unless Singapore government opens and relaxes if foreign labour policies. There is also a potential tax liability for Mr. Roderick Ruinen who was previously employed under a service agreement, which may have tax implication. If crystalised, the Company will need to fork out up to Euros 330k

• Listing valuation is high - the historical listing PER of 23x is high considering that 1H2021 is showing a steep decline in revenue as well as losses on a pro forma basis. Given the lumpiness of the project revenue, and no management guidance for 2H 2021, I would say that even if they are able to match prior year's profitability, they are already fairly valued. 

Mr IPO Chilli Ratings

The presence of EDBI is comforting but not on the same terms as (some would argue at better terms than) retail investors. The Company is also highly exposed to the oil and gas sector, which investors know are highly volatile and cyclical. Listing valuation is high, considering this is not a tech play,  and in light of declining profitability for FY2021. 

For the above reasons, I will give this IPO one chilli. On a side note, if you are not ESG conscious and wants a regular dividend, you might as well invest in the global oil companies such as BP,  Chervon,  Exxon and Royal Dutch. You might not get the 9% return as EDBI but at least you can hedge against your rising petrol prices.

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