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Monday, July 4, 2016

Advancer Global Limited - IPO Review

I am a bit late to this as I had just finished reading the prospectus over the weekend.

Advancer Global Limited is a company established in providing integrated services in the following segments:



  • Employment Services - Sourcing and Employment for FDWs to individuals and corporate.
  • Cleaning and Stewarding - Integrated cleaning and stewarding solution service to corporate offices and residential. This is also the biggest segments among the three.
  • Security Services - Providing security guard services to residential and corporate.

They are offering a total of 43 million shares, of which 41 m shares will be under placement and the rest of the 2 m shares will be under the public retail tranche. There is a very small amount of limited offer to the public, so you can expect demand to get very crowded.

Anyway, I will just go through the pros and cons of what I like and dislike about the company.


Pros:

1.) Solid Financial Standings and Strong Cash Flow

As with most company doing their IPOs, the financial statement always look strong and impressive so it is not very surprising to see the same for this company. I am more interested in looking at the gross and net margins than the increasing profitability itself.

If you dissect these details, you would find that the "Cleaning and Stewarding" business has expanded rapidly from 2013 to 2015, though their margins are not the highest among the 3 segments. Nevertheless, the margins still improved over the years due to the company undertaking service contracts using the in-house manpower resources to achieve a greater cost efficiency and through the acquisition of Unipest. 

The "Employment (FDWs) services" segment has not really grown as much as we'd like to see from 2013 to 2015, though margins remain steady high at around 40+% on average. 

The revenue from the "security services" business is about the same range but with a much lower margin. Labor costs is a concern though the company has undertaken steps to use the progressive wage model to project the amount of wages they need to cater.




In terms of cashflow, they look pretty solid out there because they do not have a huge capital expenditures to commit. This is understandable given that they are a service and asset light company and the key could probably lies in the valuation (P/FCF which is currently at about 8x).




2.) Synergies among the 3 segments

There are synergies with the 3 divisions and bigger players can take advantage of this by streamlining their process efficiency to reduce costs.

For example, the contract they secured for a particular residential project can consist of the security and cleaning services at one go.

Also, when a family resists an employment services for full time FDW, they can choose the alternative services of part-time cleaning which appeals to them.

3.) None of Major Customers or Suppliers take up > 5% revenue

This is purposefully chosen such that the business do not have to depend upon each individual major customer or supplier which will impact their business should anything happens.

4.) Regulatory laws favoring these industries

The company business is subject easily to regulatory laws abiding the demand and supply of the nature of industry.

This can be good or bad, depending on how you view at them.

For instance, the government has placed certain criteria for accreditation for those opening up a security business by requiring them to obtain a licence from the PLRD to supply the services of a security officers under Section 15 of the PSIA.

For the cleaning service, the NEA has also in 2014 implemented a new licensing system by imposing a higher standards across the industry with the goal of encouraging a more professional and reliable services.

For the employment service, the government has also reduced the concessionary rate of the levy rate from $120 to $60 per month in order to cater to the aging needs of the elderly and children. This will help to increase the demand for such services in the future.


Cons:

1.) Not familiar with the industry

The industry has no precedence to which we can compare against the valuation of competitors easily.

The company has highlighted the below as competitors but it is very difficult to ascertain what kind of services or moats does Advancer Global has in advantage over the other competitors.

The only familiar name I know is Certis Cisco which is offering security services to corporate, hotels and commercials. Their net margin is in the similar range at about 12%.



2.) Expanding regionally

One of the company intent with the proceeds is to grow their overseas presence by setting up a joint venture with another company due to the difficulty in complying law in that particular countries.

The company has also little to no experience dealing with overseas operations, so the question of whether local market share is sufficient to grow over the long run. Overseas expansion will add on risks to the portfolio.

3.) Supply of Foreign Labors regulated by local laws

This is on the opposite end of the spectrum for cons of regulation laws.

The supply of foreign labor is highly dependent on the regulatory laws abiding the conditions. The introduction of restrictions on foreign labor may place a huge dent on the operations of these companies. 

For instance, the Indonesian government has announced in May that they will stop sending in maids from Indonesia to abroad in order to protect their rights.

4.) High needs for working capital

The average number of days for the cash conversion is about 44 days so you can expect a lot of cash being tied up for working capital purpose needs. Again, I am not familiar with the industry so do not know if that is the norms. Generally, I'd like company which can expect to turnaround their cash conversion a little faster than that.


Final Thoughts

I have presented both the pros and cons that I can think of.

I think if one wants to have a quick punt on this you should minimally bid for at least 100,000 shares to make it worthwhile, assuming a 10% successful allocation, they are only worth 10,000 x $0.22 = $2,200.

Given their current cheap valuation, I do think they have legs to run further so it may also be wise to keep them slightly for longer periods and see where they go from here. For all we know, this could be another multi-bagger like the ones we see recently with acromec.

It's up to the individual to decide. The closing applications is on 7th Jul noon.


6 comments:

  1. In this climage, IPO is more likely to fail.

    ReplyDelete
    Replies
    1. Yes, very floppy climage at the moment

      Delete
  2. This stock is for mid-Long term hold.
    This industry is a monopoly.

    ReplyDelete
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