Advancer Global Limited, the parent company of maid agency Nation Employment, is filing for an Initial Public Offering (IPO) on the Singapore Catalist board.
The company’s IPO market capitalisation is $38.1 million.
43 million new shares are up for grab at $0.22 each
2 million shares for public
4 million shares for stakeholders (directors, employees, customers, suppliers, people who have contributed to the group)
37 million shares for placement (private institutions or high net worth individuals)
The company’s management has promised to achieve a dividend payout of at least 50% of net profit to shareholders for FY2016, FY2017 and FY2018
Reasons for going public:
1) To increase public awareness of the company and its brands both locally and overseas.
2) To raise capital to fund future acquisitions.
3) To fund the company’s working capital
Advancer Global Limited consists of 3 core business: maid employment agency, cleaning and stewarding services, and security services.
AGL recorded growth in all 3 segments of its business over the last 3 years.
Employment Service revenues are stablising in term of revenue growth. It achieved a low single digit growth in revenue over the last 3 years.
Cleaning & Stewarding service and Security service revenues are both growing at double digit rate. Personally, I prefer stronger growth in this area of their business than Employment services as these are more recession-resistance and stable in terms of revenue as they are mostly contract-base services.
Cleaning & Stewarding Service’s is contributing more towards AGL overall revenue growth.
As the group derives more of its revenue from Cleaning & Stewarding and Security services, the less volatile (in my view) its future revenue will be, which makes it a better investment overall.
AGL currently has a quick ratio of 1.61, which means it is able to adequately cover its current obligations. Post-IPO, it will have a quick ratio of 2.63, which more than able it to cover its obligations. The excess cash can also be used by AGL to expand overseas or reduce its liabilities.
Other Operating Income
Although Other Operating Income represents less than 5% of revenue each year, it has been increasing steadily from 2.7% in FY2013 to 4.5% in FY2015.
The red flag (to me) is the weightage of ‘Government Credits & Grants’, which is more than 50% of Other Operating Income.
I feel that ‘Government Grants & Credits’ has a great impact on the group’s overall profitability. In FY2015 alone, AGL received almost $1.2million in Government Credit & Grants. Assuming that these Grants are non-taxable and are one-off (which is very likely), these credits actually represent 25%-31% of AGL’s net profit. If AGL no longer gets these grants and credits from the Government, AGL could potentially lose up to a quarter of their profit!
On a side note though, despite the huge implication Government Grants & Credits can have on its net profits, the stock has a PER of around 12 (using Net Profit less Government Grants & Credits). This actually makes the stock quite cheap in terms of valuation.
AGL did not break down the revenues it earned in the last 3 years geographically in its prospectus. We assume that it is currently only a local company. In its prospectus, it listed ‘overseas expansion’ as one of its reasons for going public – to increase brand awareness and fund overseas expansion.
We consider this as a double-edged sword. If AGL successfully expand overseas, its growth potential would be in the high double digits for the next 5 years. However, if it failed to expand overseas, we expect the company to face saturation in the local market and achieve growth rates of low double digits or lower.
The stock seems to be valued on the low end of the pricing spectrum base on fundamental analysis.
Post-IPO, the company will be adequately capitalised, runs a low risk defaulting on its obligations and has plenty of cash to fund its expansion and acquisition plans.
However, its ability to continue growing will depend on its overseas expansion while its profitability might be affected by the amount of Government Grants it receives.