SDS’ fair value seen lower ahead of October listing


SDS Group Bhd’s initial public offering (IPO) may be weighed down by weak investor sentiment and rich valuation ahead of its planned debut on the ACE Market next month.

Inter-Pacific Research Sdn Bhd set a 21 sen target price for the company based on 10 times earnings per share of 2.1 sen for the fiscal year ending March 31, 2021 (FY21).

This is against the company’s 23 sen listing price and was arrived at by giving a discount to the trailing 12 times price-earnings growth ratio used to determine the IPO price.

Its analyst Daryl Law said this is a safer entry point for investors amid the ongoing low risk appetite for equities.

“We view the current listing price of 23 sen may have already priced in future earnings in the nearer term, leaving little incentive for short-term investors,” he wrote in a report this week.

“Longer term, the share’s consumer tag may add a measure of defensive play premium to valuations, provided earnings hold up well even amid flagging consumer sentiments.”

Based in Johor, SDS is principally engaged as a bakery product manufacturer and distributor, as well as a food and beverage (F&B) outlet operator.

The wholesale business is the group’s primary market, making up between 67.4% and 74.5% of its revenue from FY16 to FY19 and distributing bakery products to over 10,000 customers in Peninsular Malaysia and Singapore.

This comprises the Top Baker and Daily’s brands. The company operates 33 F&B outlets in Johor under SDS and Fanpekka Café by SDS as part of its retail channel.

As part of its slated listing on Bursa Malaysia Securities Bhd’s ACE Market, SDS will undertake a public issue of 104.3 million new shares to raise RM24 million in gross proceeds.

Some 25% or RM6 million of the fund will be used to expand the company’s wholesale and retail channels in the northern and central regions of Peninsular Malaysia, supported by additional capacity at its new manufacturing plant in Seremban, Negri Sembilan.

For the wholesale channel, RM2 million from this sum will be utilised to increase its fleet of one-tonne lorries from 18 to 34 units, and the number of 16-tonne lorries for the Seremban plant from six to eight units.

The remainder RM4 million will finance the setting-up of eight new F&B outlets in the Klang Valley.

About RM7.79 million or 32.5% from the IPO proceeds is intended for general working capital, while RM7 million will be used to repay bank borrowings.

Beyond fund raising purposes, SDS said its planned listing will enable the group to tap into the equity market for future funds, while increasing the brand visibility of Top Baker and Daily’s in the bakery industry, as well as the SDS brand in the F&B market.

In FY19, the company’s net profit rose 34% year-on-year (YoY) to RM7.69 million as revenue grew 7.4% to RM187.13 million.

Inter-Pacific Research expects the company to record YoY revenue growths of 8% and 6.6% in FY20 and FY21 respectively, backed by the addition of depots for its wholesale channel and opening of new F&B outlets.

Margins, however, are expected to narrow as distribution costs will rise as the group expands operations further away from its production plants.

“We forecast earnings to dip 21.1% YoY in FY20, weighed down by listing expenses before growing by 25.7% moving into FY21,” Law wrote.

The group has not adopted a formal dividend policy, but has intentions going forward and no dividend payout was factored in the forecast period by Inter-Pacific Research.

SDS’ IPO has been opened for applications since Aug 23 and will close this month on Sep 23. The balloting of the applications is scheduled for Sep 26 ahead of the company’s tentative listing date on Oct 7, 2019.

Upon listing, the company’s market capitalisation is expected at RM93.3 million based on the IPO price and its enlarged share capital of 405.82 million shares.