Katrina Group – IPO

Katrina Group was listed yesterday, and the share price rose from 0.21 to close at 0.34 (62% rise on first day of IPO). Katrina operates 32 restaurants in Singapore and 2 restaurants in Beijing. Look at the picture below for the cuisines that it serves.

Restaurants List.png

Source: Katrina’s IPO Prospectus

One good thing about IPO is that the IPO prospectus provides you lots of information about the Company to understand its business, some of its history, strengths, prospects, plans, risks, etc. The bad things are 1) historical financial statements might have been presented too nicely (adjusted to show higher numbers, 2) new costs that will impact the performance materially after IPO, 3) the sales team preparing the IPO are optimistic about the prospects and forecast performance and pushes for higher valuation, 4) usually IPO leaves little money on the table for new investors, 5) in many cases, the share price fell shortly after IPO.

Many great investors suggest that general public not invest during or right after IPO for these reasons. Of course, each IPO is different and there are several cases where IPO price was the lowest price in the Company’s history (think Google). So, let’s study Katrina’s IPO.

IPO Proceeds

Katrina is raising 7.5m by selling 35.8m new shares at 0.21 per share:

  • 5m for business expansion (open new restaurants, provide online food ordering and delivery business)
  • 2m for general working capital and corporate purpose
  • 2m for listing expense (professional fees, placement commission, etc)

After IPO, the two founders (husband and wife) will own around 84% of the Company.

Financial Performance

Considering the tough retail condition in Singapore, Katrina’s financial performance from 2013 to 2015 was quite good with revenue growing at 13.5% CAGR and net profit at 7.3% CAGR.  Operating margin was relatively stable at 10-11%. ROA was in the range 17% – 21.5%, while ROE 27% – 36%.

Financial FY13-15.png

Source: Katrina’s IPO Prospectus

The new shares issuance dilute the EPS from 2.18 cents to 1.84 cents. But, there is a footnote that you must read.

Service Agreement with the 2 Founders

Katrina implemented a new service agreement with the 2 founders. Basically, the agreement is to pay the CEO, Alan Goh, monthly salary of 35k, and the executive Director, Catherine Tan (Alan’s wife), monthly salary of 25k. That’s 720k per year for the two management personnel.

It will also pay performance bonus ranging from 4% to 8% of the profit before tax.

Performance Bonus.png

Source: Katrina’s IPO Prospectus

Had the Service Agreements been in place at the start of FY15, the aggregate remuneration paid to the two founders would have been approximately 1.3m instead of 0.4m, and the profit after tax for FY15 would have dropped from 4.2m to 3.5m or 1.51 cents per share (after adjustment for the new share issuance).

These extra costs are real costs that will be incurred from this year onwards. Also, I think this remuneration package is a bit too high for the two founders. They have been quite generous to themselves at the expense of the new shareholders who come on board.

Dividends

While current balance sheet is strong with 10.3m cash, the Company will issue 10m dividends to the two founders (the only shareholders before IPO). This clears out the cash on hand, which is replaced by the 6.2m raised from the IPO.

So, in fact, if the Company were to expand the business without IPO, it could do so with its existing cash on hand of 10.3m, which was 4m more than the net capital it raised from IPO. Therefore, it seems to me that the IPO is more for the founders to get cash out of the business than to expand the business.

Business in China

Whenever an F&B operator from Singapore does business in China, I have more concern. This is because competition is China is extremely tough, and several companies that I know have not been doing well in China. Katrina is no exception.

Katrina - Revenue by Geography 2013-2015.png

Source: Katrina’s IPO Prospectus

Its restaurant operations in China have been suffering losses. The accumulated losses from 2013 to 2015 exceed 400k. Its restaurant in Shanghai was incorporated in February 2012 and closed within 3 years due to losses. Total loss from Shanghai Katrina was more than 1m. I do not expect the business condition in China to improve this year. Therefore, China’s operation is likely to continue to be a drag on Katrina’s overall performance.

Valuation

Note: I’m not doing a thorough valuation on Katrina because the service agreement and the 10m dividend arrangement raised my doubts about the founders’ intention to go public. Also, pre-IPO numbers tend be adjusted higher, so, I have to be more careful.

For a quick estimation, based on the financial performance from 2013 to 2015, assuming slow growth rate, Katrina could be valued at around 70m.

However, 1) the dilution from new share issuance, 2) generous compensation package for the two founders, 3) additional operating costs for going public, 4) dividends of 10m, are having material impact on margins and EPS after IPO.

If the IPO were done at the start of 2015, the net profit for FY15 would have been below 3.5m. At today’s market cap of 78.7m, the trailing P/E would be 22.5x. Current price has priced in low double-digit earnings growth for the next 3-4 years. Given current business environment in Singapore, this is quite hard to achieve. Katrina’s plan expansion is to Malaysia, which is also facing similarly tough economic condition, is not likely to be easy either.

After a 61% rise on the day of IPO, its share price is likely to be volatile and speculative in near term.  Therefore, I will stand at the side line for now.

 

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2 thoughts on “Katrina Group – IPO

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