5 Things You Should Know About LHN Limited’s Upcoming IPO

Credit: Simon Cunningham

There’s been a drought in Singapore’s share market when it comes to initial public offerings (IPOs).

But, that has not deterred real estate management outfit LHN Limited from pursuing a listing on Singapore’s Catalist board. According to Asiaone, the company’s managing director Kelvin Lim believes that being a publicly-listed outfit would allow LHN to attract more talent and “lift its standing abroad.”

As stated in its prospectus, LHN is a “real estate management services group with the ability to generate value for [its] landlords and tenants through [its] expertise in space optimization.”

Since its establishment in 1971, LHN has developed a track record of refurbishing unused, old, and under-utilized properties to increase their net lettable area (NLA) and potential rental yield.

Besides its main Space Optimisation business segment, LHN has two other small but fast-growing segments: Facilities Management; and Logistics Services.

You can observe the historical top-line growth of LHN’s different business segments from FY2012 (financial year ended 30 September 2012) to FY2014 in the chart below (click for larger image):

LHN's historical business segment growth

Source: LHN’s IPO prospectus

With all these as a backdrop, let’s dive into the five things you should know about LHN’s IPO.

1. The nitty-gritty

The company would be issuing 73.9 million new shares which are priced at S$0.23 each. At its listing price, LHN would carry a market capitalisation of S$83.2 million with its post-IPO share count of 361.52 million.

LHN’s public offer had opened last Wednesday and will close at 12 noon on 9 April 2015. The company’s shares will then commence trading on 13 April at 9am.

2. Key business highlights

LHN is currently the master lessee and manager of a diversified real estate portfolio comprising 36 commercial, industrial, and residential properties in Singapore, a commercial property in Indonesia, and a residential property in Myanmar.

These properties have a total NLA of over 4.0 million square feet and have an average occupancy rate of more than 90%.

LHN believes that it is able to secure new tenants for the properties it manages due to two main reasons: 1) The assurance that prospective-tenants have in being able to get hold of high-quality rental space through the company; and 2) the company’s ability to promptly respond to any requests for facilities management services from tenants.

LHN also has the ability to hang onto its existing tenants judging from its respectable historical average tenancy renewal rate of 72%.

With Singapore as its main geographic base, LHN is looking to tap into the growth of other South East Asian nations like Indonesia, Thailand, and Myanmar. The company believes that these countries’ economic growth will help drive demand for industrial and commercial real estate (in Indonesia and Myanmar) as well as container depot management services (in Thailand).

As part of LHN’s growth strategy, it wants to expand its property portfolio by “seeking out suitable properties in Singapore and the ASEAN region to lease on a long-term basis” in addition to acquiring its own real estate.

3. LHN’s financials

LHN’s prospectus has historical financials going back to FY2012. The headline numbers for the firm’s top- and bottom-line growth looks great as you can see in the chart below (click for larger image):

LHN's historical revenue and profit growth
Source: LHN’s IPO prospectus

But if we dig deeper, LHN’s earnings growth may not be as robust as what the chart suggests.

For instance, in FY2013, LHN’s bottom-line had been padded due to a S$1.43 million gain on the sale of a subsidiary, and a S$1.94 million profit contribution from discontinued operations. Then, in FY2014, LHN’s bottom-line had been the beneficiary of a S$5.8 million fair value gain on its investment properties.

It remains to be seen if LHN can grow its earnings in a sustainable manner without the inclusion of fair value gains and non-recurring sales of subsidiaries.

LHN’s cash flow situation also has room for some improvement. As you can see in the table below, over the past three years between FY2012 and FY2014, LHN has not been able to produce consistent growth in both operating cash flow and free cash flow:

LHN's cashflow history

Source: LHN’s listing prospectus

Moving onto LHN’s balance sheet, this is where the company manages to somewhat shine. As of 30 September 2014, it had S$20 million in cash and fixed deposits and just S$14.3 million in total borrowings (inclusive of finance leases).

4. Use of proceeds

LHN would be raising proceeds of around S$14.4 million from its IPO after deduction of the estimated listing expenses of S$2.6 million.

Of the sum of S$14.4 million, S$5 million (29.4%) has been earmarked for use to acquire real estate and to grow the firm’s property portfolio .

Meanwhile, a sum of S$3 million each has also been set aside for LHN to expand 1) its logistics services and facilities management businesses, and 2) its operations in existing geographical markets as well as to enter new markets.

Of the remaining S$3.4 million, some S$500,000 would be used to develop LHN’s technological capabilities while the rest would be deployed as working capital.

5. Valuation & dividend policy

Based on LHN’s listing price and adjusted earnings per share of 3.53 cents for FY2014 after the IPO, the real estate management services provider would have a modest price-to-earnings ratio of just 6.5.

For some perspective, the SPDR STI ETF (SGX: ES3), an exchange–traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI), is valued at 13.8 times its trailing earnings at the moment.

LHN does not have a fixed dividend policy currently, but it stated its intentions in the IPO prospectus that it wants to distribute at least 20% of its net profits as dividends in FY2015 and FY2016.

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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.