Sin Ghee Huat IPO.

Closing date of application: 5 June 2007
Commencement of trading: 7 June 2007

Established in 1980s, Sin Ghee Huat is a “one-stop” distributor of stainless steel products used in, amongst others, the following industries:

- oil and gas and petrochemical
- marine
- construction
- food processing

They supply more than 4,000 items of stainless steel products including pipes and pipe fittings, plates, bars, tubes and flanges, and are a major distributor of 304/304L and 316/316L grades of stainless steel products in Singapore.

Their products are sourced from over 50 reliable suppliers from Finland, Italy, Japan, South Korea, Spain, and Taiwan, and distributed to over 800 customers throughout Singapore, Malaysia, and other countries in Asia Pacific and the Middle East. Repeat orders from our customers accounted for approximately 90% of our revenue.

Revenue breakdown:

Their revenue stream is derived from 2 sources, namely:

Project Sales:

Project sales to contractors and engineering firms, manufacturers and end users who usually purchase a diverse range of products to complete their projects. Project sales accounted for 62.1% of revenue for FY2006, and their customers include MNCs such as Chevron, Exxonmobil, Shell, and even smaller companies like Hiap Seng and Rotary Engineering.

Project sales by industry are as follows: Oil, Gas and Petrochemical (43%), Marine (22%), Construction (12%), Food Processing (6%), Others (17%).

Product Sales:

Product sales accounted for 37.9% of revenue for FY2006, and the customers are mainly traders who purchase our products for resale to other customers.

Key future plans

1) To redevelop existing or acquire new warehousing facilities and equipment.
2) To develop an online requisition system.

Key risk factors

1) They have previously written off slow moving stock, for the amounts as follows: $1.8m for FY2004, $751k for FY2006, and $289k for 1HFY2007.
2) They do not have any long term contracts with their customers, and their customers may source from the suppliers directly.

Financial figures

Intended IPO price: $0.33
No. of shares available for public offer: 3m
No. of shares available for placement offer: 56.67m
Total post invitation share capital: approx. 222m


FY2006
Revenue: $78.1m
Profit: $10m
NAV: 0.3179
EPS: 0.045
EPS % Incr: -10%
PE ratio: 7.3x
Price: 0.33

2QFY2007
Revenue: $100m
Profit: $19.2m
NAV: 0.3135 (incl. IPO proceeds)
EPS: 0.0868
EPS % Incr: 90% (Est.)
PE ratio: 3.8x
Price: 0.33

Dividend policy: It intends to pay not less than 30% of profit as dividend for FY2007.

Conclusion:

Although Sin Ghee Huat seems to be your standard run-of-the-mill steel products distributor (read: narrow economic moat), it does command a rather high profit margin of 15-20%. What I also like about Sin Ghee Huat is that it is backed by its $0.3135 NAV.

A good comparison would be to Asia Enterprise Holdings - another local small cap steel distributor, though its focus is more on providing the shipbuilding and marine sector. In comparison:

AsiaEntH current price: $0.44
NAV: $0.2981
PE Ratio: 8x

In fact, in these bullish markets, steel stocks could potentially trade up to 12-15x PE, although the historical PE ratio for the steel industry is closer to 2-6x PE. However, even pegging Sin Ghee Huat to 6x PE would give a Fair Value of $0.52.

Furthermore, if it really does earn 8.68cts per share for FY2007, the dividend payout would then be approx. 2.5cts, or 7.5% yield based on the IPO price.

Probability of getting allotted for the IPO – VERY LOW


I have only included the key points of the prospectus. Certain information have been omitted in order to keep my write-up short, but you can find the entire prospectus here.