IPO rush

“The investing public has a bigger appetite. The mom-and-pop investors, and even institutional investors, are starting to look beyond yield,” says Tay Hwee Ling, Deloitte Singapore’s audit and assurance partner, at a briefing on Nov 23. In the years following the global financial crisis, major central banks pursued aggressively loose monetary policies, which drove interest rates down and provided some support for stock prices. However, capital spending activity in the corporate sector was subdued in the face of excess capacity and general uncertainty.

That is now changing as a result of accelerating economic growth and new technologies, some market watchers say. Now, more businesses are being pushed into the public market, to raise money for their own growth or as a means of funding new ventures by their parent companies. The result of all this could be a more vibrant market and wider investor participation.

As at Nov 15, some $3.7 billion had been raised via IPOs. Only $2.3 billion was raised during the whole of 2016, and only $513 million in 2015. At their IPO prices, the 15 companies that listed by Nov 15 this year were valued at $6.56 billion. A big chunk of this was due to NetLink Trust, a unit of Singapore Telecommunications that hit the market in July. The IPO of the trust raised $2.45 billion. Singtel took in proceeds of some $2.3 billion from the divestment of a 75% stake in the trust. It recently declared a special dividend of $500 million, much less than the market expected. Singtel says it plans to use the remainder of the funds it raised for spectrum payments and growth investments. The company is widely seen to be the most successful of the three telecoms players in building a portfolio of digital businesses.

Meanwhile, 10 of the 15 IPOs were by companies that listed on Catalist, the specially created board for small, fast-growing enterprises. A total of $201.5 million has been raised by these companies. At their IPO prices, they had a combined market capitalisation of $1.1 billion. By contrast, Catalist-bound companies raised just over $106.2 million in IPOs in 2016, less than half of 2015’s $236.9 million.

Interestingly, as at Nov 15, four of the five best-performing stocks since their listing this past year were Catalist counters. The best performer is Samurai 2k Aerosol, a company that sells spray paints. It sold shares in an IPO at 20 cents each in January, making it the first listing of the year. The stock closed on Nov 23 at $1.12, up 460% since the IPO. Founded by an individual named Ong Yoke En, whose business card describes him as CEO and “inventor”, the company has created its own aerosol canister with two chambers. When used for the first time, the smaller chamber breaks open, allowing certain additives to mix with the paint and providing a hard-wearing protective coating to the surface that is painted.

The second-best performer is Catalist-listed concert organiser UnUsUaL, which did an IPO in April at 20 cents a share. The stock has risen 275% since then and is now trading at 75 cents. The company focuses on bringing Western artists to China’s smaller cities, where this sort of live entertainment is scarce and local governments are hungry for tourism dollars. Fast-growing film producer mm2 Asia acquired 51% of the company for $26 million last year. UnUsUaL is still 82.18% owned by a vehicle called UnUsUaL Management, in which mm2 has a 51% stake and UnUsUaL’s founders Leslie and Johnny Ong hold the remaining 49%. As at Nov 23, UnUsUaL had a market capitalisation of more than $482 million.

It should also be pointed out that, as at Nov 15, four of the five IPOs this past year that are currently trading underwater are also Catalist counters. The worst performer is Aspen (Group) Holdings, a Malaysian property developer. The company sold shares in an IPO at 23 cents in July. The stock is currently trading at 20 cents, down 13.9%.

More IPOs coming
Since Nov 15, there have been at least four more IPOs. Two of them are F&B businesses listing on Catalist: RE&S Holdings and No Signboard Holdings. Another is MindChamps PreSchool, a company that operates early education centres, which is listing on the Mainboard.

Then, there is Cromwell European REIT, which owns a portfolio of offices and industrial properties in countries such as Italy, France, Denmark, the Netherlands and Germany. CEREIT attempted to list two months ago with a portfolio that included assets in Poland. If its listing goes through, it will be the second REIT with foreign assets to hit the market this month, after Keppel-KBS US REIT, which holds office properties in the US.

“Clearly, from a global perspective, asset owners and sponsors around the world continue to view Singapore as an attractive market to monetise and inject their assets into trust vehicles, allowing them to recycle capital and finance their development activities,” says Ho Cheun Hon, Credit Suisse’s head of Southeast Asia equity capital markets.

However, Singapore is not the only market seeing a surge in IPO activity, says Ernest Kan, Deloitte’s deputy managing partner. “We want to talk about Singapore, but other countries in Southeast Asia are getting more interesting. Other markets have something comparable, they are coming up strongly.” Thailand, for one, is now a leading market in Southeast Asia, with an especially strong and steady pipeline of energy-related companies going public.

According to Deloitte, as at Nov 15, there were 144 IPOs this year in Southeast Asian markets, which raised a total of $10.4 billion. At their IPO prices, the 144 companies had a combined market value of $33.9 billion. Last year, there were just 113 issues that raised a total of $7.5 billion. Among the countries that have seen much bigger IPOs this year is Malaysia, where nearly $2.4 billion has been raised so far, which is six times what was raised for the whole of 2016.

Meanwhile, China and Hong Kong are much bigger IPO centres, attracting far more exciting companies. As at Oct 31, China had 377 IPOs and Hong Kong, 121. “We need to peg ourselves to these markets. We can’t just think, we have NetLink and it is very big. Only when you look beyond Singapore will you have more energy to do more,” says Kan. How will the Singapore IPO market perform next year? “The pipeline is still there, still steady, and with more variety in terms of geography,” says Tay of Deloitte. “There’s still sufficient liquidity, there are potential buyers willing and able to subscribe,” she adds. Credit Suisse’s Ho warns that macro factors can change the market and investment sentiment rapidly. “But the general expectation is that we will continue to see this trend of healthy IPO issuance activity next year. Credit Suisse continues to have active marketing conversations with potential issuers regionally as well as internationally.”

Carmen Lee, head of OCBC Investment Research, figures there could be as many as 20 new listings in 2018, about as many as there are likely to be this year. “However, the more pertinent point is the size of the IPOs,” she says. She points out that NetLink Trust boosted the IPO data significantly for Singapore this year. And, computer games peripherals maker Razer helped boost excitement in Hong Kong, where it garnered a valuation of US$4.6 billion ($6.2 billion). “Market watchers will be looking out for deals of a similar nature,” notes Lee.

More risk taking?
What does all this mean for investors? Clearly, participating in an IPO is different from hunting for value among beaten-down stocks. Companies come to market for funds to grow, but they also do so at a time when they are able to garner the best valuations.

With economic growth broadening out and market sentiment turning more bullish, companies are coming to market at higher valuations. According to Deloitte, the Catalist-bound IPOs that took place up until Nov 15 were priced at an average of 11.3 times earnings. Catalist- bound IPOs in 2016 and 2015 were priced at an average of 9.6 and 8.7 times earnings respectively.

On the other hand, the latest crop of Catalist- bound IPOs has better rates of profitability than the Catalist companies that came to market in 2016 and 2015, according to Deloitte. Net margins for companies that listed on Catalist this year averaged 9.5%, up from 7.9% in 2016 and 8.3% in 2015.

Gregory See, a fund manager at AGT Partners, which is participating in the IPOs of MindChamps and No Signboard, says he is generally indifferent to market sentiment but inclined to be “more aggressive” when market volatility results in cheaper valuations. However, one really has to judge each IPO on its own merits and take into consideration the ability of a company to deliver on its growth plans. “It is more useful to look at companies in terms of their value proposition and intrinsic value, rather than focusing too much on what the market may do in the short term,” See points out.

Whatever the case, a more active IPO market looks set to energise the local market. The last new listing to hit the market before this issue of The Edge Singapore went to print was restaurant operator RE&S Holdings. On Wednesday, Nov 22, its first trading day on Catalist, the stock closed at 31 cents, nearly 41% above its IPO price. On the following pages, we have also looked at the prospects for MindChamps, CEREIT and No Signboard.

Second time’s the charm for Cromwell European REIT?
BY SHARANYA PILLAI

The public offering for Cromwell European Real Estate Investment Trust (CEREIT) opened on Nov 22, about two months after its first attempt at an IPO was called off. The offering of 428.5 million units at €0.55 per unit is expected to raise gross proceeds of €236 million ($376 million). Based on the offer price and estimated distribution per unit (DPU), the REIT will have a distribution yield of 7.8% in 2018. At listing, it will have a market capitalisation of €866 million. CEREIT is expected to have gross borrowings of about €494.4 million, with total borrowings and deferred payments as a percentage of the deposited property of about 36.8%.

When listed, CEREIT will be the first euro-denominated REIT on the Singapore Exchange. It will also be the second pure-play European REIT on the bourse. The first is IREIT Global, which owns five freehold properties in Germany and was listed on the Mainboard in August 2014. For 9MFY2017 ended Sept 30, IREIT reported a DPU of 4.31 cents. Based on its closing price of 75.5 cents on Nov 22, it has a market cap of $473 million and an annualised yield of 7.5%.

CEREIT’s offering comprises an international placement of 392.2 million units and a public offering of 36.4 million units. Investors subscribing to the Singapore public offering will pay 88.5 Singapore cents a unit.

The REIT, which is sponsored by Australia-listed Cromwell Property Group, will hold 74 properties across five Western European countries. Collectively, the assets had an appraised value of €1.4 billion and an aggregate lettable area of 1.1 million sq m as at April 30. The Netherlands, Italy and France account for 34.5%, 29.9% and 22.1% of the portfolio, respectively. The remaining properties are located in Germany and Denmark.

Office and light industrial/logistics properties account for 47.4% and 42.1% of the portfolio, respectively. The portfolio also includes three government-let campuses, one retail asset and one hotel in Italy. Overall, the assets have a weighted average lease expiry of 4.9 years.

In its preliminary prospectus dated Sept 8, CEREIT was slated to have a portfolio worth €1.8 billion with an aggregate lettable area of 1.4 million sq m. The REIT had then included seven Polish assets, which collectively accounted for 26.2% of the IPO portfolio. These included shopping centres in the capital Warsaw and hypermart-anchored convenience centres in the country’s secondary cities. On Sept 22, Cromwell Property Group announced it was not proceeding with the registration of CEREIT’s prospectus.

The IPO had been hindered by concerns over the Polish assets as well as the retail sector, says Cromwell EREIT Management CEO Philip Levinson. Cromwell EREIT Management is the manager of CEREIT. “Investors are very familiar with Western Europe, especially [those] out of Singapore. Poland requires a lot more investigation to get comfortable with both its macro economy and real estate market. Retail [assets] across the real estate universe [are] in the midst of a shift and that was creating some concern among investors,” he says.

“When we postponed the registration… it was clear to us that the market conditions were not optimal for a portfolio of this complexity and size. So, rather than pushing it through, we elected to take it off the market temporarily and review investor feedback,” Levinson says.

When asked whether the Polish assets may be injected into the REIT in the future, he says: “To be honest, we believe the Polish real estate market is one worthy of consideration. But that being said, we won’t be reintroducing Poland into the portfolio in the foreseeable future.”

Cromwell EREIT Management’s chief investment officer Thierry Leleu says Europe has seen a decline in unemployment, strong household consumption and GDP growth. “When you couple that with one of the legacies of the global financial crisis, which was very little new supply being made available, that actually bodes very well for real estate, because the logical consensus is that there will be upward rental growth, notably in the gateway cities where our portfolio will be focused,” he notes.

Three cornerstone investors have entered into separate subscription agreements for 581.8 million units at the offer price. Cerberus Singapore Investor, an affiliate of a vendor of certain properties in CEREIT’s portfolio, will hold at least 11.6% of CEREIT. Hillsboro Capital, an investment firm of Andrew Tan’s, will hold another 11.6%. Tan is chairman of Philippine conglomerate Alliance Global Group. Gordon Tang and his wife Celine will hold 13.9%. Tang is non-executive director of property developer SingHaiyi Group and Celine is its group managing director.

Cromwell Property Group has committed to hold a strategic stake of about 35.8% of CEREIT. If an over-allotment option is exercised in full, Cromwell Property Group will own 32.9%.

The public offer closes at noon on Nov 28. Trading in units of CEREIT is scheduled to start on Nov 30 at 2pm.

MindChamps touts new teaching ‘movement’ as it eyes expansion in China and Australia
BY CHAN CHAO PEH

David Chiem Phu An, who studied film and theatre, is putting on his biggest show ever as he steers MindChamps PreSchool through a listing on the local bourse and prepares to export the early childhood education company’s curriculum to China and Australia.

A refugee from Vietnam who found his way to Australia, Chiem has spent the past decade building MindChamps into a leader at the top end of the early childhood education sector in Singapore. Specifically, among players that charge $1,700 a month or more for day-long sessions, MindChamps now claims a market share of 38.5%. Its competitors EtonHouse and Busy Bees command market shares of 5.5% and 26.4%, respectively, according to MindChamps’ listing prospectus, which cites research by a firm called Converging Knowledge.

While $1,700 a month might sound like a lot of money, Chiem says there is no shortage of parents willing to pay for high-quality preschool education, even when times are bad. “This is your child’s mind you are developing for the future; this is not a handbag,” says Chiem, who is chairman and CEO of the company. In fact, he goes as far as to say that MindChamps is a “recession-proof” business. “For parents, if something hits, you might sell your car or other things. But taking your child out of a school they love is probably the last thing parents want to do.”

MindChamps owns and operates a total of 10 preschool centres, and has given out franchise licences to another 44 centres. The centres are mainly in Singapore but also in Australia, the Philippines and United Arab Emirates. According to the company, to reflect growing demand, its franchise fee has gone up from $55,000 in 2008 to $150,000 currently. On top of this, its franchisees have to pay royalties.

In a move that investors would cheer, MindChamps has introduced a policy of raising the fees charged by its preschools every year. The company previously increased its fees every other year or so. Chiem says it is a more transparent way of running the business. “This is what it is: no surprises, consistency in everything, from rent to teachers’ costs and all those things.”

For 2016, MindChamps posted a 48.1% y-o-y rise in revenue to $18.4 million and a 55.7% jump in earnings to $5.8 million. However, for 1H2017, the company reported a 53.1% y-o-y decline in earnings to $1.5 million on a 4.5% y-o-y growth in revenue to $9.2 million. The company attributes the drop to its 1H2016 revenue and earnings being boosted by some $1.4 million in master franchise licensing fees.

A movement, not a model
What is it that makes MindChamps different from preschools that charge a fraction of its fees? The company says its curriculum, developed on the back of research by a neuroscientist named Allan Snyder, is capable of effectively reshaping the minds of children. It claims, for instance, to be able to train children to respect and understand the ideas and views of other people, while having no fear of being themselves.

Chiem says MindChamps has not just created a new “model” for teaching children but also started a “movement” that will change early education in the 21st century. He also characterises the kind of childhood education that MindChamps provides as a service that is still going through a process of price discovery. According to him, some childcare educators in China charge as much as $3,000 a month. And, it is really the preschools that are able to justify fees of more than $1,000 a month that are growing the fastest. “If you charge anything much lower, [the parents] won’t want it,” he says.

MindChamps is succeeding in not only drawing parents eager for their children to get a good start in life but also investors excited about helping it bring its method of teaching to other parts of the world. This past week, the company sold a total of 30.5 million shares to investors at 83 cents each. Taking into account both the public and placement tranche, the offer was 21.4 times subscribed. Another 28.9 million shares were taken up by three cornerstone investors.

Among the cornerstone investors is Hong Kong-listed China First Capital Group. Previously in the automotive parts business, CFCG has in recent years shifted its focus to financial and education services. It now has a market value of some HK$17 billion ($2.9 billion). Another cornerstone investor is Hillhouse Capital Management. Founded by Zhang Lei, a Yale University graduate, the firm started with just US$20 million in seed money from Yale’s endowment fund and now manages more than US$30 billion ($$40.3 billion). Zhang was an early investor in e-commerce giants such as JD.com and Tencent Holdings. The third cornerstone investor is Target Asset Management, run by veteran fund manager Teng Ngiek Lian.

Post-IPO, the largest shareholder of the company is a privately held company called MindChamps Holdings, with just below 51% of the total outstanding shares. This entity is majority-owned by Chiem and his wife, non-executive director Catherine Du. A few other members of the senior management team of MindChamps own shares as well.

Another significant MindChamps shareholder is Singapore Press Holdings, which first invested $12 million in 2014 for a 22% stake. On Nov 10, SPH bought another 4.84% for almost $4 million to bring its total pre-IPO stake to 26.84%. With the IPO, SPH’s stake has been trimmed to 20%. At MindChamps’ IPO price, this stake is worth $40 million, or 2.5 cents per SPH share.

‘Just the beginning’
All in, MindChamps raised total net proceeds of some $46.2 million through its IPO. At its IPO price, the enlarged company is valued at just over $200.5 million, or some 34.6 times its 2016 earnings. While that might seem a lofty valuation, some investors think it is justified, given the company’s growth potential.

Notably, MindChamps is expected to leverage the backing of CFCG and Hillhouse to quickly expand in China. Chiem declines to say how fast MindChamps plans to expand in China, but he emphasises that the likes of CFCG and Hillhouse invest with the expectation of seeing significant results. “You can say they don’t do things in bite size.”

Gregory See, director at AGT Partners, notes that the current preschool market leader in China is Shanghai-listed Vtron Group, which was trading at 43 times earnings as at Nov 22. He also points out that the market is still quite fragmented, with the five largest players having a combined market share of just over 3% at the moment. “We are not overly concerned with traditional valuation metrics at this point in time as the company is still in an investing phase,” says See.

Chiem says the IPO could be the harbinger of more capital raising to spur the new teaching “movement” that MindChamps has been championing. Besides China, the company is also looking to expand in Australia, where it acquired four preschool centres for A$15.5 million ($16 million) just before the IPO was launched. Chiem has big plans to grow the company. “The IPO is really just the beginning. [It is] the vehicle to bring on board other channels to rapidly raise funds.”

No Signboard seeks listing to diversify as seafood chain sees declining sales
BY JEFFREY TAN

No Signboard Holdings had previously found little success in a regional expansion of its seafood chain of restaurants, famed for its signature white pepper crab dish.

The company now intends to diversify into the beer and ready-meals businesses, as well as open a new restaurant chain. It is seeking a listing on the Catalist board of the Singapore Exchange to raise funds for its expansion. The company is issuing 15.7 million new shares and selling 50 million vendor shares at 28 cents apiece. Only 2.5 million shares are available to the public, with the remaining 63.2 million shares being placed out. Another 59.3 million new shares are being issued to cornerstone investors.

Among them is Goi Kok Ming, CEO of property developer GSH Corp. Goi is the son of well-known local businessman Goi Seng Hui, who is executive chairman of GSH. Other cornerstone investors include Asian Opportunities Absolute Return Master Fund, JPMorgan Asset Management (Singapore), Lam Choon Sen — founder and executive chairman of logistics firm Goodpack, LB Asset Management, Lion Global Investors, OSC Investments Capital and Qilin Asset Management.

Of the expected gross proceeds of $21 million, No Signboard intends to spend $10 million on a new brewery. It will also expand its in-house beer business Danish Breweries. The company had acquired an 80% stake in Danish Breweries for $1.8 million in cash in June. The remaining 20% stake was acquired by No Signboard director Samuel Chen. Danish Breweries makes and sells its own brand of beer called Draft Denmark and brews beer for third-party brands.

Another $5 million will be used to establish a chain of Chinese casual dining restaurants. No Signboard plans to open two such outlets in 2H2018. A further $2 million will be used to sell ready meals via vending machines installed by related entity Ma2 Shop. The remaining $4 million will be used for general working capital purposes and to cover listing expenses.

No Signboard started out in the late 1970s as a seafood stall run by Ong Kim Hoi at the Mattar Road Hawker Centre on Old Airport Road. The stall did not have a signboard and was known as No Signboard among regular customers. Today, Ong’s grandchildren — executive chairman and CEO Sam Lim, and executive director and chief operating officer Lim Lay Hoon — run a much larger F&B operation. No Signboard owns and operates three No Signboard Seafood restaurants at Esplanade, VivoCity and The Central @ Clarke Quay. It also has a franchise granted to Mattar Road No Signboard Seafood Restaurant and its owners Yeo Nak Keow and Cheo Chia Kew. Yeo and Cheo are relatives of the Lims.

In 2008, No Signboard ventured overseas via a franchise in Jakarta. The restaurant closed down after three years. The company also opened a restaurant in Macau in 2008 and one in Hong Kong in 2011. A “challenging business environment in those jurisdictions” led the company to shutter its overseas businesses and refocus on Singapore.

Unfortunately, the company’s performance has been uninspiring. Revenue fell 10.3% to $22.7 million in FY2016 ended Sept 30, from $25.3 million a year ago, despite a 5.6% increase in average spend per customer to $94. Earnings fell 13.5% y-o-y to $7.8 million.

No Signboard declined to be interviewed for this story. In its prospectus, the company attributed its weak performance to slower economic growth, which “adversely affected the local spending power”, and lower customer count.

The company’s performance has continued to be weak in 9MFY2017. It generated restaurant sales of $15.8 million, down 6.5% y-o-y. The company had cash and cash equivalents of $50,000 as at June 30, compared with $700,000 a year ago.

By comparison, its direct competitor Jumbo Group reported a positive set of results in the same period. Revenue rose 3.5% to $106.9 million, from $103.3 million a year ago. Earnings grew 4.7% y-o-y to $11.8 million, from $11.3 million. The company had cash and cash equivalents of $48.1 million as at June 30, compared with $54.1 million a year ago. No Signboard’s offer closes on Nov 28. The stock is expected to begin trading on Nov 30. At IPO, the company will have a market capitalisation of $129.5 million and an earnings multiple of 13.9 times.