Sheffield Green Ltd

Sheffield Green Ltd ("Sheffield" or the "Group") is offering 24m shares at $0.25 each for a listing on Catalist, comprising 3.6m shares via public offering and the remaining 20.4m through a placement. The offer will close on 26 October at 12 noon and starts trading on 30 Oct 2023 at 9am. The market cap of the Group (based on the IPO price) is around S$46.6m.

Principal Business

The Group is a human resource service provider for the EPCI (Engineering, Procurement, Construction and Installation) space in the renewable energy sector, which includes onshore wind, offshore wind, solar and green hydrogen. Sheffield provides end to end human resource services ranging from sourcing, training of workers to provision of equipment kits.

The Group is headquartered in Singapore with subsidiaries in Singapore, Japan and a branch office in Taiwan.

What I Like About the Group

• Strong macro tailwinds and global demand for renewable energy - The Group is playing in a sector that has strong sector tailwinds. One of the biggest investment opportunities is currently in the energy transition space, especially in Europe where they are trying to diversify away from its reliance on oil (from Russia) and reaching a net zero emission target for the environment. With many countries setting net zero targets (including Singapore) and implementing policies that incentivise investments in the renewable space, Sheffield will benefit from this mega trend 

• Sheffield is not just a "headhunter" - The Group offers a suite of end-to-end services compared to its competitors that only provides recruitment services. This will make the Group more relevant to the renewable companies and distinguish Sheffield from its peers. Similar to many oil and gas service companies in Europe, Sheffield originally started in the Oil and Gas sector and pivoted to renewable energy later on. I am of the view that the skillsets are transferable as both sectors are highly technical in nature

• Sheffield plans to expand the scale of existing business and geographical coverage - The Group plans to grow organically into geographies where there are significant renewable energy related activities. This is a scale business and I was on a trip to the Nordics and there are significant renewable energy related activities. The Group is currently negotiating with a Dutch global entity to provide personnel for their global offshore wind projects. The Group also intends to expand to the United States, Poland, Denmark and France.

  

• Sheffield is experiencing a strong growth trajectory - The Group started from a low base but has demonstrated its ability to grow its revenue and gross profits from FY2020 to FY2022. I am paying less attention to the Net Profit After Tax from FY2020 to FY2022 as the Group is investing for the future  and the 9 months FP 2023 shows a revenue of US$19m and a net profit of US$2.4m. There is an intention to distribute 30% of the net profit after tax attributable to equity holders of the Company for FY2023 and FY 2024. Assuming the full year profit is US$2.4m/3*4 = US$3.2m. That translates into US$3.2m x 1.36 = S$4.3m or EPS of Singapore 2.33 cents ($4.3m divided by 186.2m shares). This implies a PER of 10.7x (25 cents divided by 2.33 cents) or a dividend yield of 2.8% (2.33 cents x 30% divided by 25 cents)

Some of my concerns

• Volatilities due to nature of the industry - While the industry is growing rapidly, the operations and cash flows may fluctuate depending on the availability and timing of the contract awards, renewals, maturity or termination. This can be mitigated given the demand currently outstrip the supply in the renewable space

• Reliance of major clients from Taiwan - The Group is reliant on its major clients where 86.3% of FP 2023 revenue is derived from the Group's major clients. The Group derives 91.6% of the revenue from Taiwan for FP2023, so fingers crossed that China won't be attacking them anytime soon while Sheffield expands to Japan and elsewhere. Have fun trying to identify Customer A to H in the prospectus

• Management team will need to be upgraded - To expand beyond Taiwan and Japan into "new territories", the existing management team will need to attract new talents and this may not be easy given the diverse geographies such as Denmark, Netherlands, France, Poland and United States. The biggest challenge will be the cost in acquiring new talents and expanding the senior team as navigating the overseas markets can be daunting

• Singapore may not be the right place to list this Company - Our local investors here may not know how to appreciate the renewable energy space and may not give the Company the valuation it needs for its business expansion. I don't think the Company is raising sufficient capital for its expansion plans and the need to pay dividends provides distraction

•  Weak market sentiments and high interest rate from fixed deposits - While I like the market positioning of Sheffield and would love our local IPO market to prosper, the market has no such sentimental value. With the REITs and stock market delivering poor returns and fixed deposits offering a decent yield, it will be tough to convince investors to back this company 

Peer Valuation

There are not many HR companies listed here. One of the biggest is HRNet Group that has a market cap of S$675m, net income of S$61.2m, PER of 11.1x and yield of 5.5% (Sourced from CapitalIQ). The peer may not be directly relevant.

HRNetGroup data from CapitalIQ

The Group identified Brunel International that is listed on Euronext as one of its closer competitors. Brunel is actually a giant, with a market cap of $927m, net income of S$56.8m and trading at a PER of 16.3x. The share price chart of Brunel is actually quite "good looking" (see below). According to the prospectus, Brunel fulfils the "white collar needs" while Sheffield fulfills the "blue collar" needs. Haven't seen such terms for a long time!  Maybe Brunel can acquire Sheffield in future to mix the white with the blue? 😆

Brunel International data from CapitalIQ

Mr IPO views and chilli ratings (Note that he is vested)

Investors subscribing to Sheffield needs to believe a few things:

1. Renewable energy sector is on a mega trend and you want to capture this trend through a company that services this sector
2. You are willing to pay up for growth and you believe Sheffield is at the growth inflection point
3.  You are willing to ride the market and share price volatility in the near term   
4. You believe the management of Sheffield can execute on its expansion plans to other shores (pun intended)

Under normal market circumstances, I would have given this a 3 chilli ratings to (1) recognise Sheffield for trying to revive our Singapore IPO market (2) provide some shares for the public investors (3) listing it at a seemingly fair valuation (assuming my guess for its 2023 EPS is correct) for a sector that is growing rapidly (4) invest behind the energy transition theme

However, this is not a normal market environment. Given the geopolitical tensions and the extremely weak market sentiments, I will give it a one chilli rating (if you are punting even though i feel it may surprise on the upside). You might need to take a longer term view on Sheffield if you want to benefit from this mega energy transition trend and do note that our investors here may not really care about a green planet...