Kimly Limited IPO: One of the few things that confound me as an investor is why do retail investors demand participation in a hot IPO that seems overvalued? And the answer is simple. Everyone wants the opportunity of making a quick buck. And the problem is this : IPO’s are usually fairly or overvalued. Didn’t you know already? IPO stands for It Is Probably Overvalued. It probably isn’t the first time you have heard this and it won’t be the last. But the truth of the matter is retail investors will not pay  heed to prudence in investing. Rather, they pay  heed to greed.

Enticing Story

And what better way to do so than to participate in Kimly Limited IPO. Well, for one, the story seems enticing. A company operating 64  coffee shops with a compounded annual growth rate(profits) of 9.9% since 2014 and one of the largest coffee shop owners in Singapore is listing the company to collect $40 million proceeds for expansion. The  issue is underwritten by UOB KayHian and sponsored by Prime Partners Corporate Finance Private Limited.

The prospectus also seems attractive. The listing is positioned as a defensive business, highly cash generative with the intention to pay out 50% as dividends. Now, note that it is just an intention to pay out  50% of net profits which any any company management can claim. Please take that with a pinch of salt. While the argument can be made that the company is a defensive one, how does one justify paying $0.25 for a net asset value per share of $0.0456? That seems to be a price that is too high for one’s good. The risk to reward ratio is not good in my opinion. There may be some slight upside but on valuation concerns, the downside is greater than the upside.

Paying A Premium For The Story

You have here a business that is priced at 5.48 times of book and if you are banking on dividend growth for this company, your assumptions or projections would be rather aggressive I must say! The thing is that many people think about this from a REIT or dividend perspective and think that the dividends paid will grow over time. That is conditional on management making the right acquisitions and executing on the delivery business. And the thing is this : There really is no compulsion on management’s part to pay a dividend, especially if the company is in expansion mode. So to investors valuing the projected dividend stream, be wary here and be conservative.

Another angle of looking at it is to look at the reproductive cost of its assets. The reproductive cost of its assets are a lot lower than what is priced in the market. No matter how you look at it, the company seems overvalued!

Now of course, let us take the opposing argument that the company is undervalued. In my mind, if you want to justify a greater than 5 times price to book ratio, in the next fiscal year, the management had better acquire other properties and coffee shops whose rental earnings are accretive to bottom line. From there, it could possibly pay out a good dividend. In the next few years, dividends must grow from the $12.1 million base. This $12.1 million is derived from the net profits of $24.2 million in 2016(based on management’s claims to a 50% payout ratio). Since the company’s projected market capitalisation is $288.7 million, could  the company pay a dividend greater than $12.1 million in the coming years considering that expansion plans are in place. While that is possible, I think growing the dividends will take some time.

Last but not least, the earnings seem pricey. It has been reported by the national media that the implied price to earning is about 12 times. This compared to other companies such as Japan Foods and Tung Lok which trades at a PE of 17 times and 25 times respectively. On those grounds, some feel that the valuation of Kimly Ltd is undervalued.

I would like to think otherwise. If the company’s cyclically adjusted PE ratio is not less than 10, this is not something that I would consider.

A Word Of Caution On IPO’s

The IPO is truly an overhyped entity from start to end. And if you didn’t know that already, read the preceding sentence again. The IPO is really overvalued mostly, as in the case of Kimly Limited, trading at a price to book of 5.48 times. The other thing is that with regards to IPO’s the retail investor is at a disadvantage.

Investors are prior stages in the company’s funding rounds think of the IPO as an opportunity to exit. So the whole idea as an early stage investor is to sell the story to the unsuspecting public and get the hell out! It is that one opportunity that earlier stage investors are looking for, to sell the shares to an unsuspecting idiot. The retail investor buys in hopes of growth but mostly, disappointing results follow. To me, for Kimly to continue trading higher, the earnings per share and the free cashflow had better grow at greater than 15% per year. And this is unlikely. It’s CAGR was 9.9% for the last 3 years.

Last but not least, research suggests that IPO stocks lag the performance of non IPO stocks over a 3 to 5 year period. This is confirmed by several research studies such as this . So if you are not ready to listen to me, at the very least, listen to what research has to say.

Now of course there are many who will make claims that they have made a lot of money on IPO’s. Yes they are right. For example, in the case of Linkedin, the price of the company doubled in just 1 day. Of course, you could make money from an IPO. But the question is could you do it consistently on a portfolio basis? How are you going to keep picking IPO performers when statistically speaking, most investors lose money in them. Slim chance! In all my investing life, I have never ever heard of anyone who has been able to profit from IPO’s consistently. Not one! And for that reason, I’m out!


kingsley

I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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