BH Global Marine Ltd - IPO

BH Global Marine Limited

Issue statistics:
Offer size: 70m new shares
Public Tranche - 4m shares
Placement Tranche - 66m shares
Price: S$0.20
NTA per share (post-IPO): S$0.082
Historical PE: 6.1x (FY04)
Market Cap (post-IPO): S$56.0m
Open: 1 September 2005
Close: 8 September 2005, 12.00noon
Trading: 12 September 2005 (on "when issued" basis)
Lead Manager: Hong Leong Finance

The Singapore-based company supplies a comprehensive range of marine electrical products to ship chandlers, ship owners, ship management companies, shipyard operators and ship repair contractors. It expects the company's growth to be driven by the following factors: a) growth of shipping traffic through Singapore, and b) growth of the shipbuilding and ship repair industry in Singapore.

Revenue climbed 35.7% from S$18.1m in FY03 to S$24.6m in FY04. Earnings swelled 119.5% from S$3.1m in FY03 to S$6.9m in FY04 on the back of higher sales.


Estimated net IPO proceeds of S$12.4m will be used for the following:

1. S$3.0m to increase its inventory level, both in quantity and range.
2. S$2.5m to repay a term loan drawn down from Malayan Banking Berhad.
3. S$1.5m for the extension, addition and alteration works for a leasehold property.
4. S$0.5m to develop and expand a portfolio of OEM marine electrical products bearing its own name and to engage professional advice to assist in improving its brands for international registration as trademarks.
5. S$4.9m for stepping up its marketing efforts to other markets and for general working capital purposes.

COMMENTARY

Fm the IPO Prospectus,

Page 20~25 - RISKS RELATING TO OUR BUSINESS

We are dependent on certain major customers
Our top four customers collectively accounted for 31.8%, 33.2% and 40.4% of our revenue for FY2002,FY2003 and FY2004 respectively, as shown in the section “Major Customers” of this Prospectus. There is no assurance that we will be able to reduce our dependence on these customers over time nor can there be any guarantee that these customers will continue to place orders with us at current levels. The loss of, or significant reduction in business from any or all of these customers without a timely replacement will have a material and adverse impact on our revenue and financial performance.

We may be unable to repeat or maintain our past gross profit margin
There was a 13.1 percentage point improvement in our overall gross profit margin from 36.2% in FY2002 to 49.3% in FY2004. Please refer to the section “Management’s Discussion and Analysis of Results of Operations and Financial Condition” of this Prospectus for details. The increase in gross profit margin for the past three financial years ended 31 December 2004 was partly attributable to

(i) higher selling price for products from Europe as a result of strengthening of EUR;
(ii) lower purchasing costs as a result of the depreciation of US$ vis-à-vis S$ and
(iii) higher copper prices.

However, we are unable to ensure that such foreign exchange rates and copper prices will continue to be favourable to us and this may increase our cost of purchases. In the event that we are unable to pass on such increases of our cost of purchases to our customers, we may be unable to maintain similar levels of gross profit margins in the future and our performance may be adversely affected.

With our policy of stocking a comprehensive range and substantial quantities of marine electrical products, we are exposed to fluctuations in prices of basic raw materials and are subjected to stock obsolescence
Our level of inventory has grown progressively from $1.5 million as at 31 December 2002 to $7.4 million as at 31 December 2004. We have not made any provision for stock obsolescence in the past three financial years ended 31 December 2004. As marine cables and marine electrical products are made primarily from basic raw materials such as copper, rubber and steel, any major downward trends in their prices can materially erode the holding value of such inventory. It is not possible for us to hedge our inventory against such downward trends in prices of raw materials and when such events occur, our performance and financial position will be adversely affected. On the other hand, any major upward trend in the prices of such raw materials would increase the costs at which we have to purchase our inventory and correspondingly increase the amount of working capital required for our business. In the event that increase in prices cause substantial increase in working capital needed, and we are unable to fund such increases, our performance and financial position will be adversely affected. Moreover, certain of our comprehensive range of marine electrical products may be subject to unexpected obsolescence over the years in the event of lapses in maintenance of our inventory. In the event of such obsolescence, our performance and our financial position will also be adversely affected.

We do not have formal or long-term contracts with most customers and suppliers We currently have established relationships with our customers and suppliers.We are exposed to the risk of losing our relationships with any one of these customers or suppliers to competition. There is no assurance that these customers or suppliers will not terminate their relationship with us. If they do so, our business, results of operation and financial condition will be materially affected. As these relationships are non-exclusive and largely dependent on goodwill, such customers and suppliers are free to enter into similar or more favourable relationships with other parties. Most of the agreements underlying these relationships are informal and general in nature and do not legally bind the parties. In the event that any of the relationships are terminated, our performance will be adversely and materially affected.

We are reliant on shipping activities in Singapore
Our business is based primarily in Singapore. Our business operations in Singapore are dependent on the number of ship arrivals and shipbuilding activities in Singapore which are in turn dependent on:

• the ability of Singapore’s ports to compete with other regional ports in terms of price, service and efficiency; and
• the ability of Singapore’s shipyard operators to provide reliable, efficient and quality shipbuilding and repair services at competitive prices.

There can be no assurance that the number of ships arriving in Singapore will continue to remain at current levels. If the number of ship arrivals in Singapore decline substantially, our revenue and financial performance will be adversely affected.

We are exposed to the credit risks of our customers
As at 31 December 2004, our trade receivables of $7.3 million accounted for approximately 38.8% of our current assets and 31.9% of our total assets. Therefore, our financial position and performance are dependent, to a certain extent, on the creditworthiness of our customers. We usually extend credit terms of 30 days to 90 days to existing customers, both local and overseas.We are exposed to credit risks due to the inherent uncertainties in our customers’ business environment. These include political, social, legal, economic and foreign exchange risks, as well as those arising from unanticipated events or circumstances. As such, we are not able to assure you that the amount of bad debts written off will not increase materially in the future. Please refer to the section “Credit Management” of this Prospectus for more details. A delay or default in payment and/or significant increase in the amount of bad debts will have a material and adverse impact on our financial position and performance.

New investors will incur immediate dilution and may experience further dilution
Our Issue Price of 20 cents per Share is substantially higher than our pro forma NTA per Share of 8.2 cents based on the post-Invitation issued share capital. If we were liquidated immediately following this Invitation, each investor subscribing to this Invitation would receive less than the price paid for their Shares. Please refer to the section “Dilution” of this Prospectus for further details.
Comments - 143.9% Premium! (page28)

Page34
For FY2005 and FY2006, our Directors intend to recommend and distribute at least 40% of our net profit attributable to Shareholders as dividends and subject to the factors outlined above. However, investors should note that the intention to recommend the aforesaid dividends should not be treated as a legal obligation on our Company nor should it be treated as an indication of our Company’s future dividend policy. There can be no assurance that dividends will be paid in the future or of the amount or timing of any dividends that will be paid in the future.

Comments - From page28, EPS =3.3cts for FY04 but would be 3.1cts with service agreement in place. With enlarged no. of shares fm 21Mil to 28Mil, the indicative dividend yield,

• Diluted EPS = 3.1 * 21/28 = 2.325cts
• Dividends = 40% of 2.325cts = 0.93ct
• Net Yield = 4.65%

The above is just for indicative purpose as it's based on FY04 results. The yield would be better if BH is able to achieve a better EPS for FY05. The yield would be worse if BH achieves lower EPS for FY05.

Page 41 - OWNERSHIP STRUCTURE
Comments - Founding family controls with 70% after IPO. Free float only 25%, may be illiquid.

Page 48
Average trade receivables’ turnover = 120(FY02), 100(FY03), 89(FY04)
Average trade payables’ turnover = 53(FY02), 46(FY03), 65(FY04)
Comments - Improving collection and longer credit payment terms, which is good. But gap is still 25 days and the improvement is huge for FY04 but may be window dressing for IPO purpose.

Page 71 - PROSPECTS
TREND INFORMATION
For the current financial year ending 31 December 2005, based on current trend to-date, our Directors observe the following:

1. In relation to the sale of Marine Electrical Equipment, we anticipate the trend in increase in the prices of basic raw materials such as copper, rubber and steel, which are major components in Marine Electrical Equipment, to affect our purchasing costs. However, in general, we also expect that the selling prices of these products to increase, subject to the competitive conditions in our industry and fluctuations in the exchange rates between S$ and other currencies which we transact in.
2. In relation to Marine Consumables, generally, unit selling and purchase prices for these products are not likely to experience significant fluctuations as they are staples for the marine industry and demand and supply conditions do not change significantly. This is also subject to fluctuations in the exchange rates between S$ and other currencies which we transact in.
3. In relation to our operating expenses, we expect staff costs to increase due mainly to higher headcount and increments in salaries and wages as we expand our business and increase our marketing efforts.
4. In relation to our inventory, we expect to increase our purchases and hence, our inventory levels, as we aim to further improve our position as a supplier of a comprehensive range of products to our customers.

Cumulatively, our order books based on confirmed sales orders, from 1 January 2005 to the Latest Practicable Date was approximately $16.2 million. Based on our Directors’ knowledge and experience, typically, our lead-time to fulfil an order (from the receipt of purchase order) is one day for customers located in Singapore and approximately two to three days for our overseas customers.

Comments - Based on order books, revenue may be flat. Costs will likley be higher, due to staff cost and inventory build-up. Finance cost will be lower due to debts repayment from IPO proceeds. EPS will most likely be lower due to dilution from enlarged no. of shares and cost increases.

Page 78 - REMUNERATION OF EXECUTIVE OFFICERS AND OTHER EMPLOYEES WHO ARE RELATED TO OUR EXECUTIVE DIRECTORS
As at the date of this Prospectus, there are seven employees of our Group who are related to our Executive Directors. Johnny Lim and Eileen Lim, our Executive Officers, are the siblings of our Executive Directors. Hing Kah Wah, our Operations Chief Coordinator, is the brother-in-law of our Executive Directors. Chua Yew Beng, our sales executive, is the brother-in-law of our Executive Directors’ mother. Goh Siew Hong, our sales executive, is the sister-in-law of Alvin Lim, our Executive Director. Tay Kian Soon, our sales executive, and Ng Chin Peng, our warehouse supervisor, are the cousins of our Executive Directors. The aggregate remuneration of these employees for FY2003 and FY2004 were approximately $359,000 and $419,000 respectively. The compensation includes salary, bonus, CPF and benefits-in-kind from our Group. The basis of determining the remuneration of these related employees is the same as the basis of determining the remuneration of other unrelated employees.

Page 79 - EMPLOYEES
All our employees are located in Singapore. As at 31 December 2004, we had a total of 34 full-time employees. The number of temporary employees employed by us during the period under review is insignificant.
Comments - Family members comprises 3 siblings in senior mgmt + 7 other employees = 10. That means aro' 30% of employees are family members!

FINAL COMMENTS
Family business who'll retain 70% control after listing. Will likely be illiquid after the 1st week of listing and perhaps only come to life for a while when good dividends are declared. Don't expect biz to be exciting. Can be a yield play as they plan to pay at least 40% of profits as dividends for next 2 years. But, if the yield is going to be aro' 4-5%, I'd prefer to buy Singpost or Suntec, if I can catch them at the right price :D