BullRun: Union Steel Holdings : IPO

Issue statistics

Offer size: 75m new shares + 14m vendor shares Public Tranche - 4.2m shares Placement Tranche - 84.8m shares
Price: S$0.20
NTA per share (post-IPO): 10.00 cents
Historical PE: 5.73x (FY04)
Market Cap (post-IPO): S$69.4m
Open: 2 August 2005
Close: 11 August 2005, 12.00noon
Trading: 15 August 2005 (on "when issued" basis)
Lead Manager: OCBC

The company is principally engaged in the recycling of ferrous and non-ferrous scrap metals, the trading of steel products and the provision of other services, such as waste collection and management, demolition works, rental of steel plates and car scrapping. The Group has more than 500 customers spread across Japan, China, India, Indonesia, Malaysia and Singapore. The company believes global demand for metals is likely to rise as China and other Asian nations continue their economic and infrastructural expansions. Its directors believe China will continue to be a major consumer of steel and other metals in line with its economic expansion and infrastructural expansion plans, such as projects relating to the Three Gorges, the Olympics and the Shanghai Exposition. Its directors also believe India and Indonesia may undergo further infrastructural development. Revenue jumped 30% from S$86.3m in FY03 to S$112.1m in FY04. Earnings more than doubled from S$4.6m in FY03 to S$9.5m in FY04.

Estimated net IPO proceeds of S$13.2m will be used for the following:

S$5.0m for its expansion plans in China and Indonesia, failing which the net proceeds will be used for other possible acquisitions, strategic partnerships and/or JVs in China, Indonesia or elsewhere.
S$5.0m to pay down certain bank borrowings from United Overseas Bank Limited and Sing Investments & Finance Limited.
The balance as working capital.

Comments
From the prospectus,

Page 79
For FY2005, our Directors observed the following trends:
(i) Our Directors expect our revenue in FY2005 to be relatively similar compared to FY2004. This is primarily a result of our Company maintaining our sales margins in light of higher direct costs.
(ii) As a result of the increase in the international prices of fuel in 2005, our Directors expect expenses on fuel, gas and diesel for our Group to be higher in FY2005 as compared to FY2004. As a result of the increase in oil prices, our Directors expect distribution costs (primarily carriage and freight charges) and our direct costs (primarily fuel costs) to be higher in FY2005 as compared to FY2004. Given the above and barring any unforeseen circumstances, our Directors believe that, for FY2005, our Group will remain profitable but the level of profitability in FY2005 will likely be lower as compared to FY2004.
Page 62 under Note (2) in small prints,
Had the proposed Service Agreements been in force at the beginning of FY2004, the estimated total remuneration for Messrs Ang Yu Seng, Ang Yew Lai and Ang Yew Chye and the profit after taxation for FY2004 would have been S$1.9 million and S$8.7 million, respectively. Please refer to the section entitled “Service Agreements” for a description of the Service Agreements.

From the info provided in these 2 pages, what is clear is that EPS will for sure be lower in 2005 compared to 2004 as Revenue will be flat and Expenses, Costs and Salary (Net Profit $9.5Mil in 2004, so $1.9Mil salary in 2005 for the 3 directors will result in a very significant reduction in 2005 profit) will go up. Thus,

2004 EPS = 3.49cts (272Mil Shares)
With the new shares issued fm IPO, 2004 EPS = 2.74cts (347Mil Shares)
Best Case 2005 EPS = 2.74cts (if same as 2004)
Therefore, Best Case Dividend = 30% of 2.74cts = 0.822cts (stated in prospectus that they MAY pay 30% of net profit as dividend)
Thus, Best Case Net Dividend Yield at $0.20 = 4.11%

However, due to the above statements, Dividends will be significantly less than 0.822cts and Net Yield significantly less than 4.11%.

Page 83
Mr Lim Chen Wei, Jonathan is our Group Financial Controller in charge of the finance functions of our Group. From 1998 to 2000, Mr Lim was a senior associate with PricewaterhouseCoopers. From 2001 to 2002, he became the internal audit supervisor of Kuok Oils and Grains Pte Ltd. From 2002 to 2004, Mr Lim was the finance manager of Digiland International Limited where he managed, amongst other matters, the daily financial operations, the monthly consolidated financial statements and operating performance and the credit risk exposure of Digiland International Limited and its subsidiaries. Mr Lim is a certified public accountant with the Institute of Certified Public Accountants of Singapore and a certified internal auditor of the Institute of Internal Auditors. He graduated with a Bachelor’s Degree in Accountancy (Merit) from the Nanyang Technological University in 1998.

For the important post of Group Financial Controller, the staff (age 31) was hired only in 2004 or 2005, likely for the purpose of this IPO.

Pg VI (Appendix)

The audited financial statements can be found here for the 3 companies under the Union Steel Holdings group,

Union Steel Pte Ltd
YLS Steel Pte Ltd
Yew Lee Seng Metal Pte Ltd

The Net Profit Margin is dropping for (1). The Group Margin is however going up, due to YLS Steel Pte Ltd increasing margin. But, as the revenue contributions of (1) and (2) are almost equal, in the longer term, the declining margin of (1) may be bad for the group as a whole.

My Action

May be good for a stag as issue size is small and easily 'cornered' but I'll most likely give it a miss. Mid term, not very attractive due to flat revenue and reducing profits and low yield. Long term, big question mark, so better to re-look after the 2005 results.

References