Sheffield, Niks should have calibrated timing, pricing of IPOs to draw more investors

BELIEVE it or not, there have been two new listings on Catalist over the past week.

Dermatology and aesthetic medical services provider Niks Professional began trading on Oct 27 (Friday), while Sheffield Green – which provides human resource services to the renewable energy sector – hit the market on Oct 30.

The bad news is that both stocks suffered poor trading debuts. Niks ended its first trading day at S$0.20, more than 13 per cent below its initial public offering (IPO) price of S$0.23.

Sheffield closed at S$0.191 on its first day, nearly 24 per cent below its IPO price of S$0.25.

Weak trading debuts are all too common in the Singapore market. In February, food and beverage group YKGI ended its first trading day some 10.5 per cent below its IPO price of S$0.20.

The company – whose brands include the eponymous Yew Kee Duck Rice – has seen its shares tumble further since then. The stock closed Wednesday at S$0.114, an appalling 43 per cent below its IPO price.

In June, Pasture Holdings ended its first trading day 2 per cent below its IPO price of S$0.25. Shares in the supplier of masks and pharmaceutical products kept sliding, though. The stock closed Wednesday at S$0.185 – a discount of 26 per cent to its IPO price.

Are Niks and Sheffield destined to go the way of YKGI and Pasture in the months ahead? Are there lessons to be learnt for other listing aspirants?

Financial performance matters

While general market sentiment has certainly been blunted by the poor long-term performance of many Singapore stocks as well as persistent grouses about corporate governance issues, YKGI and Pasture have not given investors anything to cheer about since they listed.

In fact, both companies reported uninspiring financial results recently. Pasture posted a 35.9 per cent decline in revenue to US$9.7 million for the financial year to Jun 30, due to a slump in the sale of masks after the easing of the Covid-19 pandemic.

The weaker revenue combined with listing expenses resulted in the company reporting a loss of nearly US$1.3 million for FY2023, versus earnings of nearly US$2.5 million for FY2022.

YKGI achieved a 10.7 per cent increase in revenue to S$29.6 million for the six months to Jun 30, due to more stores being in operation and the easing of the pandemic.

Nevertheless, its earnings declined 84.1 per cent to S$0.4 million. This was due to cost inflation, higher employee benefits, and non-recurring listing expenses of S$1.2 million.

One company that has delivered strong results since listing recently is mechanical and electrical engineering services provider Ever Glory United.

For the six months to Jun 30, the company reported a 163.3 per cent rise in revenue to S$26.6 million on the back of an increased number of ongoing projects. Despite being weighed down by listing expenses, the company’s earnings were up 764.2 per cent to S$5.5 million.

Ever Glory listed in May following a placement of shares priced at S$0.22 apiece. The stock closed its first trading day more than 63.6 per cent higher, at S$0.36.

The company’s strong financial performance evidently supported the market value of its shares. In August, Ever Glory completed a 1-for-1 bonus issue of new shares. The stock closed Wednesday at S$0.37.

Niks solidly profitable

Will Niks and Sheffield report sufficiently strong financial performance in the months ahead to lift their shares above their IPO prices?

Of the two companies, Niks appears to have a relatively stable revenue base and a bottom line that is firmly in the black. Yet, its revenue for FY2022 slipped 5.2 per cent to S$11.1 million, while its earnings fell 17.3 per cent to S$2.8 million.

The company attributed the softer revenue to its patients and customers cancelling appointments in order to travel as Covid-19 restrictions were eased, as well as lower contributions from a key doctor who took an extended break during the period.

The weaker profitability was also partly due to listing costs booked during the period.

For the first quarter of 2023, Niks saw revenue fall nearly 8 per cent to S$2.6 million and earnings decline by 35.3 per cent to S$0.5 million.

Niks plans to open new clinics and outlets, recruit more healthcare and management professionals, purchase more equipment, and expand its medical skincare products distribution business in China.

Niks has also earmarked two-thirds of its net IPO proceeds of S$3.3 million for potential acquisitions, joint ventures and strategic alliances.

At its IPO price of S$0.23, Niks would have a market capitalisation of S$29.9 million – or about 14.4 times its annualised earnings for Q1 FY2023.

Sheffield’s fast growth

On the other hand, Sheffield seems to have a more growth-oriented profile. The company recruits personnel of varying skills and seniority for its clients, many of which are involved with projects in the offshore wind energy industry.

Its revenue increased by 55.2 per cent to US$3.9 million in FY2021, and by a further 97.6 per cent to US$7.8 million in FY2022. This was driven by the company securing new projects as well as increased personnel requirements at its existing projects.

Yet, the company reported a meagre profit of US$0.2 million for FY2021 and a small loss of US$0.2 million for FY2022.

Sheffield was in the black for the nine months to Mar 31, 2023, though. The company reported revenue of more than US$19 million for the period, and a net profit of US$2.5 million.

Sheffield plans to use S$2.1 million of its net IPO proceeds of S$3.8 million for organic growth initiatives. A further S$1.05 million is to develop new product lines. The remaining S$0.6 million is for working capital purposes.

At its IPO price of S$0.25, Sheffield would have a market capitalisation of S$46.6 million – or about 10.4 times the company’s annualised earnings for the nine months to Mar 31, 2023.

Perhaps one lesson from the weak listing debut of Sheffield and Niks is that companies should calibrate the timing and pricing of their IPOs, to ensure that early investors do not immediately end up underwater.

Both Sheffield and Niks might have done better if they had waited until their revenue and earnings strengthened a bit more, or if their IPOs were priced less aggressively. Leaving some immediate upside for IPO investors might have helped them garner a wider investor base.