Penning down some quick scribbles on thoughts of an IPO in Singapore which will be listed at 9am this morning – Advancer Global. It’s business segments consist of Employment Services,  Cleaning and Stewarding, and Security Services.

I typically avoid IPOs and the only one that I have ever bought on the first day of its trading ended in tears.

The business is most interesting from a numbers perspective. It churns out a copious amount of operating cash flow that is accompanied by relatively low capex. In FY2015, it made S$4.3 million in operating cash flow and for FY2014, it made S$3.5 million. As for capex, it amounted to S$0.2 million for FY2015 and FY2014. To be conservative I’ll average the 2 years’ free cash flow performance to get a quick and dirty ‘normalised’ free cash flow, to adjust for business fluctuations and fluctuations in working capital. A point to note here is that the business was also provided with government grants and insurance refunds that should be considered non-recurring. These  amounted to S$2.3 million in total over the 2 years. Taking all these into account, the average adjusted free cash flow thus amounts to S$2.6 million.

Being service oriented, the business operates using low amounts invested capital. Its invested capital was about S$1.6 million and S$0.5 million for FY2015 and FY2014 respectively. That means in each year, the company generated at least high double digits in adjusted ROIC (2 year average ROIC in excess of 100%), leaving plenty of funds available for reinvestment purposes. The challenge is of course avenues for the business to redeploy the money profitably. So far, at least in the last 3 years of financial data provided in the Offer Document, it appears that they didn’t need much cash to grow the business, judging from the above 10% revenue growth achieved each year over the last 3 years.

Valuations wise, it appears very acceptable. With an expected market cap of S$38.1 million, cash holding of S$4.1 million as at 30 April 2016, after which, it will grow to S$12.5 million from the IPO proceeds, and debt of S$1.3 million, we are looking at an enterprise value of S$24.3 million. On an adjusted free cash flow to enterprise value basis, it’s about an 11% yield which doesn’t appear too bad excessive. Of course they will need to utilise the cash for expansion and the cash pile will almost certainly head downwards in the months and years to come.

As a quick final note on the risks and quality of the business from a numbers perspective, it doesn’t appear to be as good as the issuer may want us to believe. The gross margins for each individual business segment fluctuates fairly widely and revenue figures fluctuate as well. One way and the most obvious way for revenue to grow is to raise the pricing of their services which they have been doing so. The question is how sustainable will this be going forward? Raise it enough and your customers will flee by the droves.

Will continue keep tabs on this company.

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