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IPO Chilli Ratings

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Food Innovators Holding Limited

Food Innovators Holdings Limited ("FIH" or the "Company") is offering 14m shares at $0.22 each, for which 13m shares will be through placement and the remaining 1m shares via a Public Offer. The IPO will close on 14 Nov at 12 noon and starts trading on 16 Oct 9am.  FIH has two business models - the first is to be a master lease and sublease the space to other tenants and the second is to operate and manage restaurants.  The Company currently has 12 restaurants in Japan, 10 in Singapore and 4 in Malaysia. The market cap based on the IPO price is around $24.9m. Financial Highlights FIH's revenue grew from $37.8m in FY2022 to $43.8m in FY2024. It is quite funny to see that being a master land lease holder has a higher margin than operating the restaurants, once again illustrating the point that it is better to be a landlord to shake leg and collect rent. According to the prospectus, the PER is around 19x. The Company intends to pay 20% of its net profit after tax a
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5E Resources

5E Resources ("5E" or the "Company"), a leading scheduled waste management services provider in Malaysia, is offering 38.5m shares at $0.26 each for a listing on Catalist. 2m shares will be available to the public and 36.5m shares via placement. The IPO will close on 10 May at 12 noon. The market cap based on the IPO price is $38.3m.

 Principal Business

5E is the 5th largest scheduled waste management services provider based in Johor, Malaysia since 2008. The customer base currently covers 8 out of 13 states and 2 federal territories in Peninsular Malaysia.  It has two complementary business segments in the sale of recovered and recycled products and chemical trading. 

Key competitive strengths


Business strategies and future plans

Financial Performance

 

The revenue dropped from MYR 53.8m to MYR 44m from FY2019 to FY2020 due to the impact of Covid. The revenue for 9M2021 has since recovered strongly from MYR 29.8m in 9M2020 to MYR 37.4m in 9M2021.

While the revenue has increased strongly, it didn't flow through to the net numbers as there were listing expenses of MYR 2.2m was expensed off in FY2020 and MYR 4.57m in 9M2021, which relates to a listing on Hong Kong that didn't materialise as well as current listing expenses.

I think there is typo in the prospectus – I believe it was meant to say "exclude" instead of "include" in the gatefold above, whereby if you exclude the listing expenses, net profit for FY 2020 and 9M2021 would be MYR 10.2m and 8.8m respectively.

Including the listing expenses, the net margin would have declined, resulting in a drop in net profit for the 9 months from MYR 6.09m to MYR 4.23m between 9M 2020 and 9M 2021.

The EPS for 9M2021 is 0.9 Singapore cents. Assuming it is pro-rated to 12 months, the EPS will be 1.2 Singapore cents. Based on the IPO price of 26 cents, the price earnings ratio is 21.6x. However, it includes the listing expenses (both HK and SG) that may not be recurring in nature.

If I use the more bullish EPS of 1.8 Singapore cents (FY2020), the PER hovers around 14x, meaning the valuation is still on the higher end but I didn't factor in the growth for FY 2021.

Having said that the NAV per share is around 16.30 cents, versus the IPO price of 26 cents, which is not too dilutive.

Proposed dividends

The Company intends to distribute no less than 25% of its Group's net profit after tax as dividends for the financial years ending 31 Dec 2022, 31 Dec 2023 and 31 Dec 2024.

What I like about the Company 

  • Stable recurring revenue and income with high profit margins – the waste disposal industry is highly regulated and that provides a stable source of recurring revenue and income with high gross margins
  • This is a ESG business – With increased scrutiny on the environmental, this business could be better positioned as having a positive impact on the environmental. The Company should focus on how it can reposition itself as being the 'frontliner' on good ESG practises and helping its clients to make a positive impact to the environment. It can be an early mover if it seizes the opportunity given Malaysia is not so advanced in this area yet
  • Dividend paying – 5E intends to pay out dividends for the next 3 financial years

 Some of my concerns

  • Business concentrated in Johor and revenue are in MYR – The operations are concentrated in Johor and operations can be affected by local policies, events and economic conditions. In addition, it is heavily reliant on local domestic industries and bills customers in MYR. While the MYR has been fairly rangebound of the last 5 years, it is currently near record lows against the SGD, thus investors in 5E would be subject to the SGDMYR rate when translating the results into SGD
 

  • Increased labour costs – with Singapore facing labour shortages, it is no different in Malaysia where with the re-opening of borders, will make skilled labour more mobile. I would expect the labour costs for this Company to increase over time given its reliance on foreign workers
  • Small market cap, low liquidity – As in all small issuances, this Company has a market cap of $38m and with 74% of the shares tightly held by a few families and individuals, the liquidity will decline over time
  • IPO market has not done well – with global markets gyrating and volatile, the market is in a "risk-off" mode. LHN Logistics closed 7.5% below the IPO price of $0.20. Given the somewhat rich valuation of this Company, the placement tranche is likely supported by the friends and family group

Mr IPO views

I am not sure which adviser asked 5E to seek a listing in HK, where the valuation may be higher but it doesn't really have an angle there. The Singapore market is probably a better option given its proximity but probably held back because Malaysian counters haven't done well locally. In any case, the listing expenses wasted on professional advisers could have gone to better use. The Company is cash flow generative and doesn't seem like it is in real need of cash. They could probably have told the story better on why they decided to "not list in HK" but list in Singapore instead. Is it because they fail in certain aspects or the queue is too long or … what? They could also do a better job by providing pro-forma financials on key metrics such as the EPS or PE should the listing expenses be excluded?

 Given the current weak market sentiments where the last 3 IPOs are below water, it would be hard to imagine that public investors who applied for the shares and receiving say 3,000 shares would be able to "flip them" safely but kudos to the Issuer and Manager for setting aside some shares for public offer.

I will avoid for now but give it a one chilli rating to show some appreciation for offering some shares to the public.

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