World Class Global Limited ("WCG" or the "Company") is offering 136m shares in the IPO @ 26 Singapore cents each for a listing on Catalist. New shares of 100m and vendor shares of 36m will be sold to the investors. There will be 3.98m shares for the public offer and 132.02 m shares via placement. There will be an over-allotment option where underwriter can offer an additional 10.8m shares if the demand is good at the IPO. The offer will close on 13 June 2017 at 12 pm.
WCG is a real estate company that undertakes property development and property investment in major cities in Australia and Malaysia. It was spun out from its SGX-listed parent – Aspial Corporation Limited.
Its property development projects include Australia 108 and AVANT in Melbourne, Australia. The Company also hold 28 properties in Penang, Malaysia, which comprises mainly shop houses. The Company intends to develop the land parcels or refurbish the properties.
While WCG mentioned about its launched projects and the above chart on the right showed how much "capital value" has accredited vis-à-vis the purchase price, it is still not easy to figure how the eventual profitability of the projects and how much "profits" is coming on stream at completion and handing over to investors. Similarly, it is challenging to ascribe any value to the projects yet to be launched.
Projects to be launched
The Company has been loss-making for the last 3 years because the accounting rules in Australia does not allow for progressive recognition of revenue for the projects. As such, profitability will be lumpy as it can only be recognised when the "keys" are handed over to the buyers. Based on the projects shown, the first year of profit should come when the first project, Australia 108 is delivered.
The NAV per share of the Company is 11.4 Singapore cents after taking into account the estimated net proceeds of the IPO and based on post invitation share capital of 905.7m shares. This is at a huge discount to the IPO price of 26 Singapore cents. Investors are paying for "future earnings" and capital appreciation of its properties.
Use of Proceeds
The majority of the issuance is used towards the acquiring and construction of properties.
What I like about the Company
· Established and experienced management team – The Company has proven that it is able to deliver by launching projects in Melbourne, Australia and pre-sold more than 90% of the units.
· High % of Pre-sold units – The Company managed to sell more than 90% of its residential units. Assuming all the purchasers are "credit worthy" and able to complete the sale, this removes the "sale" risk and the remaining will be execution risk depending on whether the Company is able to keep its costs in rein. In other words, profits are "locked in" as long as the cost of the projects don't over-run. It is a good to know that there had been no instances of cost overrun in the history.
· Dividend paying – WCG intends to pay dividend of up to 50% of its net profit for the year ending 31 Dec 2019 and thereafter.
Some of my key concerns
· Unclear tax and regulatory regime – The Company spent so much time informing investors that it could potentially be subject to Australia's investment regime and the various implications alongside. While I am still clueless whether investors in WCG will be subject to any taxation, it highlights the risk of government intervention in this sector, be it through taxation or measures to control demand and supply
· Lumpy earnings – In most jurisdictions, the accounting rules allows for revenue recognition using % of completion method. In Australia and in the case of WCG, the rules created 3 full years of losses. Earnings will be pretty lumpy given most of the high value projects are in Australia. It also means that WCG is unable to "collect cash" from investors based on the % of completion.
· IPO price at premium over its NAV – The IPO price of 26 cents is a very high premium over the NAV of 11.4 Singapore cents. Investors are paying to participate in the ability of the Company to generate future earnings. This represents a price to book of 2.28x
· Highly levered company – Property development requires a lot of financing and as of 31 Dec 2016, the Company's gearing ratio (debt/equity) is around 5.6x. Any material rise in interest rate or liquidity freeze will impact the Company severely
· Forex risk – The Company will be affected by currency movements in AUD and MYR. AUD has always been relatively stable whereas MYR has been on a downtrend against SGD for the longest time
· Imbalance of cash flows – The developers receives a "deposit" from the buyers (say 20%) and have to finance the cost of construction through bank leverage, it can only collect the remaining balance at the completion of the projects. While this creates an incentive for developers to complete the projects quickly, it also means that the WCG has to finance the construction, resulting in negative cash flows
· Vendors cashing out at double the cost – I am not sure of the background of why Koh and Ng owns 5% each with Aspial holding 90% in the first place and I am not sure why they are even allowed to divest part of the shares at the IPO! Shouldn't it be pro-rata with Aspial at least too? In any event, the founders are "cashing out" just doesn't sound right to me. I certainly hope they are using the cash to support the IPO…
· Why is the Singapore property development business not part of WCG? – I have no idea why this is the case.
Look at price to book or PE multiples of WCG against the likes of UOL, City Development and Capitaland, the Company looked over-valued in all aspects.
I am quite tempted to give it a zero chilli rating based on the above fundamental reasons, however, I understand the placement is probably placed out to close F&F (friends and family). Given the positive IPO sentiment and possibly tight placement, it will probably debut above water.
Please note that I have taken a very small tranche to "test out" Zico Capital but on hindsight i should have given it a miss as i was too busy to do the analysis. Fingers crossed!