New IPO Coverage - Japfa Limited

From Company's Prospectus

1. Business Description

Agri-food company that produces multiple protein foods, with operation in 5 high growth emerging Asian markets. Indonesia Japfa Limited (Japfa) is a agri-food company that produces multiple protein food, with operation in 5 high growth emerging Asian Markets.

From Company's Prospectus

Vertically integrated business model that covers the entire value chain for protein products. Japfa has a vertically integrated business model that covers the entire value chain for many its protein products, for feed production and breeding to commercial farming and processing, In addition, they also expand its downstream into consumer food business.

From Company's Prospectus

Animal protein contributes the highest revenue  and profit after tax. Japfa is divided into 3 operating segments - (1) Dairy, (2) Animal Protein & (3) Consumer Food. Below provides summarize this 3 operating segments:

From Company's Prospectus

Indonesia Handojo Santosa is the ultimate shareholders of the company. Indonesia Handojo Santosa is the ultimate shareholders of the company.

Who is Handojo Santosa?

According to Forbes, Handojo Santosa is the 40th richest man in Indonesia. He inherited Ometraco Group from his father and managed to turn Japfa Comfeed into the second-largest poultry feed producer in the country. Age 47, he is currently worth approximately US$670m.

Japfa Comfeed Debt Restructuring?

During the early 2000s, due to the financial crisis, Japfa Comfeed did enter into a debt restructuring with its creditors before. Thus, this is something that I wished to highlight to investor. 

See Japfa Comfeed: 

Annual Report 2000 - http://www.japfacomfeed.co.id/profile/annualreport/JapfaAnnualReport2000.pdf

Annual Report 2001 - http://www.japfacomfeed.co.id/profile/annualreport/JapfaAnnualReport2001.pdf

2. Use of Proceed

Table below summarizes the use of proceed, 44% will be used to pay off debt while the other 44% will be used for its China farm expansion:

From Company's Prospectus

3a. Financial Highlights

Low Margin Business. Despite the big revenue and profit contribution from the Animal Protein business, it is largely a low margin business. I see growth opportunity in the Dairy business which should be of higher margin.

Corn is the biggest cost driver. As of FY13, corn accounts for approx 84.5% of the cost of good sold. Thus corn will be a good leading indicator for how the stock/result will perform.

Leverage seems high. With a net debt-to-equity (net gearing) of 108%, the company leverage seems high. Even after the repayment of the US$70m from the IPO proceed, the net gearing will still remain at approx 100%. This is pretty aggressive for a low margin business like Japfa because the margin of error have to be very low.   

From Company's Prospectus

Below provides a more detailed financial statement:

From Company's Prospectus - Income Statement

From Company's Prospectus - Balance Sheet

3b. Valuation

Based on price multiple, you are paying approx 22x P/E for the IPO. This compares favorably to other regional and global competitors:

From Company's Prospectus

4. Investment Highlight

Growing affluence = Higher protein consumption. Japfa will benefit from a growing affluence in its core market, Indonesia (>80% of revenue). As the country grows, the population will be more affluence and this will result to more consumption for meat/protein as they seek improvement in their quality of life.

Diary is a key growth driver. I see the Diary segment as one of the most important growth segment for the company. Given the food safety concern in China, good and reputable diary sources is a key going forward. Japfa premium raw milk in China is consistently at the top of the market in terms of quality, consistently exceeding Chinese and international standards for nutrition and safety. The quality of our raw milk is also reflected in its selling price. In 2013, the average selling price of our milk was RMB 4.51 per kilogram, which was approximately 25% higher than the average price of milk from ten major milk production regions in China, according to the China Ministry of Agriculture. 

5. Investment Weakness

Concern over animal diseases? Naturally, investors will be concerned about the outbreak of avian flu or any cow/swine related diseases.

Mitigating Factor - The company has been in the industry for more than 40 years and their ability to grow into today size is a testimony of its good & established operating track record. Thus although I recognized this risk, I reckon that the company is experience enough to prevent and handle, in the event of any outbreak.

6. Conclusion

I think this will be a decent bet for the long term and given the small public tranche, the short term IPO performance might be good. 

New IPO Coverage - IREIT Global

From Company's Prospectus

1. Business Description

First European-focused REIT; initial focus on Germany & UK. IREIT is a Singapore real estate investment trust established with the investment strategy of principally investing, directly or indirectly, in a portfolio of income-producing real estate in Europe which is used primarily for office purposes, as well as real estate-related assets. IREIT is expected to have an initial primary focus on Germany and the United Kingdom.

IPO portfolio comprise four office properties in Germany. The IPO Portfolio will comprise four office properties in Germany, strategically located in Bonn, Darmstadt, Münster and Munich, with an aggregate net lettable area (“Net Lettable Area” or “NLA”) of 121,506 sq m (1,307,878 sq ft).

From Company's Prospectus

Bonn Campus, which is wholly-leased to GMG Generalmietgesellschaft mbH (“GMG”), a
wholly-owned subsidiary of Deutsche Telekom AG (“Deutsche Telekom”), and which
comprises four linked modern office buildings of two, four or six storeys. The property is
located in proximity to a key motorway of Bonn and is located in one of the prime office areas
of Bonn, where the headquarters for Deutsche Telekom are located

Darmstadt Campus, which is wholly-leased to GMG and comprises six connected office
buildings with seven and five storey sections, and a multi-storey car park, located at the main
cluster of technology companies. The property is part of one of the largest clusters of
Deutsche Telekom offices outside of Bonn and is located adjacent to a number of other
offices occupied by Deutsche Telekom, including the cellular division of Deutsche Telekom,
T-Mobile Deutschland GmbH (“T-Mobile”)

Münster Campus, which is wholly-leased to GMG, houses offices occupied by Deutsche
Telekom and comprises two six-storey modern office buildings and a six-storey external car
park structure. The buildings are located in a main business park housing leading financial
institutions and global technology firms

Concor Park, which is a multi-tenanted property comprising three linked, recently fully
refurbished five-storey office buildings with a separate car park and is located in the Munich
suburb of Aschheim-Dornach. The property is adjacent to urban and inter-urban rail stations
serving Munich and the surrounding area. The tenants include Allianz Handwerker Services
GmbH (“Allianz”), European Bank for Fund Services GmbH (“Ebase”), ST Microelectronics
GmbH (“ST Microelectronics”) and other leading companies

Below summarize the properties key terms:

From Company's Prospectus

Mr Itzhak Sella is the ultimate sponsor of the REIT; Mr Tong Jinquan is the Strategic Partner. Mr Itzhak Sella is the ultimate sponsor of the REIT while Mr Tong Jinquan is its strategic partner.

However after the IPO, Mr Tong will be the biggest shareholders of IREIT:

From Company's Prospectus

This 2 characters might be unfamiliar for fellow investors, below provide a quick summary on them:

Itzhak Sella - Refer to his Linkedin Profile (Link: https://www.linkedin.com/pub/itzhak-sella/3/b68/60a)
Tong Jinquan - Refer to Forbes (Link: http://www.forbes.com/profile/tong-jinquan/)

2. Financial Highlights

IPO price of S$0.88, represents 12.8% premium over NAV. The actual NAV is S$0.78. Thus by subscribing at IPO price you are effectively paying 12.8% premium.

From Company's Prospectus

Annualized 7.6% yield based on projection. Based on the IPO projection, the annualized yield is 7.6% for FY14.

3. Investment Highlights

Favourable dynamics of Germany’s real estate market. According to the Independent Market Research Consultant, the German property market is seeing increased demand as a global safe haven with growing participation from nondomestic investors attracted by the stability, liquidity and the steady growth potential of the German real estate market as well as the return of some German institutional and private investors and lenders choosing to focus on their own country rather than riskier foreign
markets.

In addition, the broad German office market is expected to respond favourably to the improving economic backdrop with stronger business sentiment boosting both take-up and investment volumes. According to the Independent Market Research Consultant, Germany is currently in a position in the rental cycle where landlords are expected to benefit from an increase in the growth of rental rates.

From Company's Prospectus

100% occupancy with Free hold status. The IPO portfolio is currently 100% occupied and the free hold status of the property represent one of the biggest highlight.

Strong tenants anchored by a wholly-owned subsidiary of Deutsche Telekom with long-term leases. Deutsche Telekom Properties via GMG is one their biggest tenant.  Deutsche Telekom, as the holding company of GMG, has entered into a profit and loss transfer agreement with GMG2, providing IREIT an avenue for a claim against Deutsche Telekom, should the assets of GMG be insufficient to cover the claims of IREIT. This ensure low credit risk for the REIT.

In addition, Concor Park is a multi-tenanted property with large, international and reputable corporate
tenants including Allianz, ST Microelectronics and Ebase, and has a WALE of 5.9 years.

4. Investment Risks

Chinese + Israeli -- Marriage from Heaven OR Disaster in the making???? I fear misalignment of interest here. On one hand, you have an Israeli sponsor. On the other, you have a majority shareholder being Chinese. I question the communication between the 2 and who will be the actual one making the strategic plan for IREIT.

As a minority shareholders, we are always at the mercy of the boardroom fight, that is simply out of our control. Thus, this potential strategy misalignment is one of my biggest worry.

Rental escalation based on CPI increase???? Based on the IPO projection, there will be a rental escalation triggered by CPI changes. (see projected table below) I am personally pretty susceptible on this. I am no economist expect back I am not so sure if the CPI increment is enough to achieve the stipulated trigger. Currently the base CPI is projected at 1.2%.

Weak market sentiment - Gaza+Ebola+Iraq & many more. Market has been trading poorly recently and there is a lot of geo-political risks that exist around us. In addition, there is still this Ebola disease which may significantly shift the overall market sentiment.

5. Conclusion

As much as I see value in the European property sector, I will stay caution on the IPO. I will not go ALL-IN on this one and might just buy some at IPO level and see how it perform before I add-on my position.

New IPO Coverage - Pacific Radiance Ltd

From Company's Prospectus

1. Business Description

Singapore-based offshore support services providers. Pacific Radiance is a fast expanding owner and operator of a young and diverse fleet of offshore vessels with a significant presence in Asia. It operates in 3 key segments:

(i) Offshore Support Services

(ii) Subsea Business

(iii) Complementary Business - Marine Equipment Business/Project Logistics Business

From Company's Prospectus

Diverse and modern fleet with decent utilization rates. Pacific Radiance currently wholly own and operate a total of 62 offshore vessels which are chartered out to various IOCs (International Oil Company) and NOCs (National Oil Company), international oil and gas contractors and international seismic companies. In addition, they have another fleet of 71 offshore vessels via its JV and Associated Companies.

The fleet of OSVs (exclude the 71 vessels owned through JV and Associated Companies) has an average age of approximately 3 years. Utilization rate has also improved steadily since FY2010.  

From Company's Prospectus

  

Full-value chain services within the E&P cycle.  Pacific Radiance caters to the different phases of oil and gas field project life cycle as detailed by the diagram below:

From Company's Prospectus

Exposure to cabotage-protect markets. The company's strategic partnerships with its foreign partners have allowed them to penetrate into key markets with high barriers to entry in the form of cabotage laws, such as Indonesia, Malaysia and South America.

Cabotage rules provide that vessels that flagged the respective country's flag are given priority ahead of vessels flagged elsewhere.

Diagram below detailed the historical milestones of the company:

From Company's Prospectus

2. Use of Proceeds

From Company's Prospectus

3. Financial Highlights

Offshore support services contributes the most revenue; with growing importance from subsea. Offshore support services contributes most of the revenue (FY10 - 95%, FY11 - 83%, FY12 - 84%, 1H13 - 67%). Subsea is starting to grow in importance as the company seeks to grow this segment. 

From Company's Prospectus

Asia represents a core market for Pacific Radiance. The company has successfully diversified its revenue on a geographical level since FY2010, however Asia continues to be a core market for Pacific Radiance accounting for 58% of the revenue in 1H13.

From Company's Prospectus

Decent growth achieved throughout the year. Pacific Radiance has achieved decent top line and bottom line growth throughout the years. (see diagram below) EPS has also been achieving steadily.

From Company's Prospectus

From Company's Prospectus

P/B  looks slightly expensive compared to peers but fair on forward P/E perspective. On a P/B basis, Pacific Radiance looks expensive compared to the other SGX-listed peers (with the exception of Ezion). Nevertheless, on a forward P/E terms it looks fair if they are able to continue to deliver its growth. 

4. Investment Highlights

Attractive industry. The era of "easy oil" is over and Southeast Asia' deepwater market will grow in importance going forward, OSV players that are equipped to handle harsher drilling condition will be in demand. In addition, oil prices is expected to stay at a healthy level and this will be positive for the oil sector as a whole.

Diverse and modern fleet. I like the fact that the average age of its fleet is approx 3 years, which is younger than the industry average. E&P players typically are willing to pay a premium for a younger fleet given that they are better equipped with the latest technology.

Access to cabotage protected markets. As mentioned, access to cabotage markets help boost the utilization and charter rates of locally flagged vessels and its associated companies, particularly in Indonesia.

Listing of associate company, PT Logindo. Once listed, the PT Logindo might provide a positive re-rating on the valuation of Pacific Radiance.

5. Investment weakness

Crude oil price. As usual, oil industry is cyclical and the volatility of oil price might impact the company.

Competitive market. The OSV market is competitive in nature, with bigger players having a stronger balance sheet posing a threat for the company.

Regulatory Risk. Cabotage ruling might change and it might impact the protected market for Pacific Radiance.

  

6. Technical Analysis

Out of the 171.8 million of shares placed, only 5 million of share is by way of public offer making the free float to retail investors like us very little, the remaining are placed out as placement tranche.

I have a feeling that the technical demand for this issue might be strong.

7. Conclusion

I like the sector and I like the story of the company.

Valuation wise it is fair to me and given my favourable outlook for the sector, I will give it a BUY call for the IPO. (especially given the decent performance of Rex and KrisEnergy)

8. Timetable

From Company's Prospectus

Viva Industrial Trust (VIT)

From Company's Prospectus

1. Business Description

Stapled group comprising of VI-REIT and VI-BT. VIT is a stapled group comprising VI-Reit and VI-BT.

VI-Reit : Singapore based REIT established with the principal investment strategy of investing in portfolio of income producing real estate which is used predominantly for business park and other industrial purposes in Singapore and elsewhere in the APAC region.

VI-BT : At the listing date, VI-BT, a Singapore based business trust, will be dormant. It will, however, become active on some triggering events.

From Company's Prospectus

HLG & KSH are Sponsors of VIT. Ho Lee Group Pte Ltd (HLG) and Kim Seng Holdings Pte Limited (KSH) are the Sponsors of VIT.

UE BizHub East

Brand new property comprising of Business Park component & Hotel component. Located in the Changi Business Park, UE BizHub East is a brand new integrated mixed-use business park development comprising:

Business Park Component – 2 business park buildings with retail space

Hotel Component – A business hotel managed by Park Avenue Hotels & Suites under the “Park Avenue” brand, which features a gym, swimming pool and convention centre with a theatre seating for up to 600 guests.

Rental agreement for UE Bizhub East. UE Bizhub East is under a rental agreement whereby:

Business Park component - VIT will receive S$23.35m per annum at Listing Date, with a step-up by 5% in each of the 3^rd and 5^th year of the term. (30Apr13 – 64.2% occupancy)

Hotel component (retail) - VIT will receive S$0.65m per annum at Listing Date, with a step-up by 5% in each of the 3^rd and 5^th year of the term. (30Apr13 – 100% occupancy)

Hotel component (exclude retail) – Leased to UED for a fixed rental income of S$8.55m per annum renewable at S$9.66m from the 6^th to 10^th of the Hotel Lease.

Mauser Singapore

Ramp-up logistics facility. Located near Tuas Checkpoint and Jurong Port, Mauser Singapore is a ramp-up logistics facility that provides operational and cost advantages in attracting tenants compared to conventional “cargo-lift” logistics facilities.

Mauser Singapore is under the Master Lease at S$1.8m per annum with a 5% rental escalation in the 3^rd and 5^th year built into its lease term.

Technopark@Chai Chee

Business Park located in a mature housing estate. Technopark@Chai Chee is well-maintained and offers attractive building specifications such as large floor plates which offers flexible layout and allows optimal spatial planning and easy configuration of workflow operations by tenants. The property also offers F&B establishments and other lifestyle amenities such as tennis courts and a gymnasium and is well served by amenities located in the mature housing estates in the vicinity.

Rental support agreement for Technopark@Chai Chee. The rental support agreement (RSA) states that if the gross rental income of the property is less than the target rental income of S$2.15m per month, VIT may within the period of 2 years claim the difference in each month. The aggregate liability/claim shall not exceed S$2.3m. The rental for July 13 was S$2.0m and actual occupancy rent is 60.7%. With the RSA, the calculated occupancy is at an average of 87.5%. (Suntec – 85%, JLL – 90%)

Visible acquisition pipeline through Right of First Refusal (ROFR) Properties. VIT has a visible acquisition pipeline through the listed ROFR Properties (see table beside).

From Company's Prospectus

2. Financial Highlights

Pro Forma Balance Sheet

Projected Income Statement

Projected Yield

Peer Comparison

3. Investment Highlights

Strategically located in business parks and established industrial clusters in Singapore with close proximity to MRT stations & major transportation networks. VIT’s properties are strategically located in key business parks and industrial clusters in Singapore with easy access to expressways and MRT stations. The properties are therefore supported by excellent infrastructure and transportation networks that enhance their attractiveness to existing and potential tenants.

From Company's Prospectus

Long weighted average underlying land lease and relatively new properties. The weighted unexpired lease term for underlying land for the portfolio is approximately 45 years. Both Mauser Singapore and UE BizHub East are new properties, TOP in year 2012. As such, this will result in minimum maintenance capex for these 2 properties.

Potential upside given its low tenancy rate at Technopark@Chai Chee. The current tenancy rate at Technopark@Chai Chee stands at a low 60.7%, thus there is a upside potential for them to manage up the tenancy rate.

4. Investment Risk

TOO MUCH FINANCIAL ENGINEERING! Too much financial engineering is involved and the yield is optically higher due to the rental support mechanism.

5. Conclusion

To be honest, I really don't like VIT at its IPO price of S$0.78 as I think that (1) its valuation is fair to expensive & (2) suspected asset quality given low tenancy rate, artificially supported by rental support mechanism.