Asia Enterprises Holding Limited - IPO

Asia Enterprises Holding Limited

Issue statistics
Offer size: 68m new shares Public Tranche - 5m shares Placement Tranche - 63m shares
Price: S$0.27
NTA per share (post-IPO): 21.43 cents
Historical PE: 4.52x (FY04)
Market Cap (post-IPO): S$72.36m
Open: 23 August 2005
Close: 30 August 2005, 12.00noon
Trading: 1 September 2005 (on "when issued" basis)
Lead Manager: DBS

The company is a major Singapore-based steel distributor. Besides supplying a wide array of steel products, it also provides value-added steel processing services to industrial end-users in Singapore and the Asia Pacific. Most of its customers are from the shipbuilding & marine, engineering/fabrication, oil & gas, construction, precision metal stamping and manufacturing industries/businesses. The company expects its business to be driven by an increase in shipbuilding- & marine-related activities. Revenue jumped 44.3% from $56.5m in FY03 to $81.5m in FY04. The improvement in earnings, which rose more than threefold from $3.5m in FY03 to $11.9m in FY04, could be attributed to higher sales.

Estimated net IPO proceeds of S$16.2m will be used for the following:

1. S$10.0m to support business expansion, in particular, to grow its market share in shipbuilding- and marine-related activities and to expand its customer base in Southeast Asia.
2. S$5.0m for possible investments to expand its product range, capabilities and businesses through acquisitions, JVs or strategic alliances.
3. S$1.2m as working capital.

PROSPECTUS EXTRACTS

Page 63 - Ownership Structure
Comments - Wow! So many different families! They ought to provide us with the family tree!

Page 65 - Lock up period
Our Shareholders, namely the Koh family, the Lor family, the Ong family, the Yeo family and the Teo family, who will in aggregate hold 26,924,306 Shares, representing 10.05% of our Company’s enlarged issued and paid-up capital after the Invitation, have each undertaken not to sell, transfer or otherwise dispose of any part of their respective interests in our Company for a period of three months commencing from the date of our Company’s admission to the Official List of the SGX-ST.
Comments - How come all these families so special? The rest 6mths lock-up period. All waiting to take profit asap, huh?

Page 78 - Inventory turnover days 258(FY02), 210(FY03), 299(FY04)
Comments - Wow! almost 300days! Money sitting in the warehouse, not in the bank earning interest! Looks scary to me, poor inventory mgmt?

Inventory data for all 3 listed Steel Distribution cos. using latest results,

1. AEH : Inventory $46.502Mil (Dec-04) vs Revenue $81.395Mil (1 yr)
   
   • AEH has the highest inventory, slightly more than 50% of revenue (1yr)
     
2. HSH : Inventory $67.466Mil (30-Jun-05) vs Revenue $197.819Mil (11mths) ; Inventory $34.133 (31-Jul-04)
   
   • HSH is next highest , 31.3% (annualised using 11mth revenue data)
     
3. HG Metal : Inventory $80.002Mil (31-Mar-05) vs Revenue $154.4Mil (6mths) ; Inventory $62.004Mil (30-Sep-04)
   
   • HG Metal is lowest, aro' 26% (annualised using 6mth revenue data)

It does appear that AEH has the highest inventory figure and in an increasing steel price environment, they'll enjoy higher margins. The converse will be true in a declining steel price environment.

Note : Above figure is a simple estimation. It does not take into consideration the different make-up of the biz. A more accurate figure would be to use only data for the distribution biz (as that forms the bulk of AEH biz).

Page 82 - Customers with 5% or more of total revenue in any of last 3 years are,

1. Keppel Offshore & Marine group : 4.8% in FY04
2. Metal Component Engineering Limited : 2.0% in FY04
3. Piasau Slipways Sdn Bhd : 7.4% in FY04

Comments - So, the other "branded" name customers often mentioned for this IPO do not contribute 5% or more in revenue in any of the past 3 years.

• FY04 Revenue $81.495Mil : 5% = $4.1Mil
• FY03 Revenue $56.474Mil : 5% = $2.82Mil

Page 87 - Some of our competitors in the steel distribution business include, Chuan Leong Metalimpex Company (Private) Limited, HG Metal Manufacturing Limited, Hup Seng Huat Co. Ltd. and Regency Steel Asia Pte. Ltd.
Comments - Those who are free can compare with the 2 other listed competitors, HG Metal and Hup Seng Huat. Some comparison data,

1. Share Price $0.27 at 27% premium to NAV. Premium higher compared to HSH but lower than HG.
2. Debts : After IPO, can be debt free. Both HG & HSH have large debts of $100Mil & $46Mil respectively.
3. Market Capitalisation : HSH is biggest at $134Mil. AEH & HG about the same at $70Mil+

Page 99 - Had the Service Agreements been effective since 1 January 2004, the aggregate remuneration (including CPF contributions and other benefits) payable to our Executive Directors for FY2004 would have been approximately $2.3 million instead of $2.9 million and profit before tax for our Group would have been approximately $16.0 million instead of $15.4 million.
Comments - Yes, the salaries are huge but would be lower after the listing compared to what they'd been getting prior to the listing. Of course, the more profitable, the higher the salaries would be. I don't think I've seen many small cos. paying their MD so many $Mil in salaries!

Page 91
TRENDS

• (a) Our Order Book Our revenue in FY2004 increased by $25.0 million from $56.5 million in FY2003 to $81.5 million in FY2004. This was an increase of approximately 44% as compared to the previous corresponding period, which was due mainly to an increase in the selling price of the steel products we distribute. Barring unforeseen circumstances, we expect to register continued growth in our sales in FY2005 due to the growth in shipbuilding and marine related activities in Singapore and Southeast Asia. Typically in our industry, our customers do not commit to a definite and long-term purchase requisite of their requirement for the various steel products. Notwithstanding this, over the last 32 years, we have established a diverse pool of more than 600 customers in Singapore and the region. Our repeat customers who collectively account for approximately 80% of our revenue for each of the last three financial years ended 31 December 2004. We were therefore able to establish ourselves as a regional centre for steel products.
  
• (b) Steel Prices In FY2004, we achieved a gross profit margin of 30% due to a steep increase in the selling prices of the steel products and lower inventory holding cost. Our inventories were accumulated over the last few years when steel prices were lower. However, our Directors believe that the steel price increase in FY2004 was largely a result of strong global demand for steel. In Asia, the demand was primarily driven by the PRC due to their rapid growth of investments and industrial outputs. In 2004, the PRC government has taken steps to cool the economy, by using a combination of fiscal and monetary policies. Notwithstanding the recent increases in the price of iron ore and coking coal, we believe that the steep increase in steel prices in FY2004 is unlikely to be repeated in the near future. As a result, we believe that moving forward, our gross profit margin could be lower than in FY2004. The average selling prices for our steel products in June 2005 remained relatively stable as compared to the average selling prices in December 2004, supported mainly by the strong demand from our customers engaged in shipbuilding and marine related activities. Barring any unforeseen circumstances, we believe that demand for steel will continue to experience growth and our Group will continue to benefit from the increase in demand for the current financial year.

Comments - Fm the above highlighted points, Revenue may be higher than 2004 but Gross Margin will likely be lower. In a steel price increasing environment, the co. benefited fm having a high Inventory Turnover of aro' 300days (pg78, also above), resulting in a high Gross Margin in FY04. However, going forward, should the price of steel drop, the reverse will be true, ie. Gross Margin will drop (as they will then have expensive 300 days old stocks but selling price is lower). So, for those who plan to be vested, watch out for steel price trend.

Page 58 - We intend to recommend dividends of not less than 40% of our net profits attributable to Shareholders in FY2005.
Comments - From pg91 above, revenue may be slightly better and gross margin may be lower than FY04. I simply use net profits for FY03 and FY04 and average them to get an indication,

1. Net Profit : FY03 = $3.475Mil ; FY04 = $11.932Mil ==> Average = $7.7Mil
2. EPS : FY03 = 1.74cts ; FY04 = 5.94cts ==> Average = 3.84cts
3. Shares : Pre-IPO = 200Mil ; Post-IPO = 268Mil

Using the average EPS and the enlarged nos. of shares,

• EPS = 3.84cts * 200/268 = 2.87cts
• Thus Dividend = 40% * 2.87cts = 1.15cts
• Net Dividend Yield = 1.15/27 = 4.245%

Note : The above is just an estimate. No figures were given in the prospectus.

OTHER COMMENTS

1. Only new shares are being issued, ie. no vendor shares. So, meaning, they are not cashing out some of their current hldgs immediately.
   
2. The usual practice of all IPOs would be to distribute out most of the existing cash prior to IPO as dividends. The same is done here, but the controlling Lee family (and some others) chose to get preference shares (which were converted to shares for IPO) instead of cash.

The above 2 points does indicate that the controlling Lee family is planning to remain for the long term, which is good. But then again, they are very well paid, in terms of salary, so no reason for them to quit if co. is profitable.

Very likely, the other families were 'forced' to follow this direction of no vendor share being issued, but in return, their lock-up period is shorter, 3mths (pg65, also above). I think quite of few of them will likely cash out after the 3mth lock-up period.

Disclaimer : The above is only my opinion. Do not use the above as a basis for your decision.