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Figtree IPO: A Growth Play In The Industrial Warehouse Construction Space
Initial Public Offering | 08 November 2013
By: Nicholas Tan
Articles (71) Profile

With all hands at Figtree Holdings set for sail of its firm on the Catalist board, Shares Investment was invited on 29 September 2013 to a pre-initial public offering (IPO) briefing with both its executive chairman and managing director, Danny Siaw, and executive director, Tan Chew Joo, who shared with us its core business and their view on the outlook of the firm and the countries it have operations in.

Browsing quickly through the list of Singapore-listed stocks, one would notice that there are more than a couple of “trees” in the block, including several big names such as the Balinese-styled luxury hospitality group Banyan Tree Holdings and leading real estate group Mapletree Investments. The all-weathering tree largely associated with being sturdy, deep-rooted and often depicts a steady growth, also represents characteristics relating to strength and potential, it is, thus, no wonder why companies are shaping themselves after the forest green.

Adding to the list is Figtree Holdings, which is to be listed on the Catalist on 11 November. The firm is launching a placement of around 54.6 million new shares at $0.22 per share. Net proceeds amount to approximately $9.9 million after deducting the estimated listing expenses, in relation to the placement, and are to be used to undertake industrial property development projects, expand operations in existing and new markets in Southeast Asia, finance the purchase of a 5,000 square feet new office as well as repay borrowings and for general working capital purposes.

Four-Stage Business Model
Figtree operates as a design and build company which specialises in building commercial and industrial facilities but also engages in property development as a secondary activity. The group mainly acts as the main contractor for its projects in Singapore, covering new construction, addition and alteration works on existing buildings as well as refurbishment and upgrading of existing buildings. In the PRC and Malaysia, the group provides design, project and construction management consulting services.

Table 1: Business Process

Source: IPO Prospectus

Its business model comprises of four stages. At the bidding stage through invited tenders, if its submitted bid is amongst the most favourable, it will enter into negotiations to finalise the price and terms of the contract before it is awarded. Next, a project team is set up to work with the design team to develop the design. Once the design is finalised, the project commences and the project team will invite sub-contractors to bid for each area of sub-contract work. At the final stage, the project team will manage the project, in accordance with project requirements, and once completed it will handover to its customers. In all, the whole process will take approximately one to two years to complete a project.

Strong Foundation And Overseas Potential

Table 2: SWOT Table

Source: IPO Prospectus

After understanding the business model, let’s try to dissect the company’s strengths and weaknesses as well as its future potential and threats using a famous management tool created by Albert Humphrey, the SWOT analysis.

Figtree has a strong leadership, with both directors starting their career at Bovis Lend Lease, a design and construction company in Australia, amassing in total more than 50 years of experience in the design and build industry. By acting as a main contractor with an in-house design and project management team, Figtree engages in the whole design and construction process leading to better project control and higher margins.

Noticeably, order book visibility is a key factor as the nature of its current business is low in recurring income. However, $5 million from the IPO net proceeds have been earmarked to undertake industrial property development projects to generate recurring income through leasing. Geographical concentration in revenue is present as the bulk of 1H13 topline is derived from Singapore. This is likely to continue in the near-term, even as, it currently has three project management contracts underway in China, which would marginally increase overseas revenue stream.

With businesses in Malaysia and China, it has a first-mover advantage to tap on growth opportunities in these countries and is looking to ride on the rapid growth of the e-commence sector in China. Evidently, Alibaba-owned Taobao and along with (which in total hold more than 50 percent market share in China) have seen exponential growth in visitor traffic. Moreover, online sales in China have surged to Rmb8 trillion in 2012. This has led to an increase in the growth of third-party logistics providers as well as demand for modern warehouse facilities.

Figtree operates in a highly competitive environment and holds a local market share of 10 to 15 percent, according to management. Though its business model enables it not to hold any foreign workers under its wing, it is still indirectly subjected to the risk of adverse foreign labour policies in the form of an increase in foreign workers’ levies which will increase costs. Its strong dependency on sub-contractors might also be a problem if the pool shrinks, thus giving more negotiating power to the sub-contractors. However, this is negated at the moment with its policy of having at least three sub-contractors bidding for each sub-contract work.

Growing Order Book
In a short span of time, Figtree has established a sizeable order book since winning its first contract valued at $45 million from Second Development to design a warehouse for main tenant Menlo Worldwide Logistics in May 2011. Notably, since 1 July 2013 and up to its latest practicable date the group had secured a further $65.9 million worth of project works, almost doubling its order book from $46.7 million as at 30 June 2013.

As at 3 October 2013 (latest practicable date), Figtree had an order book for on-going project works of approximately $91.9 million. Management estimates that these on-going project works is expected to be completed between FY13 and FY15, with a substantial part of revenue to be recognised in FY14. In its prospectus, it mentioned that it is currently negotiating for potential projects in the ordinary course of business hence with its strong track record and network, we may expect more new contracts to be announced between its listing date and its financial year ending 31 December, taking its order book to new heights.

Robust Financials; Moderate Valuation

Table 3: Financials

Source: IPO Prospectus

1H13 revenue rose 42.2 percent to approximately $49.9 million primarily contributed by two local contracts for the construction of two ramp-up warehouses. Margins have been on an uptrend with gross margin significantly improving by 5.8 basis points to 16 percent on the back of better project control. Similarly, profit before tax margin improved 5.4 basis points to 13.8 percent despite higher administrative expenses due to a higher headcount and remuneration payout. As such, net profit surged by 56.2 percent to reach a record high of $5.7 million.

As at 1H13, Figtree has a net cash position of approximately $6.4 million with no debt on its balance sheet and with its unique business model one would noticed it has an extremely high return on equity of 62.5 percent. All these are hallmarks of an investable company. Net asset value doubled from FY12 to $0.041 per share due mainly to a surge in trade receivables, in line with higher revenue income. As with all growth companies, management revealed that it has no plans to distribute any dividends soon and it does not have a fixed dividend policy

In terms of relative valuation, Figtree’s IPO pricing at $0.22 per share is not exactly cheap when compared to its peers as it translates to a price-to-earnings (PE) ratio of 12.87 times FY12 earnings. However, considering its growth potential (1H13 earnings have exceeded FY12 level) the firm is likely to be reasonably priced. Amongst its listed peers, Boustead Singapore and Soilbuild Construction, are trading at 9.1 times and 8.1 times FY12 PE ratios, respectively.

Overall, Figtree does elicit characters like strong foundation and growth potential similar to the established names at the beginning of the article. However, the pricing of its IPO at the high-end and its low free float of 19.7 percent may not make it as attractive as it should be.

Well trained in aspects of finance and business, Nicholas oversees the finance and manufacturing sectors at Shares Investment.

Please click here for more information about this author.

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