This article first appeared in Capital, The Edge Malaysia Weekly, on October 24 - 30, 2016.
BCM Alliance Bhd, set to be listed on the ACE Market on Oct 24, will have a market capitalisation of RM80.04 million on its debut, based on its 19 sen initial public offering (IPO) price.
It will be an interesting listing to watch given that there was strong investor appetite for the public portion of the IPO despite recent weak sentiment in the stock market. With an oversubscription rate of 49.94 times.
The demand for BCM’s shares is probably linked to its healthy medium-term growth prospects, with the company being a market leader in the country’s booming self-service laundrette business. It also has plans to expand in Asean, particularly in Indonesia and Indochina, by partnering local companies there.
BCM is essentially a distributor of commercial laundry equipment as well as medical devices in Peninsular Malaysia.
About 60% of the group’s revenue is from the commercial laundry equipment segment. The segment has grown tremendously over the last three years, mainly due to the sales volume growth of its vended laundry equipment, which increased to 1,970 units in FY2015 from just 362 units in FY2013.
BCM made a net profit of RM6.1 million on the back of revenue of RM64.3 million in FY2015, compared with RM2 million and RM35.38 million respectively in FY2013.
“Earnings, going forward, will be underpinned by stable demand for medical devices, which is supported by the increasing number of hospitals, and its strong market position in commercial laundry equipment with international brands,” PublicInvest Research says in an Oct 10 IPO note.
The research house pegged a fair value of 26 sen on BCM, based on a 12 times price-earnings multiple to its estimated FY2017 earnings per share (EPS) forecast of 2.13 sen. EPS stood at 1.5 sen in FY2015. PublicInvest’s fair value of the company implies a 36.2% upside to the IPO price.
“We see our valuation as fair considering its medium-term growth prospects, with its price/earnings-to-growth ratio at 0.6 times, based on an average three-year estimated earnings growth,” it says.
Indeed, of the RM16.01 million gross proceeds raised from the IPO, RM2.6 million (or 16.2%) will go towards its expansion at home. It plans to open eleven 24-hour self-service laundrette outlets under its Speed Queen brand by end-2018. These are expected to be set up in the Klang Valley, Johor, Penang, Melaka, Negeri Sembilan, Terengganu and Kelantan. The group is currently in the process of identifying suitable sites.
According to its IPO prospectus, the reason it wants to set up such outlets is to enable it to increase the brand awareness and visibility of its Speed Queen brand of vended commercial laundry equipment. It hopes to be able to attract new customers into setting up their own self-service laundrette outlets.
BCM set up its first outlet only in September last year, at a cost of about RM190,000, and expects the breakeven period for it to be between three and five years. However, the company expects the average cost of the new outlets to be higher, at about RM230,000 each, excluding rental cost.
“We are assuming the group establishes one outlet every two months, and have been made to understand that each outlet will take about two years, on average, to break even. Hence, we do not expect major earnings contribution in the interim,” says PublicInvest.
BCM intends to use RM10.91 million or 68.2% of the IPO proceeds for working capital requirements, of which RM7.7 million will be to purchase brand new commercial laundry equipment and medical devices.
“We expect FY2016’s earnings to be weighed down by the one-off listing expenses, amounting to RM2.5 million, though partly mitigated by its current outstanding order book of RM16.3 million (as at August 2016), all to be delivered this year,” says PublicInvest.
Between April and August, BCM submitted several contract tenders totalling RM77 million for the distribution of medical devices. With more new government and private hospitals in the next few years, PublicInvest believes the group will be able to replenish its order book.
Indeed, under the 11th Malaysia Plan, the government plans to build an additional six hospitals in Kemaman, Bentong, Pendang, Pasir Gudang and Maran, while three existing government hospitals are undergoing upgrading works. These could provide opportunities to BCM.
Additionally, KPJ Healthcare, one of the company’s major customers, is targeting to set up nine new hospitals in the next four years.
One of the key risks associated with investment in BCM, however, is its relatively high exposure to foreign currency fluctuation. This is because a significant proportion of its purchases are transacted in foreign currency — in FY2015, it was 75.2% of its total purchases — while its revenue is mainly denominated in ringgit. Hence, its financial performance is affected when the ringgit depreciates against the US dollar or euro.
Still, the commercial laundry equipment industry in Malaysia is projected to grow at a compound annual growth rate of 4.3% for the 2016 to 2020 period, to reach RM271.3 million by 2020.
BCM’s IPO is for a total of 126,375,000 shares, comprising a public issue of 84,250,000 new shares and an offer for sale via a private placement of 42,125,000 shares.
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