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Just a few months back, NSB IPO-ed at 28 cents, selling about 59 million shares to institutional investors and 65 million shares to the public.
Recently, the market is selling NSB at about 15 cents. If institutional investors such as Lion Global, JP Morgan, and Goi Kok Ming (son of GSH) bought at 28 cents, NSB must be a steal now at 15 cents! Big discount!
Or is it?
In my initial assessment on 11 November 2017, I carelessly overlooked several glaring yet material details. I would have come to a very different conclusion. It only became apparent when the recent quarterlies were released. So let's start there.
1) The latest quarter results look really bad. How could it be, when it looked so good on the IPO prospectus? Must be the IPO expenses! Not really. Y-o-Y change, which excludes the IPO expenses, showed a drastic increase in some of the expense items. Refer to 2Q results here:
http://infopub.sgx.com/FileOpen/Q2-31Mar...eID=505983
What about 1Q results? It reported a 56.3% increase in Y-o-Y net profit, even though it had a $1.1m IPO expense! Not really. It included net profit of $2.5m from 4Q17. Stripping away this profit, NSB would be about $0.9m in the red for the previous quarter. Refer to 1Q results here:
http://infopub.sgx.com/FileOpen/Q1-31Dec...eID=489213
It does not make sense for the business conditions of F&B operators to change so sudden. There was no news of massive crab shortage or anything like it. From the 1Q and 2Q results, the cause of the fall in profit can be traced to 3 expense items; cost of goods sold, employee expenses, and other expenses.
How did these items fare before IPO? Let's take a look.
Expense items presented as a percentage of revenue:
-------------------------------------------before IPO--------- ------after IPO----
FY14 FY15 FY16 FY17 HY18
Cost of goods sold: 27.0 22.2 21.1 24.2 30.5
Employee expenses: 20.9 19.4 20.7 22.6 33.3
Other expenses: 8.8 5.5 5.2 7.8 13.8
Perhaps it was coincidental that costs were going down in years leading up to IPO, from FY14 to FY16, as presented in the IPO prospectus. And then going up immediately after, from FY17 onwards. I don't have a rational explanation. Could they have possibly reduced their reported expenses by paying for some of it through other ‘related but unrelated’ entities? I don't know. But that would be silly because such acts can land the involved in big trouble. In any case, I’m guessing that the expense figures in the near future will look more like the post, rather than pre, IPO figures.
2) If you're thinking that since management has 73% ownership in NSB, they will surely do plenty to turn things around, here's some more figures to ponder over:
During the restructuring exercise prior to IPO, all $16.8m of the retained earnings were paid out of NSB as dividends, leaving it with a $2 share capital. It was then recapitalised with $5.1m, which after taking into account the liabilities, puts equity at $3.9m.
Before the restructuring exercise, from FY14 to FY16, dividends totaling $20.1m were paid out.
During the IPO, 50m vendor shares were sold, giving NSB owners $14m.
Total cash received by NSB owners over the past 3 years: $16.8m - $5.1m + $20.1m + $14m = $45.8m
They could still be highly motivated, even with all that cash. I don't know.
3) Market says NSB is now worth $71m, down from $130m at IPO. For $71m you get a struggling beer business, an unproven food vending business, an as of yet unknown casual dining business, and a restaurant business with changing expense figures that has no good explanation. It also has about $20m of cash. But this cash is earmarked to develop these struggling, unproven, and unknown new businesses. I don't know what kind of cash flows they will produce, so I wouldn't be expecting much of it.
Another way of looking at this is that NSB owners has set themselves up with $45.8m of retirement money, while they use funds from IPO investors to fund their new (and more risky) business ideas. Although IPO investors collectively hold only 27% of the shares, $21m out of $26m (or about 80%) of NSB's share capital was funded by them. Similar moves were also done by other recent IPOs. HRnetGroup, which also took out large 'retirement money' before IPO, also used IPO funds to acquire foreign businesses.
4) The prospectus shows the audited equity of NSB as of 30 June 2017 is $15.3m, which is reproduced numerous times throughout the document. But in reality, the equity is $3.9m, which is its unaudited proforma (reproduced fewer times throughout the document), due to the restructuring as described above in point 2. It can easily mislead and confuse if one is not careful, just like its declaration of 23.6x subscription for its shares. Who could be advising NSB?
The sponsor is RHT Capital.
Which, as I recall, has also been highlighted in:
https://www.valuebuddies.com/thread-395-...#pid147565
https://www.valuebuddies.com/thread-1452...#pid146805
What do you think NSB is worth? And how much will you pay for it?
Recently, the market is selling NSB at about 15 cents. If institutional investors such as Lion Global, JP Morgan, and Goi Kok Ming (son of GSH) bought at 28 cents, NSB must be a steal now at 15 cents! Big discount!
Or is it?
In my initial assessment on 11 November 2017, I carelessly overlooked several glaring yet material details. I would have come to a very different conclusion. It only became apparent when the recent quarterlies were released. So let's start there.
1) The latest quarter results look really bad. How could it be, when it looked so good on the IPO prospectus? Must be the IPO expenses! Not really. Y-o-Y change, which excludes the IPO expenses, showed a drastic increase in some of the expense items. Refer to 2Q results here:
http://infopub.sgx.com/FileOpen/Q2-31Mar...eID=505983
What about 1Q results? It reported a 56.3% increase in Y-o-Y net profit, even though it had a $1.1m IPO expense! Not really. It included net profit of $2.5m from 4Q17. Stripping away this profit, NSB would be about $0.9m in the red for the previous quarter. Refer to 1Q results here:
http://infopub.sgx.com/FileOpen/Q1-31Dec...eID=489213
It does not make sense for the business conditions of F&B operators to change so sudden. There was no news of massive crab shortage or anything like it. From the 1Q and 2Q results, the cause of the fall in profit can be traced to 3 expense items; cost of goods sold, employee expenses, and other expenses.
How did these items fare before IPO? Let's take a look.
Expense items presented as a percentage of revenue:
-------------------------------------------before IPO--------- ------after IPO----
FY14 FY15 FY16 FY17 HY18
Cost of goods sold: 27.0 22.2 21.1 24.2 30.5
Employee expenses: 20.9 19.4 20.7 22.6 33.3
Other expenses: 8.8 5.5 5.2 7.8 13.8
Perhaps it was coincidental that costs were going down in years leading up to IPO, from FY14 to FY16, as presented in the IPO prospectus. And then going up immediately after, from FY17 onwards. I don't have a rational explanation. Could they have possibly reduced their reported expenses by paying for some of it through other ‘related but unrelated’ entities? I don't know. But that would be silly because such acts can land the involved in big trouble. In any case, I’m guessing that the expense figures in the near future will look more like the post, rather than pre, IPO figures.
2) If you're thinking that since management has 73% ownership in NSB, they will surely do plenty to turn things around, here's some more figures to ponder over:
During the restructuring exercise prior to IPO, all $16.8m of the retained earnings were paid out of NSB as dividends, leaving it with a $2 share capital. It was then recapitalised with $5.1m, which after taking into account the liabilities, puts equity at $3.9m.
Before the restructuring exercise, from FY14 to FY16, dividends totaling $20.1m were paid out.
During the IPO, 50m vendor shares were sold, giving NSB owners $14m.
Total cash received by NSB owners over the past 3 years: $16.8m - $5.1m + $20.1m + $14m = $45.8m
They could still be highly motivated, even with all that cash. I don't know.
3) Market says NSB is now worth $71m, down from $130m at IPO. For $71m you get a struggling beer business, an unproven food vending business, an as of yet unknown casual dining business, and a restaurant business with changing expense figures that has no good explanation. It also has about $20m of cash. But this cash is earmarked to develop these struggling, unproven, and unknown new businesses. I don't know what kind of cash flows they will produce, so I wouldn't be expecting much of it.
Another way of looking at this is that NSB owners has set themselves up with $45.8m of retirement money, while they use funds from IPO investors to fund their new (and more risky) business ideas. Although IPO investors collectively hold only 27% of the shares, $21m out of $26m (or about 80%) of NSB's share capital was funded by them. Similar moves were also done by other recent IPOs. HRnetGroup, which also took out large 'retirement money' before IPO, also used IPO funds to acquire foreign businesses.
4) The prospectus shows the audited equity of NSB as of 30 June 2017 is $15.3m, which is reproduced numerous times throughout the document. But in reality, the equity is $3.9m, which is its unaudited proforma (reproduced fewer times throughout the document), due to the restructuring as described above in point 2. It can easily mislead and confuse if one is not careful, just like its declaration of 23.6x subscription for its shares. Who could be advising NSB?
The sponsor is RHT Capital.
Which, as I recall, has also been highlighted in:
https://www.valuebuddies.com/thread-395-...#pid147565
https://www.valuebuddies.com/thread-1452...#pid146805
What do you think NSB is worth? And how much will you pay for it?