I am usually not that interested in participating in an IPO. In my investing journey thus far, I have only participated in two of them, both which I have failed to get them. This review is on the back of request from my friend who seems to be interested in the company. So let's see where it takes us.
For a start, these are the offerings in respect of the 168,000,000 shares they would be releasing:
(i) 65,000,000 Cornerstone Shares;
(ii) 94,200,000 Shares under the Placement (including 6,350,000 Reserved Shares); and
(iii) 8,800,000 Shares under the Public Offer (subject to the Over-allotment Option).
Timetable is as follows:
12 November 2014: Opening of the Offering
18 November 2014, 12.00 noon: Close of the Offering
19 November 2014: Balloting of applications, if necessary (in the event of an oversubscription for the Public Offer Shares)
20 November 2014, 9.00 a.m. : Commence trading on a “ready” basis
25 November 2014: Settlement date for all trades done on a “ready” basis
Firstly, my comment is the public tranche offered to retail investor is relatively small, so judging from the demand, it will seem that there will be an oversubscription for the stock. They have placed a large portion of the offerings to the Cornerstone and Institutional investor, which probably means that they want stability and long term investors who placed trust in their growth story.
The Group's main core business is in the operation of taxi services and in-house workshops, where they would be conducting services relating to the general maintenance of the taxis.
Not coincidentally, the proceeds of the amount raised from the IPO would mainly be used to expand its taxi operations (~30%) and diversify its other transport business (~30). The rest would be used mainly for working capital purpose.
The diversification into the other transport business, mainly Bulim Bus transportation, is a good move as there is a new contracting model which allows LTA to own the assets and lease them back to bus operators. This would allow the company to free up much of their capital in owning the asset, a move that would benefit companies such as SBS (under Comfort subsidiary). The bad news is that this is their first venture away from the traditional taxi operation business and will likely to face keen competition from experienced operators such as SBS.
Taxi Penetration Ratio
Going back to its main core business, i.e taxi operations, the number to look at for future growth potential is always going to be the taxi penetration ratio.
Taxi penetration ratio is an important indicator because in a country as small as Singapore, there are always going to be limited growth relative to the population and competition for demand. This is in addition that there are multiple taxi operators in Singapore. Comfort, Premier, SMRT, Trans - to name a few.
As much as we hear complaints from people that they are not able to get cab during peak hours, look at the ratio compared to other big cities. Singapore has as much as twice the number of taxis available per 1,000 people as compared to Hongkong and London and thrice as many as Jakarta. Incredible.
Profit & Loss
Looking at the financial highlights, we see that topline and bottomline have shown steady increase over the years. However, a closer look at the income statement and you would have found that in FY13, they recognized a one-off gain in disposal of their PPE. Excluding the one-off, profits would have been at around $23 million, which is rather stagnant with 2011 and 2012.
Gross Profit margins has averaged at around 26%-28% for the past few years, which shows that the management has been keeping the costs well under control. In case you are wondering what Comfortdelgro is raking in terms of gross profit margins, they are currently churning in at around 28.4%. It has been competitive.
Pre-IPO NAV is currently at 14.2 cents while post-IPO the NAV would be at 25.5 cents. At 68 cents IPO pricing, this gives their P/B ratio at around 2.6x.
Some investors have expressed their concerns regarding paying a premium to its NAV, but I will explain later why they should not be too concerned.
As taxi operators, it is no surprise that most of their assets (and therefore NAV) consist majority of their taxis, machinery and equipment, which falls under the PPE portion of the assets. These assets are depreciated accordingly over time under IAS16 which goes into the PnL under depreciation expense, which in turn was added back to the Cash Flow from Operations to make up for the cash portion. Hence, net equity does not really suffer in that sense.
The book value of an asset reflects its original cost and in this case, it doesn't really help that the assets are aging and depreciating over time. In other words, I don't know if price to book value is a good measure to value this sort of companies. Take a look at Comfortdelgro and SMRT. They should be trading above P/BV as well.
I believe their dividend policy in the future would be somewhat similar to Comfortdelgro, who agreed to pay out around 60% of their earnings. For a company that requires plenty of CAPEX, it doesn't sound rationale to increase their payout any further. So we could be looking at a pretty low yield similar to CDG.
Finding a good business is about prospecting the future growth of the industry and opportunities. Looking at the relatively muted growth for the Singapore taxi operations for CDG, it is hard to see how Transcab can do better than the blue chip counter. CDG is looking to expand elsewhere beyond the Singapore market, given the relatively higher margins and opportunities, and it is difficult to see how Transcab can be one step better than CDG. They may do okay but not great and in that sense, I just have feeling that they don't have the required business moat to grow much in the future.