Synagie should grow, not sell its e-commerce business

TWO years after it raised nearly S$10 million in an initial public offering, and just eight months after it raised another S$3.8 million from a rights issue, e-commerce services provider Synagie Corporation wants to sell its e-commerce business. The proposed deal will deprive Synagie's shareholders of a business that has only just turned profitable, and will instead leave them holding an insurtech startup that is still loss-making.

In August, Synagie announced that it had managed to turn its first profit since its 2018 listing. For the half year to June 30, the company reported earnings of S$4.1 million - a reversal from its S$3.7 million loss in the year-ago period. Revenue had more than quadrupled to S$38.3 million, from S$9 million a year ago, led by contributions from its e-commerce segment.

Synagie is just the sort of company that could be expected to do well during the Covid-19 pandemic. It sells body, beauty and baby (BBB) products online, and provides marketing support services to brands - mainly those in the fast-moving consumer goods (FMCG) industry.

The company was one of six business-to-consumer partners that were pre-approved by Enterprise Singapore and the Infocomm Media Development Authority for an initiative called Grow Digital, which co-funds up to 70 per cent of the cost for small- and medium-sized enterprises that want to use an e-commerce platform like the one offered by Synagie.

It makes sense, therefore, that Synagie has attracted the attention of investors. The week before it released its results, Synagie announced a proposal to sell its e-commerce and e-logistics arms for S$61.7 million.

The buyer is a consortium that will eventually consist of the Meranti Asean Growth Fund, Alibaba Singapore Holding, and Synagie's founders Clement Lee, Zanetta Lee and Tai Ho Yan. The Meranti fund is managed by pan-Asian venture capital firm Gobi Partners.

Shareholders are being offered what seems a handsome payoff to approve the deal. Synagie said it would distribute 18 Singapore cents per share to shareholders from the sale proceeds. Its stock had closed at 18.9 cents just before the deal was announced.

But for shareholders who had bought Synagie's stock at IPO for 27 cents a share, the deal is actually a loss-making proposition. Shareholders who had participated in the rights issue would have a lower adjusted cost of 26.71 cents a share, but would still be out of pocket. Synagie's total return since its listing is a negative 21.4 per cent.

Synagie's argument for selling the e-commerce business is that the business is fundamentally unchanged and that the recent profitability is due only to a one-off surge in demand for products related to Covid-19 and higher e-commerce activity due to stay-home measures in the first half of this year.

But rather than build on this surge for the benefit of the company and all its shareholders - as most other Covid-19 beneficiaries are now trying to do - Synagie's founders are taking the business out of minorities' hands. Its minority shareholders would be left with an insurtech business that brought in only S$800,000 in revenue in H1 2020.

Slower growth

Should shareholders reject the deal instead? Unfortunately, there is no straightforward answer.

Around the time it came to market, Synagie had actually been a fast-growing company. In 2017, it reported that its revenue more than doubled thanks to the addition of 77 new brand partners. The company said it had more than 250 brand partners as at June 20, 2018.

Since then, net additions in brand partners have slowed. Synagie said it had more than 270 brand partners at end-2018, and more than 280 brand partners at end-2019.

The slower pace of growth is unsurprising given the relatively small size of Singapore's market and the finite pool of global FMCG players with headquarters in Singapore to which Synagie can offer its end-to-end e-commerce solutions.

At the same time, more and more companies are choosing a direct-to-consumer (DTC) e-commerce model in order to build a stronger relationship with customers. Both Procter & Gamble and Unilever, for instance, have been increasing their DTC investments in order to seize control of the customer experience.

Given the relatively low price points for many FMCGs, it is unlikely that these brands will give up working with e-commerce enablers entirely. And Synagie has shown that it is still capable of stitching up some good partnerships.

In June 2020, Synagie increased its access to more brands by partnering with media investment group GroupM. Synagie will provide end-to-end e-commerce platform store management and fulfilment services to GroupM's clients in South-east Asia, consisting of multinational corporations, telcos and banks.

But there is no guarantee that Synagie can improve on its current performance. In fact, the company's track record is uninspiring.

Ideally, Synagie should secure the buyers of its business as new investors in the listed entity - as Singapore Post (SingPost) had previously done. In 2014, Alibaba took a stake in SingPost and subsequently also invested in a SingPost subsidiary. Synagie should also seize the opportunity created by a growth in the e-commerce marketplace to offer new and value-added services to its customers, perhaps by offering consultancy services, branching into new specialisations or targeting brand partnerships outside the FMCG sector.

As it is, Synagie's shareholders are being asked to choose between two very unexciting options.