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What Investors Need To Know About Serrano Limited’s Upcoming Initial Public Offering

Credit: Simon Cunningham

The recent volatility in Singapore’s share market has not deterred Serrano Limited from launching its initial public offering on the Catalist board. Serrano plans to sell 30 million shares, of which 28.5 million are placement shares and only the remaining 1.5 million would be made available to the public.

At its offering price of S$0.23 per share, Serrano will have a tiny market capitalization of just S$34.5 million upon listing.

Serrano Limited joins a slew of new listings this year, such as EMAS Offshore (SGX: UQ4) and Versalink Holdings Ltd (SGX: 40N). The performance of new IPOs have varied greatly. Prime examples would be TalkMed Group Ltd (SGX: 5G3) and Terratech Group Ltd (SGX: 40I); the former has surged more than 400% since its listing while the latter has declined by 53.9%.

What is Serrano?

With about 80 interior fit-out projects across Southeast Asia under its belt, Serrano is a leading provider of interior fit-out solutions for property development and refurbishment projects in Singapore (Singapore is by far Serrano’s most important market, accounting for four-fifths of the company’s revenue in the first half of 2014) and other parts of Southeast Asia.

In Serrano’s industry parlance, “Interior fit-out” is known as the act of customizing, manufacturing, and installing products like vanity cabinets and doors.

The company’s portfolio spans the residential, hospitality, retail and commercial sectors, with a focus on mid- to high-end private residential developments. In addition, under its Wholesale and Retail Furnishings business division, Serrano supplies a wide range of furnishings that are suitable for home, office, and commercial use to complement its interior fit-out business.

The company, which has 311 employees, is looking to expand aggressively in the region. It has been in Vietnam since 1998 and in Thailand since 2003. The company is looking to scale up its operations in Southeast Asia. In particular, it intends to further expand its interior fit-out business in Myanmar, Thailand, Cambodia, and Vietnam.

Details of the IPO

The public offering opened on 16 October 2014 and would close on 23 October. Its shares will commence trading on 28 October at 9am.

As mentioned earlier, Serrano would be selling 30 million shares at S$0.23 each. This would raise S$6.9 million in gross proceeds in the process. However, it should be noted that of the S$6.9 million sum, approximately S$1.7 million would be going to the company’s management team and their family members. The team includes, among others, Winston Chia, the Executive Chairman and Chief Executive, and Johnston Chia, an Executive Director.

After deduction of Serrano’s share of the listing expenses, the company would be left with net proceeds of S$3.6 million from the IPO. The sum will be used by Serrano for the following purposes: 1) $1 million to fund overseas expansion; 2) $1 million to be used for investment; and 3) $1.6 million for working capital.

The basic numbers and some financial risks

S$’ million Financial year 2011 FY2012 FY2013
Revenue 63.99 52.72 82.95
Net profit 0.553 1.143 3.211

Source: Serrano IPO prospectus

As you can see from the table above, Serrano’s top- and bottom-line has been growing, though there was a dip in revenue in FY2012. Although Serrano’s profit has seen big jumps in the past three years, there’s reason to suspect that FY2014’s numbers may not surpass that of FY2013 as the first half of FY2014 has already seen a 25% year-on-year decline in profit.

A look at Serrano’s balance sheet also reveals some important financial risks investors have to note. As of 30 June 2014, the firm had short-term borrowings of $53.9 million and trade payables of S$18.4 million. In addition, it is carrying receivables and amounts due from contract customers worth a total of S$72.5 million – the amount represents almost 75% of Serrano’s total assets.

If there’s an economic or industry-specific downturn, there’s a chance the company may not be able to recoup some of the amounts and receivables that it is due. Given Serrano’s high short-term borrowings and trade payables in relation to its cash holdings (the company only has S$13.1 million in cash as of 30 June 2014), any defaults from its clients may lead to financial strain when it needs to pay its creditors.

Interestingly, as seen from the table below, the company’s annual interest expense (known as finance costs in its financial statements) have also been a significant portion of its earnings before interest & taxes (EBIT). This gives Serrano little room for error when it comes to servicing its loans.

S$’ million FY2011 FY2012 FY2013
EBIT 2.44 3.98 6.63
Finance Costs 1.71 2.53 3.14
Finance costs as a % of EBIT 70% 64% 47%

Source: Serrano IPO Prospectus

Serrano’s statement of cash flows also shows that it has not been able to consistently generate positive operating cash flow. For instance, in FY2011, Serrano’s operating cash flow had been a negative S$12.38 million; in FY2012, it was a negative S$1.94 million. It was only in FY2013 when Serrano managed to generate a positive operating cash flow of S$539,801.

Valuation

Based on its share count on the listing date, Serrano had earned 2.31 Singapore cents over the last 12 months. At its listing price of S$0.23, Serrano’s shares would thus carry a historical price-to-earnings (PE) ratio of 10. Strictly for some perspective, the SPDR STI ETF (SGX: ES3), a proxy for Singapore’s market barometer the Straits Times Index (SGX: ^STI), carries a PE ratio of 13.

Serrano ”currently does not have a fixed dividend policy,” according to its prospectus.

Foolish Summary

Serrano is likely to attract investors with its exposure to fast-growing emerging markets like Vietnam and Myanmar. However, potential investors should take note of the financial risks the company faces due to its large amount of borrowings and its inability to consistently generate positive operating cash flow. Furthermore, the recent property cooling measures in Singapore have taken a toll on Serrano’s customers (the big property developers) and it may affect the company in time to come.

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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 James Yeo doesn’t own shares in any companies mentioned.