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What Investors Need to Know About Versalink Holdings Limited’s Initial Public Offering (Part II)

Credit: Simon Cunningham

In a previous article, we saw what Versalink is about and the details of the IPO. Now, we will take a look at the financial statements, some risks involved and the valuation.

A Look at the Financial Statements

Let’s take a look at the financial statements of Versalink for the Financial Years Ended 29 February 2012, 28 February 2013 and 28 February 2014.

Below is a summary of the important parts of the income statement.

FY2012 FY2013 FY2014
Revenue (RM ‘000) 49,279 59,694 78,839
Gross Profit (RM ‘000) 15,906 22,704 32,400
Gross Profit Margin (%) 32.3% 38.0% 41.1%
Net Profit (RM ‘000) 4,376 8,718 14,544
Net Profit Margin (%) 8.9% 14.6% 18.4%
Earnings per Share (sen) 3.98 7.93 13.22

Source: Company IPO Prospectus

It can be seen that all the figures were increasing consistently from 2012 to 2014. The gross profit margin and net profit margin of 41.1% and 18.4% respectively are commendable. The margins are surprisingly high for a company involved in the furniture industry.

Revenue can be broken down into domestic sales and export sales. In FY2014, 46.3% of total revenue came from the former while the latter contributed 53.7% of total revenue.

Domestic sales are “derived mainly from project sales by way of tenders to, and directly negotiated contracts with contractors who operate in the office renovation and fit-out sector, corporate customers who require renovation and fit-out services for their corporate offices and walk in customers who place orders at our showrooms”.

On the other hand, export sales comprise of sales to “overseas dealers such as furniture importers, distributors and furniture retailers who generally resell our products to end-users through their respective retail networks and furniture brand owners that purchase from us on an OEM basis”.

As of 28 February 2014, the balance sheet seems to be strong. Versalink only had total borrowings of RM4.3 million but a cash balance of RM13.1 million. Interest rates on the loans range from 4.45% to 7.85%.

Now, let’s take a look at the important aspects of the cash flow statement.

FY2012 FY2013 FY2014
Cash Flow from Operations (RM ‘000) 7,727 7,757 12,588
Capital Expenditure (RM ‘000) -2,417 -3,043 -688
Free Cash Flow (RM ‘000) 5,310 4,714 11,900

Source: Company IPO Prospectus

The firm had been producing ample free cash flow. In the latest financial year, it produced close to RM12 million of free cash flow. Free cash flow can be used to reinvest into its own business, reduce debt, buy back shares, or pay dividends to shareholders.

Talking about dividends, Versalink intends to distribute dividends of not less than 30% of its net profits for FY2015 and FY2016. If FY2014’s net profit was to be maintained for FY2015, at a share price of S$0.30, the dividend yield would be at 3.3%.

Risk Factors

One of the major risks is that of concentration risk. The firm is dependent on certain major customers for revenue. They include dealers and OEM customers like Heartwood Distributors Ltd., Modern Emirates Furniture & Office Equipments, ABC-Advanced Business Concept LLC, and Regency Inc. In FY2014, they contributed to 25% of total sales.

Versalink also cautioned that there might be losses in the first half of 2015, after accounting for listing expenses, increased costs, and lumpy revenue from project sales.

Valuation

Versalink will be going public at a historical price-to-earnings ratio of around 6. Although not a like-for-like comparison, Design Studio Group Ltd (SGX: D11) is trading at around 9 times its historical earnings.

Design Studio is involved in supplying and installing manufactured furniture products to private residential developments and interior fitting-out services to hospitality and commercial projects.

Foolish Summary

Versalink will be selling its shares at S$0.30 apiece, with 1.5 million shares offered to the public. The company seems to be strong financially, as seen from the financial statements. Risk wise, a major risk factor may be in the form of concentration risk. The firm will be debuting at approximately 6 times its 2014 earnings.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.