IHH's Trade: Something interesting to note

I think this is probably expected.

Last 3 major IPOs, those with EPF's involvement - FGV (RM4.65), IHH (RM3.19) - they are still above the IPO offer price.

As for Astro's IPO where it is rumoured that EPF did not take up stakes, it is currently trading below offer price. Hence, for upcoming IPOs, among the larger ones, we can probably take the cue. It would be much safer if EPF is taking stakes.

Astro's IPO: Get the picture?

It seems Astro's IPO is on. And it seems that the valuation is going to be around RM15.6 billion - plus minus. Assuming this year's net profit is to be about RM600 million, that's a valuation of about 26x. Read this - Astro's IPO is to be a dividend stock as it has mentioned of awarding up to 75% of profits as dividends.

I have written of my concerns on Astro moving forward. To sum it up, let's look at what's in store for Astro to defend on which are not going to be just local. Discard ABN, Media Prima, Hypp TV - check out what's entertainment about, present and future.

You may ask, why Time Dotcom and Maxis. Well, these are the parties which Astro has tied up with. In fact the Maxis tie-up is mutually exclusive as I have read.

Astro's IPO: Primetime still?

Imagine 10 - 15 years ago, what was your most viewed screen? TV? PC for work and some surfing? How about today? How many active screens do you own? Mobile (smart), tablet (iPad probably), notebook with built in wifi (whole lot of apps for video viewing, blog reading, stock charting, facebook-ing?), then your TV screen. In my house, for example I have some 6 active screens in total (2 TVs, 2 PCs, 1 tablet and 1 mobile).

With that, the biggest question for Astro in the future is how to grab that eyeballs from Malaysians as much as it can. The question is can Astro with the tonnes of content it is creating and to some extent have exclusive rights in some premium content, would it be able to grab your attention. Would more people be shifting from watching Astro's TV to reading my blog for example, or me spending time blogging rather than watching Astro's content? How would YouTube's premium content strategy turn out to be? Will YouTube be a competition to Astro? How about Apple's TV strategy?

Even TV is changing

One of the biggest question now is whether Apple coming out with "iTV"? The fact of the matter whether Apple is coming with TV or not is actually not important. The more important fact is that SmartTV is here to stay and grabbing market share from the more traditional TVs. Apple's iTV is about SmartTV, only thing is how are they going to make it smarter as in the iPhones for mobile and iPads for tablets. If SmartTV is here to stay, and with capabilities of viewing youtube, international channels not related to Astro and other hosts of applications now being made available from your PC to your TV screen, it is going to be bad news for Astro. They will lose their share of your eyeballs.

Will Astro with a whole lot of highly paid and smart people be able to address that problem? Its competitors - Google, Apple, Samsung have very highly paid (and smart) people as well. Much higher in fact. And these guys are thinking of getting into TV and content. (Yes, Astro's competition may not just be Media Prima and RTM but people like Larry Page, Sergey Brin, Tim Cook, even Microsoft's Steve Ballmer - am I over speculating? I am not.)

Netflix?

Heard of Netflix? The top darling stock in US for 2011 (of course it came down later while its strategy has proven to be a threat). It is basically a company that aggregates content - be it movies, dramas, series, - new or old - and bringing them to your living room. Their charging model is via per movie purchased or monthly subscription. Hence, households will have a huge library of content available in their living room, and they can watch it by paying a minimum sum whenever they want to watch them. The more they watch the more they pay - basically On Demand.

Of course, over here in Malaysia, this Netflix model is a bigger threat to the pirated DVD dwellers than Astro for now. But imagine you can pick and watch whatever you want anytime you want - that is OnDemand TV already here right now. YouTube can do that too. The biggest challenge right now for this things to be here, in Malaysia is licensing.

Can Astro do what Netflix is doing? As a predominant Satellite TV provider - difficult, as technologically it faces a challenge. What netflix does is it does not care which "platform" you are watching your TV on, you can basically get a USD50 set top box (STB) from any shop out there, pre-downloaded with Netfllix and watch. From there, the content will reach any home which has STBs that supports Netflix. (Most homes in US has that.)

While Netflix may not be here, what may happen are operators with Netflix model may be here and again these are potential threats to Astro in terms of grabbing your eyeballs.

Current challenges to Astro

What has been said above are potential threats to Astro - although, it may or may not be here, yet. The single biggest challenge to Astro NOW is the challenge with content costs and increasing the Average Revenue Per User (ARPU). If you see below, it may seem to be that they can pass the costs to the users as it seems that they have been able to grow the ARPU from RM82 in 2010 to RM91 in 30 Apr 2012.

How high more can this continue? Above RM100? While the actual data may not be available, let's face it - my experience in Astro being able to increase its ARPU is not by providing better and more content to the household, but by increasing its charges. The amount of content that I get from Astro is still the same or lesser in fact but over the last few years it has repackaged their pricing to squeeze more dollars from its subscribers.

Again the question is how much content do we really need. Yes, Astro is smart to repackage content so that we may need CNBC, Sports, History Channel and other useless channels which I do not watch - repriced them yearly so that we will be paying more, but this is to backfire if it does this too many times.

It already has 50% market share on the households in Malaysia. Anything more would be getting tougher as there is a percentage who would not bother or just cannot afford. Look below, it manages to increase less than 200,000 subscribers over the 2 years, still a decent sum but already it is showing a slow down in terms of getting new subscribers.

However, I would feel that the bigger challenge in the long run is to reduce its churn. While this may not seemed to be, based on the above current numbers, it will be a challenge over the long run.

How come?

- Monopolistic environment - besides what are already mentioned above, one thing that people do not realize is that Astro has been pretty much operating off a "monopolistic" environment. Astro is the only 1 operator who is able to offer satellite TV, and Ananda is smart to be able to expand this advantage fast to be able to control premium content deliveries in Malaysia. Astro now has exclusivities over ESPN, Star Sports, EPL, CNN, CNBC (basically the premium content that most Malaysians until now are not able to live without). Will that change is a question?

It may, it may not. The most recent example where Live Olympics content was already available off YouTube (owned by Google) is already an example. You can basically watch Olympics live on Youtube as in what we get from Astro. Google is a USD250 billion behemoth, and I am sure this is just the beginning. If Apple is going into offering content through TV, I am (carefully) sure things like this will be here as well, or much more.

Yes, we may say the content owners may have different ideas but content delivery partners to these guys are equally important and these giant of companies have a lot of power and money to make statements. Movie content guys are facing some of the threat that the music industries were facing since the days of Napster.

Hence, that monopolistic situation may even be cancelled out, even with the Malaysian government fully behind Astro. Content may have just gone borderless with the advent of YouTube.

- younger generations - again, more and more eyeballs have gone to tablets, phones, notebooks and other screens and moved away from TV in the last 5 years. Hows that going to translate to Astro getting more of your time? They may be able to continue to charge you subscription and increase them. But don't you think over time, we will not be that naive anymore? - paying for something which we use lesser and lesser.

- costs - at last, I am going to show the financials. Look at the revenue growth - great. But look at the PAT growth as well. In fact, for the most recent quarter, its PAT deteriorated (from RM196 million to RM123 million - 30 April 2012 quarter). How is this?

It is basically spending more to deliver content to us - either by way of purchasing them or making (producing) them. Over the years, premium content are getting much much more expensive. This is why much watched "Live" content such as EPL, NBA, Olympics are getting "record-breaking" bids. This is also why content such "American Idol" is getting value - that is if you are able to produce them well. Nothing beats live content nowadays. Beyond live content, their value deteriorates due to "On Demand" technology. And this is why strategies like Netflix's will thrive in the future. Not Astro's as it does not have the delivery mechanism to do this - besides Beyond IPTV. Who has? Actually, Telekom Malaysia through HyppTV's IPTV (but TM currently does such a bad job in this - they will learn but this is a story for another day.)

Why are Astro's other expenses higher besides the costs of sales? It has to concentrate to make more localize content of its own. And it has to spend more on getting better and newer technologies to deliver the content to your home - better Set Top boxes (the PVR, HD), having more satellites to deliver High Definitions content. However the platform that it is using is just too much a challenge against the one that TM is having - fiber.

Another potential reason for the higher revenue and ARPU could be due to the sale of broadband. Started few years ago, Astro has tied up with Time Dotcom to offer Astro Beyond IPTV. Part of the package offered for Beyond IPTV is broadband (minimum price package I think is RM138 for a 3MB broadband). Hence, if it is recognizing revenue from broadband, for sure its revenue and ARPU is going to be higher. So will the costs of sales be. Hence probably from there, that's the reason we are not able to see higher profitability despite the higher revenue.

It seems that the journey Astro is going to have is getting more and more challenging. It is just facing competition from many angles.

At RM15 billion market valuation it is trying to ask for from us, is it worth it? Would you pay 24xPE (2012's Net Profit) for so many things unanswered? But yet again, since Khazanah is there, EPF is potentially going to be there as well. And from there, Astro may get some premium - but for how long with all these questions? Yet again, it may promise all the dividends in the world - and when we hear things like this we get excited.

Anyway, there aren't much for those who would like to apply through the usual balloting. See below.

Read my other article on Astro's IPO.

Astro IPO: How delisting and relisting may create additional RM6.5 billion from the market

Astro's IPO: How delisting and relisting may create additional RM6.5 billion from the market

Guess who owns Astro and Maxis. Both listings exercise strategies are cut from the same cloth. If one can remember, both went through a decently successful initial IPO (Maxis much more successful) and both were delisted. Then Maxis was relisted, Astro is about to be relisted.

What is that strategy? Originally, Astro prior to its delisting has operations in several countries but Malaysia is the only successful and significant one. Malaysia is the only one making money while everywhere else are just too volatile and bleeding cash as well as affect its P&L.

I have pulled out the Income Statement prior to its delisting in 2010 and compare it to the Proforma Income Statement which it is going to use for its prospectus this coming IPO. See the difference, prior to delisting, the marketing, distribution and administrative expenses was much higher. So was the share of losses from its associate companies (which are using equity method of accounting). The PAT was RM233 million for the accounts prior to its delisting. After the restructuring, we are seeing an account with a healthier PAT of RM614 million. And this structure is the one it is using for the new listing.

Which were the associate companies? Well, pretty much as below.

What did it do? The below is what I have cut out from its prospectus (which it submitted to SC). Astro basically reorganized its business by pulling out the profitable Malaysian operations and offer them to the people again. It also cuts off most of its associate companies above from the listing.

For the point of delisting, Ananda and several group (Khazanah included) were buying off minorities at RM8.5 billion valuation. Now, it is expecting a valuation of between RM11 billion to RM15 billion and I believe it is able to achieve at least RM12 billion judging from the more recent IPOs for large listings in FGV and IHH. If they achieve RM15 billion, it is going to be a cool RM6.5 billion that it has managed to pull from the market.

The question is, are all these illegal? It definitely is not. But just pure assets shuffling (for gains) which is just too much of unproductive work and thinking into it - and that is much we are all about nowadays - tonnes of hot air for nothing!
Do you see anything productive here?

BTW, as I see it again CIMB is involved. Guess who is always thinking of creating something out of nothing.

Other article on Astro's IPO:

Astro's IPO - Primetime Still?

We should just stop claiming Malaysia as Top IPO market for Asia

While the facts is true for 2012, there is still 6 months to go. We have 2 large IPOs in FGVH and IHH both initiated by the government. I read Astro is coming back. Well, we are doing well on paper due to some factors.

First, the IPO market for this year is very soft, globally. Many companies have postponed their IPOs in Singapore and Hong Kong. We will never be anywhere near Hong Kong, a market where Chinese government helps to promote.

In fact, the IHH IPO is a dual market listing which includes Singapore. If Malaysia is a strong destination, we do not need to do a dual listing with our neighbor, a market which has same trading hours as ours. We might as well go NYSE or LSE direct and KL as an alternative destination.

How many more times Khazanah can create the same as in go around acquiring and list the assembled companies in Malaysia? Are they thinking of the "The Avengers" reborn?

We can be proud of the number of cornerstones involved - but anyway, the two large IPO listings shares are probably cornered anyway. Look at the limited public retail float.

The fact of the matter is that the attractiveness of our market is quite in a sad state. My earlier article on building ACE market is a case in point. Beyond CIMB, our investment bankers are not confident to carry our companies to IPOs. If we can't compete with Hong Kong, we might as well go small. You cannot do an Astro and Maxis - list and delist and list again too many times. There are only so few tycoons who can help.

How many investment bankers are doing well? CIMB, Maybank, CIMB, Maybank?

Let's not polish our own shoes.

IHH IPO: Where's the beef?

There is no doubt that private healthcare is a fast growing industry. The IHH IPO, it seems has no problem getting institutional funds to take up as apparently 62% of the shares on offer are to be taken up by cornerstone investors. These cornerstone investors will be disallowed from selling their shares for six months after the listing takes place. Among the cornerstones, EPF (8%) and Kuwait Investment Authority (6%) will be taking up more than 5%, while 20 others (including Blackrock, Singapore GIC) will be securing less than 5%.

Shares on offer

17.22% out of the 27.74% are taken by cornerstone investors

Besides the shares held by the substantial shareholders including Khazanah, Mitsui, Abraaj Capital and the Adlinyar family (who originally controlled the Acibadem group), with the majority portion taken up by cornerstone investors, only 8.81% will be offered to retail which over here includes MITI tranche. On top of that, CIMB will be the stabilization manager for this issue. Hence, for the first half of the year, the transacted portion will be very much controlled. Unless something unforeseen crop up, I do not see any reason for deterioration in prices below the offered price for the first few months. Hence, whoever that are offered pink (staffs) or blue (partners, doctors) forms etc, do take up.

Valuation

Now we know that it is easy for the controlling shareholder to support the share price due to the low tradeable portion, how about its valuation? Is IHH worth it in the long run as an investment? Also what makes the cornerstone investors commit themselves?

The high financing costs for 2011 was due to Acibadem, the Turkish unit took a high charge for its forex losses from Euro and US dollar financing - RM350 million equivalent for 2011

If you look at the above proforma income, the one that came into notice is the first quarter 2012 results. There is no doubt that IHH is selling the first quarter and its prospective earnings from 2012 onward rather than focusing on the previous years income. This is how they are pricing the IPO at RM20 to RM23 billion. My question however is even if we forecast the full year income for 2012 at RM700 million i..e the top end of expectations, its prospective PE for 2012 will still be between 30x to 33x. Note that IHH will need good results for the full year 2012, before the lock up period for the cornerstones are up.

If however we based the valuation on 2011 income, even if we are to discount the Euro and US Dollar financing losses for Acibadem totalling RM350 million, the total group profit would have come at RM483 million. On that, the pricing of RM23 billion would have valued IHH at 47.6x PE.

Is there anymore room for growth with this kind of pricing?

What about Price / NTA

If anyone is saying that one should not look at the NTA, then they are dead wrong. Hospitals are property and capex investments due to its high capital expenditure involved. To really decipher how profitable the investments are, one should look at the speed of its investments return. Hence, it is important to see whether the group has invested too much in order to grow or their balance sheet position is just nice. As you can see below, IHH has no doubt needed this IPO as they are quite highly in debt. They needed the fund raising to reduce the debt level of the group. I have actually split the balance sheet into 2 sections: (1) asset and (2) liabilities and equity.

The Group has a very high intangible assets due to the acquisitions

There is no doubt that the more than RM5.3 billion to be raised from the IPO would have improved the balance sheet of the company. Now, I realize why Khazanah needs to rush this IPO as they have plans to open more hospitals in a hurry and its current balance sheet is not providing the right position to gear further.

Notice the almost zero Net Tangible Assets prior to the IPO

If you notice, the IPO is offered at a proforma Price / NTA of more than 5x, which is high.

Prospects of the IHH group

There is no doubt due to many factors such as pricing elasticity of private hospitals, medical tourism, greying communities and societies need for better healthcare, private healthcare is a good business. Over the last few years, private healthcare has registered more than average growth. For IHH, this is especially strong when it is one of the largest group in the world. IHH can make use of the brand to do tie ups. Brands that it carries such as the Acibadem and Gleneagles can be expanded.

Now, with this what is the take? While I like the business, the valuation that's being asked is way too expensive for me to digest. I am not too comfortable with the way Khazanah piecing up the individual groups over last 3 years and promote them as one of the largest private healthcare group in the world either, as some things are better off with organic growth than building them like "Lego" blocks.

Notice the original Parkway management on the Board despite it becoming largely a Malaysian controlled company. This also shows that the IHH group is desperately in need of managers to manage this business as they have only knew how to buy businesses at very high price but to manage them, Khazanah probably needed Parkway. Can Parkway deliver - this is the question? Let's wait and see.

Another thing to note, Parkway was just valued at RM5.2 billion in 2008. Less than 4 years later, with the addition of 60% of Acibadem, 60% of Pantai and 100% of the IMU, Khazanah is selling at RM23 billion post IPO. You might want to ask, has the industry improved so much over the last 4 years?

OVERVIEW of IHH

IHH will be one of the largest listed private healthcare providers in the world based on market capitalisation upon Listing. It focuses on markets in Asia and in the CEEMENA region, which are highly attractive growth markets. IHH operates an integrated healthcare business and related services which have leading market positions in our home markets of Singapore, Malaysia and Turkey, and we also have healthcare operations and investments in the PRC, India, Hong Kong, Vietnam, Macedonia and Brunei. Its global healthcare network operates over 4,900 licensed beds in 30 hospitals and has one other hospital in Turkey, the acquisition of which is pending completion, as well as medical centres, clinics and ancillary healthcare businesses across eight countries. In addition, it has over 3,300 new beds in the pipeline to be delivered through new hospital developments and expansion of our existing facilities over the next five years, which includes two potential hospital development projects in Turkey. These new beds in the pipeline also include approximately 760 new beds in those facilities which it expects to manage through HMAs, over the next five years.

As at 31 March 2012, it employs more than 24,000 people worldwide. IHH's core businesses are operated through its key operating subsidiaries, namely PPL, Acibadem Holding and IMU Health.

Other related articles:


Why listing healthcare is such a dangerous thought

Will IHH follow FGVH in clocking a cool premium on its first day?

IHH: Who will make the most from this IPO?

IHH Healthcare locks in cornerstones for IPO

On the IHH IPO, it seems that I may be wrong based on the news by Reuters below. However, notice that no price indication is mentioned but it did say 2.2 billion shares are on offer representing 25% of its enlarged capital with 80% new shares. Am I seeing it being valued at RM20 billion? Is it really possible? As a comparison KPJ is at RM3.66 billion.

As I said, I prefer to be wrong in this one than being right.
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(Reuters) - Blackrock Inc, Capital Group and Och-Ziff Capital Management Group have emerged as cornerstone investors in the $2 billion listing of Malaysia's IHH Healthcare Bhd, according to two sources with direct knowledge of the flotation.

The other cornerstone investors are Singapore sovereign wealth fund Government of Singapore Investment Corporation, Fullerton Fund Management, AIA Group and Hwang Investment Management, the sources said.

The dual listing of IHH, slated to debut on the Malaysian and Singapore bourses by the end of July, comes at a time when a string of initial public offerings have been delayed or scrapped because of investor worries about Europe's debt crisis and China's slowing economy.

"The profile of the cornerstone investors will give the IPO some boost in confidence," said one of the sources, who declined to be identified as the talks were confidential. "In good or bad times, it (the IPO) will still do well. It (IHH) operates in a defensive sector."

IHH is the healthcare arm of Malaysia's state investor Khazanah Nasional Bhd. Its assets include Turkish hospital group Acibadem AS, Singapore's Parkway Holdings, India's Apollo Hospitals Enterprise Ltd and Malaysia-based Pantai Hospitals and International Medical University.

It is offering 2.2 billion shares, out of which 80 percent will be new shares while the remaining secondary. The sale amounts to some 25 percent of its enlarged capital. "The cornerstones will take 1.3 billion out of the 2.2 billion shares available," said the second source, declining to elaborate.

IHH officials were not immediately available for comment.


The dual listing would be the fourth-biggest IPO in Singapore's history and Malaysia's second-largest this year after the planned listing of Malaysian plantation group Felda Global Venture Holdings Bhd. International Financial Corp, a member of the World Bank Group, has said it plans to take part in the IHH listing in a move to help validate IHH's emerging markets strategy. Reuters reported earlier that IHH was also in talks with Kuwait's sovereign wealth fund on becoming a cornerstone investor.

Malaysia's pension fund and Prudential Plc's Eastspring Investments have committed to invest in the IPO.
State-owned fund manager Permodalan Nasional Bhd and the Haj Pilgrims fund are also investors, according to the sources.

Malaysia has bucked the IPO trend in other markets such as Singapore, where motor racing firm Formula One decided to postpone its near $3 billion offering due to volatile markets.

Shares of Gas Malaysia Bhd closed 10 percent higher on their debut on Monday after a $230 million listing, overcoming the negative sentiment surrounding a slump in global market flotations.

CIMB, Bank of America Merrill Lynch and Deutsche Bank are joint lead co-ordinators, while Credit Suisse, DBS, Goldman Sachs and Maybank  are joint bookrunners. Nomura, OCBC and UBS are co-lead managers.

Other article on IHH IPO.

IHH IPO: Where's the beef?

IHH IPO: Will Khazanah need to pull the rabbit out of the hat?

Private healthcare is great and a fast growing business especially when you consider that many nations in this world are greying. As a result, it may not be that difficult to sell an IPO of supposedly the second largest private hospital group in the world. At this moment, there is yet to be any conclusion on what will the market value be for the IPO, however indication from the Managing Director of Khazanah is that it will be slightly smaller than Felda's IPO. Since Felda is valued at around RM16.6 billion, would RM15 billion be close to the mark? In fact, the latest apparently, IHH is to be valued in excess of RM20 billion.

First of all, how does Khazanah get into owning so many hospitals so fast?

1. Started off with a controlling stake in Pantai Hospital Group when there were complaints of Parkway acquiring strategic hospital assets in Malaysia. As a result, Khazanah was used to purchase an effective 60% stake of Pantai Hospitals from Parkway. Hence Khazanah started off with owning all the Pantai(s) in Malaysia.
2. Instead of just expanding its list of private hospitals in Malaysia, Khazanah started to accrue many more hospitals overseas hence turning itself into the 2nd largest group. In its acquisition of Parkway in Singapore, Khazanah had to fend off controlling ownership and later buyoff the Group from the Fortis Group of India. Price: USD3.3billion (RM10.56 billion) at valuation of 39x PE based on Parkway's financial results for 2009.
3. Latest round of acquisition, the IHH group under Khazanah bought into 60% of Acibadem group at valuation of between USD1.1 billion to RM1.68 billion depending on which group they bought from. Based on my calculation, the valuation on Acibadem is in excess of 15x EBITDA and more than 100x PE. Even if it is calculated at Price / Book Value it is more than 14x book value.
4. On top of that, Khazanah already owns 12.2% of Apollo Hospitals which it acquired as an investment in 2005.

Financials of Acibadem before the acquisition from IHH

Hence, despite Khazanah managed to accumulate that many hospitals, it is at the expense of very high price being paid for these assets.

Latest Structure for the IHH Group

Although the proforma financials for IHH is not yet available, based on my estimation from past financials here are possible contributions from each.

As a comparison, KPJ Group (2700 beds) has a net profit of RM150 million for FY2011, hence RM473.4M for IHH may not be off the mark by far. The very profitable and more luxurious Bangkok Dusit Hospital Group (4,987 beds) on the other hand, made around RM487 million for FY2011. Its market cap todate is around RM13.9 billion with Price / Net Asset at 4.15x at PE around 28x

If that number is close to accurate, I would think to achieve market valuation of around RM20 billion, Khazanah will be selling this IPO at not less than 40x historical PE, which is very little room for valuation growth. At that price, I think the national investment arm will have a hard time looking for takers especially at a time when many companies are postponing IPOs.

I hope I am wrong for this one!


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(Note that the combined valuation of Parkway and Acibadem were USD4.4 billion (RM14 billion) when they were taken private. How much do you think the listed IHH would be? Would Khazanah be willing to take a valuation cut if it is going for RM15 billion or less? Hence the question, is Khazanah that desperate to sell?)  


Anyway, is the term 2nd largest misleading as it only owns 12.2% of Apollo?

Note:
Despite all the positiveness, the business of private healthcare which has a great advantage i.e. its pricing inelasticity is facing greater competition in future. I still like the IHH private healthcare group though as a business but the issue here is price. Frankly, I do not see the need to rush this IPO. If Khazanah is not valuing the IPO at in excess of RM15 billion, why do they need to let go part of the group at a lower price especially when the purchases were made at a high price. They could have waited it out and do the IPO by 2013 or 2014. I do not believe this is a political IPO either unlike the Felda IPO which they need to be quick.

Other article on IHH IPO:

IHH IPO: Where's the beef?

Deciphering FELDA's IPO - really that attractive?

FELDA Global Ventures' (FGVH) IPO (2nd largest in the world this year) is a listing which is creating buzz over the Malaysian media more so for its political reasons rather than valuations. If you read the main media, the ruling government is claiming that the IPO is an exercise which will protect the future of more than 112,000 FELDA households. Whereas the opposition is claiming that it is an exercise purely for the coming election where the government is trying to conjure votes through immediate imbursement (RM15k per family) to the settlers of whatever partially thats raised from IPO. However let's look at how attractive the IPO is especially when the government is pushing through the offering during a period where many companies in the region are postponing theirs.

Let's look at some of the basic fundamentals of the listed entity - FGVH (from the prospectus):

• third largest oil palm plantation operator in the world (344,000 hectares) with significant equity (49%) ownership in the largest CPO producer (3.3 million MT) in the world. As a comparison, Sime Darby has 522,000 hectares while IOI Corporation has 158,000 hectares;
• largest sugar producer in Malaysia through MSM - great;
• several other investments overseas including business segment producing soybean and canola products in Canada (loss making unit), oleochemicals in US - I am wondering why is such a large palm oil producer investing into a soybean and canola producer (not everything is in the name of diversification);
• claimed to have experience and professional management team - frankly, I do not have the ability to vouch this, however I would believe its competitors such as IOI, KLK, Sime are more efficient. For example yield per mature hectare for IOI is around 24MT, while for FELDA, it is around 18 to 19MT. Its ability to improve yield remains to be seen as FELDA is not a new entity after all - it could have achieved a better yield pre-listing, if it could;

Who gets to subscribe

Based on the prospectus, there are 5 parties who will get to subscribe for the IPO:

- settlers (only 2.5% - based on calculation, these settlers will only be allotted 800 shares per family which is insignificant. The question is why are they only allotted 800 shares per family.)
- employees (3%)
- public (2% - another insignificant portion, hence don't bother to apply)
- MITI approved Bumiputera investors (11.5% - apparently it is 17x oversubscribed)
- other institutional investors (41% - among names are Louis Dreyfus, Guoco Group under Quek Leng Chan, state agencies such as Pahang and Sabah, Chua Ma Yu, Qatar Holdings)

Only 7.5% for retail while 11.5% for MITI approved bumiputera

Hence from the list although the total offering is up to RM10 billion, in actual fact the public portion (eventual float) is pretty small. This strategy is probably to protect itself from large scale sale upon listing as what was experienced by Facebook in its recent IPO. From the list, parties that may be interested to sell in the short term are the retail and MITI investors (total 18%) while the other investors (which they called cornerstone investors) may be advised not to sell. Some of the potential investors such as Louis Dreyfus and state agencies are strategic investors anyway.

From that list, it is not difficult for any party to support the share price assuming the price per share is RM4.55.

Valuation

Upon IPO, the market capitalisation is RM16.6 billion assuming its price is RM4.55. What about its Proforma Income Statement.

From the 2011 numbers, historical PE will be around 17.6x - Not cheap for an IPO, hence I am wondering whether it will get a premium of at least RM1 as what many people are speculating. In fact, 2012's first quarter results dropped against its 1st QTR 2011. What about its NA after listing as this is a agricultural company which owns land and cash from the IPO. Not that attractive either - 67% of its listing price.

Achieving a RM1 premium would have caused the company to have a market capitalisation of RM20.2 billion and historical PE to exceed 20x. Considering FGVH's structure where the settlers are working on the land in smaller scale and with follow on sale of the Fresh Fruit Bunches to FGVH for further processing, it will never be able to achieve the scale of much larger commercial entities like IOI Corp, KL Kepong and Sime Darby. As a result of that, one tends to provide a good discount to a less efficient entity. Against its competitors, FGVH's valuation is as below.

Let's assume that upon listing, FGVH will be able to reduce its debt and increase its production, hence providing better profits to its shareholders - how much better could it conjure up? Considering the controversies surrounding the structure and its political struggle, FGVH's IPO cannot afford any failure especially to the government. As a result of that, I am suspecting its share price to be supported in the short to medium term, but in the longer run (say after 1 to 2 years) - who knows how it will turn out to be?

As a longer term investor, I probably am better off buying Sime or IOI.

I am also reading from analysis (probably they got it from FELDA's analysts' briefings) that with the IPO fund raised, FGVH will be aggressively acquiring assets in Africa and Indonesia. Question - is it really that easy? 

My question is how do we value "aggressiveness". Do we put a higher premium if FGVH says that they are going to be aggressively expand its business downstream? If this is case then we should not put a high valuation for companies that pays high dividend as by paying dividend, they are not being aggressive. Are we contradicting statements?


Latest: Louis Dreyfus has pulled out from participating in the IPO.

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Will EPF buys into FELDA now that its CIO is a director?

Will EPF buy into FELDA now that its CIO is a director / shareholder post IPO

I am not interested in FELDA's IPO, but I am interested in protecting my money in EPF. You know what, after browsing through FELDA's prospectus I noticed something - the current Deputy CEO and co-acting as Chief Investment Officer (CIO) of EPF is also a director of FELDA.

As a director of FELDA, he is to be provided some shares - 150,000 to be exact (see below). With the retail pricing at RM4.55, that 150,000 shares is to be worth RM682,500.

I am still not interested in FELDA but my question is that will he as the CIO who can use his position to invest on behalf of all the EPF contributors be buying FELDA's shares. If he is, will that be considered as conflict of interest? Can someone let me know or SC check this if happens that EPF is taking up some stocks?

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I have the hunch the government will get EPF to buy into FELDA as it needs those funds to provide better support for FELDA's stock price. Anyway EPF is into most KLCI stocks after all and FELDA is a very large listing - I am quite sure EPF will be in there.

If EPF is putting its money into Felda, then Shahril should resign from one of the position - either EPF or FELDA. Don't tell me he overlooked this being a person of such high position - or is it that he doesn't care with his potential immunities.

Related article

Deciphering FELDA's IPO attractiveness 

Reply from the Deputy CEO of EPF on him being offered IPO shares in FGVH

MASTERSKILL - Probably not worth the IPO price?

I have been looking around for alternative comments regarding the new IPO wannabe - Masterskill - in Malaysia but have not found any worth reading.

A month ago since, I've already been preempted that the market is already buzzing with Masterskill going IPO - especially CIMB (as they are the ones who are going to carry the company - of course they are supposed to say good things - and also probably they are starting to believe their own bullshit). Masterskill is the country's largest operator of private nursing college in Malaysia.

Here I am probably going to be a few who are probably going to have a negative view of this company based on following points:

- first dangerpoint in an investment - over reliance on government - 95+ percent of its students are PTPTN backed. (For those who do not know, PTPTN is a government aid to students who are pursuing tertiary education.) I am presuming that PTPTN is assisting Masterskill a lot in terms of attracting students from rural areas. These students do not have to pay from their own pockets during the tenure of their studies. But what they do not really get is that they have to repay the loan after their studies.

- The course itself is not cheap (Masterskill is charging some RM60k per student inclusive of fees, accommodation - from my calculation of revenue of RM290 million / 15,000 students which comes to RM19,333 per year hence for a 3-year course it comes to RM60k) - think of newly graduated nurses that do not earn that high to pay their loans after they graduate. It seems that to be a nurse, the tuition fees are not cheap. My source from one of the largest private hospital chain in Malaysia informed me that starting salary for their nurses is between RM1200 and they can only probably earn RM1900 with all allowances and OT inclusive.

- for a similar fee of RM40k-45k for the entire course, a student in Malaysia can probably obtain a better degree (but this of course may not necessarily obtain the loan assistance from government).

- with a PE multiple of assuming 13x - 14.5x (this is what Masterskill is asking for hence valuation is above RM1.4 billion) and PAT (2009) of RM97 million it is already going to be almost simlar in size compared to KPJ? KPJ (at current market value of RM1.55 billion) is an established private hospital group with various income stream. It does not have to rely on a single income stream unlike Masterskill - how is Masterskill supposed to be as big as KPJ in terms of market valuation? This is a little mind-boggling.

- HELP and SEGi are both currently valued at RM220 - 230 million each in the market, Masterskill is valuing itself more than RM1.4 billion? Although one may say that PE wise it can be fairly valued as against these two companies, but for how long can Masterskill maintain its momentum? Is this company one of those who has a business model that rides on the sudden surge of need as well as with a little help from Government of Malaysia, they manage to achieve certain successes for only a short period? But in the long run, will its business model that relies on PTPTN (i.e. government loans to students) sustain?

- the CEO has mentioned that they are targeting overseas expansion. I am a bit apprehensive as its business which relies on loan to local students, how much can they attract foreign students this way.

I think their asking price is way too expensive, but I may not be surprise that the take up rate can be good as they seem to market this particular IPO well, and judging from the market's excitement over Masterskill due to their story line as well as growth, the market can be excited but not me.

I would love to see how well they will do 3 years down the road. Will they be another GPacket or many other companies in Malaysia that has a loud IPO but fizzle out on its performance over time?

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Update: 20 April 2012
Well! This stock is a big time failure! Dropping from RM3.50 during IPO to now RM1.16. I probably was overly careful in my analysis. If you remember, many analysts (professionals?) were giving a positive call on this stock.

Serious Investing!