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Singapore News, Tuesday, April 07, 2015

LHN IPO decent; pity there's no


public portion
Source: The Business Times
RETAIL investors looking for value in promising local,
home-grown companies might be disappointed that the
Singapore market's first initial public offer (IPO) of 2015,
that of real estate manager LHN Group, has no public
portion.
Disappointment would be because LHN bears all the
hallmarks of a decent IPO that should prove rewarding
to shareholders - it is fairly priced, the company is
profitable, there is scope for upside and the money is
largely to be used for business expansion.
Setting aside for now discussion of whether IPOs should
have a compulsory public portion so that they are truly
"public" instead of private exercises, LHN's offer follows
the example of many preceding Catalist listings in that it
is wholly via private placement, in this case 73.9 million
new shares at S$0.23 each to raise gross proceeds of
S$17 million.
Most of LHN's revenue comes from its space design
business, which is the design, refurbishment, leasing
and management of properties. This also includes land
searches, feasibility studies, design and liaison with
relevant government authorities.
The company also makes money from facilities
management, which includes building maintenance,
security services, cleaning, landscaping, pest control
services and car park management service. It also has a
logistics services business.
First up is the IPO price, which is pitched at a historical
price-earnings (PE) multiple of 6.3 times. Ideally, this
should be compared with a broad Catalist PE
benchmark to gauge its reasonableness but this is not
readily available, at least for the FTSE ST Catalist Index,
probably because many second board companies have
little or no earnings.
LHN's PE does, however, compare favourably with the
Straits Times Index's 15 times, so even factoring in
Catalist's higher risk profile which would call for a lower
PE, it does appear reasonably priced and could well
close at a premium on its debut next Monday.
Second, profitability. Unlike some others before it on the
junior board which list when they are loss-making and
have no track record, LHN is profitable - net earnings
have grown steadily if not overly spectacularly, from S$7
million in FY2012 to S$12.7 million in FY2014, a
compound annual growth rate of 34.7 per cent.
Third, use of proceeds. Again, unlike many other IPOs
which raise funds to pay off debts or bank loans or to
enable major shareholders to bail out, the bulk of the
proceeds will be ploughed into the business.
According to the prospectus and excluding "working
capital" a total of S$11.5 million has been earmarked for
investment in LHN's various businesses, about 68 per
cent of gross funds raised. This is a decent proportion,

considering that the comparable ratio for other IPOs in


the past has been as low as 20 per cent.
Other indicators also lend confidence that LHN should
perform post-listing - net tangible assets is around
S$0.14 per share and for FY14, the company generated
net cash from operating activities of S$11.2 million.
Like any business, there are risks and the prospectus
contains a comprehensive list of the relevant risk factors,
a list that spans almost 20 pages. Those considering
picking up the shares when they start trading next
Monday should familiarise themselves with these factors,
especially since LHN does appear to offer good value to
long-term holders. Which, because there is no public
portion, is more the pity.