On 23 August 2019, SDS Group Bhd (SDS) has opened an invitation to the public where it is issuing its IPO shares at RM 0.23 per share.

You may easily download its IPO Prospectus with the links below: 

The application for SDS’s IPO shares would be closed on 23 September 2019. Its listing date is tentatively set to be on 7 October 2019.

The question is, ‘Should i subscribe to it at RM 0.23 a share today?’

In this article, I’ll make a list of seven things on SDS before investing its shares:

#1: Business Model 

Founded in 1984, SDS is a large-scale manufacturer of bakery products, which is supplying 708 different types of bakery products to 10,000+ customers (grocery stores, schools, hospitals, petrol stations, supermarkets and hypermarkets) that are located across Malaysia and Singapore.

In addition, SDS has a network of 33 F&B outlets across Johor where 18 are bakeries, 5 are cafes, and 10 outlets that are a hybrid between bakeries and cafes. 

Store Growth 

Source: Page 171-173 of SDS’s IPO Prospectus 

#2: Financial Results 

SDS’s financial results are as follows: 

Revenues: 

SDS has achieved consistent increase in revenues from RM 94.0 million in 2016 to RM 187.1 million in 2019, attributed to:

• Establishment of 2 new depots in Shah Alam and Taman Taming Jaya
• Introduction of a new manufacturing line that increased its capacity of sandwich loaf production in Seremban
• Consistent growth in wholesale customers & retail expansion during the period. 

Shareholders’ Earnings: 

This had resulted in higher shareholders’ earnings from RM 3.85 million in 2016 to RM 7.70 million in 2019. EPS has increased from 0.9 sen in 2016 to 1.9 sen in 2019.

It has a 4-Year Return on Equity (ROE) average of 20.49% per annum. This means, it made, on average, RM 20.49 in annual earnings from every RM 100 it has in shareholders’ equity in that four-year period.

Figures in RM ‘000 unless stated otherwise 

Source: Page 159 of SDS’s IPO Prospectus 

#3: Balance Sheet Strength 

Figures in RM ‘000 unless stated otherwise 

Source: Page 161-162 of SDS’s IPO Prospectus 

Looking at the above table, SDS has had above 100% in debt-to-equity ratio since 2017. During the period, SDS has incurred additional borrowings to fund its working capital and to acquire its new motor vehicles, plant and machinery. However, we can see that its been coming down steadily to 113.08% as of FY2019.

In addition, it has a current ratio of 0.65. As such, SDS has under eight months worth of current assets to pay its current liabilities. 

#4: IPO Proceeds 

SDS intends to raise a gross proceeds of RM 24.0 million from its IPO exercise. It plans to utilise it in the following manners: 

Source: Page 24 of SDS’s IPO Prospectus 

1. Capital Expenditures (RM 6.0 million) 

It includes purchases of lorries worth RM 2.0 million to grow its manufacturing business and RM 4.0 million to set up 8 brand new F&B outlets in the Klang Valley within 24 months from its listing date. 

2. Repayment of Bank Borrowings (RM 7.0 million) 

It involves the settlement of the following debt: 

First, SDS would settle an outstanding of RM 4.3 million in bankers’ acceptance and term loans from Hong Leong Islamic Bank where their interest rates ranges between 3.89% to 6.82% per annum. It expects to reap RM 0.3 million per year in interest savings from this settlement. 

Then, SDS would proceed to settle an outstanding of RM 0.7 million in bankers’ acceptance from Public Bank Bhd where its interest rate is 4.07% per annum. It expects to reap RM 0.03 million in interest savings from this settlement. 

Thereafter, SDS would settle its outstanding finance lease liabilities which were provided by nine financiers where interest rates ranges between 3.60% – 6.80% per year. A repayment of RM 2.0 million would generate SDS an interest savings of RM 0.1 million per annum. 

3. General Working Capital (RM 7.79 million) 

This includes purchases of raw materials and overhead payments in line with its expansion plans stated above. 

4. Estimated Listing Expenses (RM 3.20 million) 

#5: Management 

Source: Page 33 of SDS’s IPO Prospectus 

The Tan family remains influential to the future direction of SDS. 

Tan Kim Seng is appointed as Managing Director while his brother, Tan Kim Chai is appointed as Executive Director of the company. Their Nephew, Tan Yon Haw is also appointed as Executive Director of the company. 

#6: Key Risks 

To name a few, SDS is subjected to the following risks: 

• Above 100% in gearing ratio and below 1.0 in current ratio.
  
• Exposure to borrowings and the risk of adverse changes in interest rates. 
• Inherently, SDS faces the risk of food contamination. 
• Risk of hikes in rental costs for its retail premises for 21 out of 33 of its F&B outlets are operated from leased premises. 
• Huge competition from a large number of F&B operators nationwide. 

#7: Valuation 

At current price of RM 0.23, its shares are offered at P/E Ratio of 12.11.

After its issuance of IPO shares, its net asset a share is RM 0.15. Therefore, its shares are offered at P/B Ratio of 1.53. To-date, it has no fixed dividend policy. 

Conclusion: 

SDS has delivered consistent growth in revenues and earnings over the last four years. It intends to use its IPO proceeds to mainly expand its F&B outlets and to reduce its debt-to-equity ratio. 

Overall, SDS is a consumer growth stock with good promising growth. So, will you subscribe into SDS’s IPO shares at RM 0.23 a share? 

Leave your comments below to let us know.

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