June 28

Kim Hin Joo Bhd’s IPO: 10 Things to Know About It

On 19 June 2019, Kim Hin Joo (M) Bhd (KHJ) opened an invitation to the public to subscribe its IPO shares at RM 0.43 a share. Its IPO documents can be easily downloaded here:

KHJ’s IPO

Part 1

KHJ’s IPO

Part 2

The application will be closed on 26 June 2019. Its shares will be listed on 8 July 2019.

The question is: ‘Should I subscribe KHJ’s IPO shares?’ In this article, I will summarize my findings of its IPO documents. Here are 8 things that you would need to know about KHJ.

#1: Business Model

KHJ retails and distributes a variety of baby, children and maternity products in Malaysia via Mothercare outlets and through other retailers and distributors in Malaysia and abroad.

Presently, KHJ has 17 Mothercare outlets and distributes products to 339 retailers & distributors mainly in Malaysia.

Year

2015

2016

2017

2018

21/5/2019

Outlets

14

15

16

16

17

Source: KHJ’s IPO Document Page 187

#2: Geographical Markets

In 2018, KHJ derived 76.9% of revenues from the Klang Valley. The balance was derived from major towns outside the Klang Valley. Export sales have remained insignificant, accounting for only 1.8% of KHJ’s revenues in 2018.

 

Source: KHJ’s IPO Document Page 63

#3: Financial Results

KHJ has achieved continuous growth in revenues from RM 77.0 million in 2015 to RM 97.7 million in 2018. It is in line with expansion of Mothercare outlets & distribution points during the 4-year period. Profits After Tax (PAT) grown from RM 8.2 million in 2015 to RM 12.2 million in 2016 before dipping marginally to RM 11.1 million in 2018. Its fall in profit due to a rise in staff costs, rental costs, depreciation, and corporate management fees in 2017 and 2018.

KHJ has a 4-Year Return on Equity (ROE) of 18.10% per annum. This means, KHJ made, on average, RM 18.10 in annual earnings from every RM 100.00 it has in shareholders’ equity from 2015 to 2018.

Figures in RM ‘000 unless stated otherwise

Year 2015 2016 2017 2018
Revenues 77,031 84,858 93,310 97,687
Profits After Tax (PAT) 8,204 12,234 11,561 11,112
Earnings per Share (Sen) 2.16 3.22 3.04 2.92
Return on Equity (%) 17.71% 20.89% 18.61% 15.17%

Source: KHJ’s IPO Document Page 153

#4: Balance Sheet Strength

In 2018, KHJ repaid all of its borrowings and thus, have zero in gearing ratio. In addition, KHJ reported RM 48.9 million in current assets and RM 14.4 million in current liabilities. Thus, it has a current ratio of 3.40.

Year

2015

2016

2017

2018

Current Ratio

2.86

2.94

3.30

3.40

Gearing Ratio

9.06%

1.95%

0.21%

0.00%

Source: KHJ’s IPO Document Page 197

#5: IPO Proceeds

KHJ intends to raise RM 32.68 million in gross proceeds. It intends to utilise it in the following:

1. Expand Retail Network (RM 10.0 million)

KHJ intends to open another 4 to 5 outlets in the next 3 years. Out of them, KHJ secured two premises namely, Sunway Velocity and Empire Subang. The outlets are expected to open in Q3 2019. It plans to open 2 – 3 outlets in 2020 & 2021.

2. Open The Entertainer Toys Outlets (RM 5.0 million)

KHJ is finalising a development agreement with the Entertainment UK. From it, KHJ will obtain an exclusive right to operate the Entertainer Toys outlets across Malaysia as a franchisee. It intends to open 3 – 4 outlets in 3 years.

3. IT infrastructure system & ecommerce platform (RM 3.0 million)

KHJ budgets RM 3.0 million to upgrade & revamp its IT system and ecommerce platform. It includes installation of a business intelligence software and also an ecommerce platform on a progressive basis within 3 years.

4. Expansion or Relocation of Existing Outlet (RM 2.0 million)

KHJ intends to reserve RM 2.0 million to resize & reconfigure its existing outlets or relocate to a larger outlet to expand its overall retail spaces. It is subjected to availability of such spaces, rent rates, and the approval of its landlords.

5. Working Capital (RM 8.9 million)

It involves the purchase of inventories, maintenance & upkeep of outlets and as well as advertising expenses.

6. Listing Expenses (RM 3.8 million)

 

#6: Management

After its IPO listing, Kim Hin International Pte Ltd (Kim Hin) will emerge as KHJ’s main shareholder, holding 62% shareholdings of the corporation. Pang Kim Hin will remain a substantial shareholder of KHJ via his interest in KHJ and would be appointed as the Chairman of the company.

#7: Risks

KHJ is subjected to the following risks:

1. Dependent on its Key Franchisors & Suppliers

KHJ derived more than 80% of its revenue from its Mothercare & Early Learning Centre (ELC) outlets. Its development agreements with Mothercare and ELC will expire on 1 August 2021 and 19 September 2020. KHJ provides no guarantee of renewal of these development agreements despite having the franchises for 32 and 8 years for Mothercare and ELC.

2. Changes in Tenancy Agreements

KHJ operates all of its Mothercare outlets in shopping malls where the tenancy terms are 3+3 years. Upon expiry of these agreements, landlords may revise & change the terms & conditions of existing tenancies. Presently, out of 17 stores, 6 of these leases are subjected for rental review in 2019. These outlets include 1 Utama, The Curve, Subang Parade, Gurney Plaza, Pavilion, and AEON Tebrau.

KHJ may face interruptions if it is to relocate due to inability to renew its leases at favourable rates. Also, as rental expenses accounted for 10% of its revenues, a hike in rental rates will adversely impact KHJ’s financial results in the future.

#8: Valuation

At current offer of RM 0.43 per share, KHJ’s IPO shares are offered at P/E Ratio of 14.73 and P/B Ratio of 2.39.

It intends to adopt a dividend policy of paying out not less than 40.0% of profits after tax to its shareholders in dividends. Based on its EPS 2018 of 2.92 sen, KHJ would pay out, at least, 1.17 sen in dividends per share (DPS). Its dividend yield is 2.72% per annum.

Conclusion:

KHJ has delivered stable financial results for the last 4 years and has maintained a healthy balance sheet with zero gearing ratio. It has a tangible expansion plan and has the experience to execute it. However, it is subjected to key risks which include dependence on key suppliers and franchisors and rental expenses.

So, should you subscribe IPO shares of KHJ at RM 0.43 per share? You decide.


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Tags

KHJ ipo, kim hin joo, kim hin joo ipo


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