I’ve taken a recent interest to reading IPO prospectuses after I did some research on the Keppel-KBS US REIT to decide if it was worth investing (I gave it a pass). I now take a weekly look at the prospectuses available in my internet banking account for upcoming IPOs.
I’m starting a series of “An Unbalanced View” posts that aim to provide you with a quick overview of the reasons why I like or don’t like an IPO. So don’t expect detailed deep dives into the numbers or balanced arguments (you do know it’s called an UNBALANCED view right? :P)
This post’s spotlight is on the upcoming No Signboard Holdings IPO, operator of the No Signboard Seafood restaurants. IPO prospectus found here.
Dang, that’s a beautiful cover for a prospectus isn’t it? Almost like reading one of their menus. So does the prospectus content support the cover’s beauty? Nope.
Why does it stink?
1) Declining revenues, though improving net profit margins
Pretty self explanatory graphic, in my mind, the declining revenue is the more important problem.
2) Significant execution risk
There are about 4 significant strategies highlighted in the prospectus, I present them below together with my opinions on them:
a) Leverage their brand and implement a new casual dining concept in heartlands
The restaurant business is very fickle and fad based. Yes, people may try out the new dining concept when you launch them, the question is if you can sustain the chain and constantly rejuvenate and refresh the menu to cater to your customers. No Signboard doesn’t seem to have a track record there as they have been one single restaurant brand for many years.
b) Expand their recent Draft Denmark beer acquisition completed in Jun 17
Wow, you diversify into a beer business when you have no expertise on it? What’s more you complete the purchase just before an IPO and ask investors to take the ride with you? No thanks.
c) Move into the Ready to Eat Meal business distributed by vending machine
Again, a new business before an IPO. What’s more, development only commenced in 2017, so I have no way to gauge whether this idea is dumb or if the market loves it as there is no sales at this time. Once again, no thanks.
d) Expand No Signboard restaurants to overseas markets like PRC
Unfortunately by their own admission in the prospectus, their previous efforts at overseas expansion have been horrible, with bad debts from their Jakarta franchisee among other things. They are probably eyeing PRC due to Jumbo Seafood’s success there, but they give me no confidence in their ability to execute.
Overall, execution risk everywhere, with no sales to show that they can execute in each sub-business.
3) Dodgy franchise deal for Mattar Road No Signboard Restaurant
To me this is the strangest and biggest red flag I see in the whole document.
The Mattar Road restaurant is owned by Yeo Nak Keow and Cheo Chia Kew, who are relatives of the Executive directors. On 1 November, the Group entered into a franchising agreement with the Owners to allow them to operate 1 restaurant at $12,000 per month. Simultaneously, the Owners granted the Group a non-exclusive license to use certain parts of the Mattar Road restaurant, which the Group uses as a collection centre and
storage facility for live seafood, as well as for the preparation of certain ingredients used by the Group’s restaurants, for $12,000 per month.
Essentially, the Owners is able to use the No Signboard brand for the Mattar Road restaurant without a need to share profits (typical franchising arrangements has a sales percentage that is payable to the franchisor) with the Group, and just need to allow the Group to use part of their restaurant for logistics purposes.
Also, why is the Mattar Road Restaurant being carved out of the Group for a nominal fee right before the IPO? The Board really has to explain this one.
Verdict
The fact that management is diversifying away from their core competency (the restaurant business) into other areas shows me they have no confidence in their current restaurant strategy and brand. Also, the owners are floating 50 million shares out of 65.7 million in this offering, telling me that they are cashing out via IPO. Coupled with significant execution risk, declining revenues and the fishy franchise deal, this IPO really stinks.
Traders may want to take a short term punt, but for a medium to long term investor like me,
Thanks for reading.