It has been a quiet August so far in terms of actual deal flow but, as is the case every year, bankers are busy preparing for the expected post-summer resurgence in IPO activity. One of the first companies to hit the market looks likely to be Sewko Holdings, after bankers started investor education for its upcoming Singapore IPO on Monday this week.
The investor education will continue for two weeks and the expectation is that the institutional bookbuilding will launch in the first week of September.
Sewko is a holding company for Singer Asia, which sells Singer-branded household appliances, consumer electronics and other products in five countries in South and Southeast Asia. Its two key markets are Sri Lanka and Bangladesh, which together account for about 60% of revenues, while the rest comes from Thailand, India and Pakistan.
Singer is perhaps still best known for its sewing machines, which it started to sell back in the 1850s, and this heritage has also inspired the name of the holding company. However, the company has branched out significantly since then and sewing machines make up only about 15% of Singer Asia’s total revenues, people familiar with the company say.
In fact, in Sri Lanka and Bangladesh Singer is the household name for a range of consumer durable goods such as washing machines, refrigerators and TVs, much like Samsung is in most of the rest of Asia. It also sells furniture, fitness equipment and IT products, and provides consumer financing.
The company is aiming to raise about $150 million from the IPO, although sources say the portion being offered for sale may depend on the valuation. If the current shareholders like the price, they may decide to sell a larger portion. The target size is 25% and the IPO is expected to include both new and existing shares.
A key selling argument, sources say, will be the unique opportunity to get exposure to the growth of GDP and domestic consumption in Sri Lanka and Bangladesh.
For Singapore-based funds focusing on frontier markets this may be just the thing and the deal is also likely to attract the attention of broader emerging market funds looking to diversify away from the more mainstream markets. Other investors could well view this as too risky a bet, however – particularly at a time when global equity investors are moving out of emerging markets.
The Indonesian stock market has led the recent declines in Asia with a 10.9% drop between last Friday and Tuesday this week, before adding 1% on Wednesday. Meanwhile, the Thai stock market has lost 6.3% this week, India’s benchmark Sensex index has fallen 3.3% and Malaysia is down 2.4%.
That said, Sewko will stand out in Singapore, where yield-focused real estate investment trusts (Reits) and business trusts have accounted for 86% of the capital raised in the form of IPOs this year, according to Dealogic data. Sewko will offer a welcome break from that at a time when interest rates continue to trend higher in anticipation of the US Federal Reserve starting to ease back on its bond buying in the next few months.
Consumer demand plays also have a tendency to go down well with a variety of investors.
According to an earlier announcement by Singer Asia’s controlling shareholder, Retail Holdings, Sewko will include Singer Asia and eight subsidiaries that are already listed in the respective markets where they operate. The small scale and limited liquidity of most of these companies – according to Bloomberg data, the eight companies have a combined market cap of just $444 million – as well as potential concerns about corporate governance mean they do not really appeal to international investors in their current form.
Putting them all together in one holding company that will be listed in a more liquid market like Singapore will make them significantly more accessible.
Aside from the geographical focus, Sewko’s business is similar to that of Courts Asia, a small-cap seller of household appliances and electronics that raised $111 million from a Singapore IPO in October last year. Its key markets are Singapore and Malaysia, but it is also in the process of expanding into Indonesia.
By May this year, Courts had gained as much as 49% since listing, but since then it has been on a declining trend and on Wednesday it closed just 3.2% above the IPO price. It is currently valued at a price-to-earnings multiple of about 9.6 for the fiscal year to March 2014, Bloomberg data show.
In addition to its own branded products Singer Asia also distributes consumer durable goods for other brands such as Haier, Hitachi, Samsung and Whirlpool through a retail network that spans more than 3,500 distribution points across the five countries. It is the largest retailer of such products in Sri Lanka, Bangladesh and Pakistan and, according to a source, it has a market share of more than 50% in the first two of these countries.
According to Singer Asia’s website, most of the household products sold by the company are sourced from third-party manufacturers, either in fully-assembled or kit form. However, due to tax or duty incentives it does manufacture some products itself, including water pumps, furniture, paddy threshers, refrigerators, sewing cabinets and washing machines in Sri Lanka; and freezers, gas appliances, refrigerators and sewing machines in Pakistan.
The company generated $439.5 million of revenue in 2012, which was up 7.2% from the previous year. Net profit grew 11.2% to $16.9 million in the same period.
Retail Holdings owns just under 56% of Singer Asia, which is its only operating asset following the sale of the Singer worldwide sewing business and trademark in 2004. In connection with that sale, the Curacao-based company changed its name from Singer to Retail Holdings. The rest of Singer Asia is owned by private equity firm UCL Asia Partners.
HSBC is the sole bookrunner for the IPO. The UK-based bank also arranged last year’s listing of Courts Asia on a sole basis.