Optimax Holdings ($OPTIMAX 0222) first
trading day is on 18 August 2020 (Tuesday). The IPO was oversubscribed
by more than 80 times. Are you one of the lucky applicants who got
allocated some shares? Or did you get none? Where will share price move
towards on Tuesday? What will the market concur as the value of the
Company?
The Short Sighted View
(Note:
We should be mindful that anything can happen between now to its first
trading day, derailing this prediction. We live in an ever volatile
world governed by volatile global leaders.)
No study of the business or financials required. Sentiment matters more. Should the following thesis remains true, Optimax will open above RM 0.35, hit a day high of RM 0.50 or above, and close above RM0.40.
The market continues to seek positive news flow to drive up share
prices. The market deems IPO as positive news flow. The last 3 IPOs in
June 2020 (under the pandemic environment) have done well on their first
trading day.
- Reservoir Link Energy ($RL 0219) – IPO price RM 0.41. On first trading day, hit day high of RM 0.79 (93%) and closed at RM 0.515 (26%).
- TCS Group Holdings ($TCS 0221) – IPO price RM 0.23. On first trading day, hit day high of RM 0.605 (163%) and closed at RM 0.45 (96%).
- Ocean Vantage Holdings ($OVH 0220) – IPO price RM 0.26. On first trading day, hit day high of RM 0.55 (112%) and closed at RM 0.53 (104%).
Should share price limit up on Tuesday, successful IPO shares
applicants will have the opportunity to cash out their investment with
great returns.
For the not so lucky ones who wasn’t allocated any shares or didn’t put in their application, let’s take a look at …
The Long Sighted View
Optimax operates a network of 13 eye specialist centres. Key services
provided include refractive surgery (laser vision correction and implant
vision correction), treatment of eye diseases and disorders (cataract
treatments), and oculoplastic treatment (i.e. plastic surgery on the
eyes area).
Its IPO prospectus highlighted 4 competitive strengths:
(a) Track record of 25 years to serve as reference for customers;
(b) Established network of private eye specialist centres in Malaysia;
(c) Stakeholders are resident eye surgeons in their respective eye specialist centres; and
(d) Experienced management and operations team.
(a) Track record of 25 years to serve as reference for customers;
(b) Established network of private eye specialist centres in Malaysia;
(c) Stakeholders are resident eye surgeons in their respective eye specialist centres; and
(d) Experienced management and operations team.
These are bland statements that can describe many long running
Malaysian SMEs. These give no excitement to fuel the market. So, what
can possibly fuel optimism for the mid to long term?
Clearly
demonstrated track record for growth in the last 3 years, while under
the leadership and operations of the second generation who are young and
energetic.
The Company has grown at a strong double digit growth over the past 3 years.
- Revenue at 28% CAGR
- EBITDA at 31% CAGR
- PAT at 45% CAGR
- Free Cash Flow (FCF) flipped from a negative RM 10 million in 2016 to a positive RM 10 million in 2019.
All its centres have seen year on year growth for the past 3 years,
except for Seremban and Muar. Part of the IPO proceeds will be used to
renovate and upgrade the Seremban centre from a clinic into an
ambulatory centre with more advanced equipment. This could allow the
centre to turn into a growth engine.
The historical strong growth in the recent years were driven by the
young and energetic second generation who were holding key roles in the
Company since 2017. Post IPO, the Tan family will continue to hold
61.77% of the Company.
The second generation can continue to maintain and even accelerate the growth trajectory by expanding …
A marketable brand, tapping into opportunities to scale across the Southeast Asia region.
Optimax holds the perpetual trademark license for the “Optimax” brand
for Southeast Asia region. There are tremendous opportunities to expand
its current eye specialist centres network into Indonesia, Vietnam,
Thailand and Singapore – all of them have a growing demand for eye
related surgeries and treatments, with a growing middle class
population.
The Company can do so by acquiring majority stakes in existing
established eye specialist centres in each respective countries. By
doing so, Optimax can scale their existing proven operating model in
which the …
Key staff are incentivised in alignment to the shareholders.
Out of the 13 eye specialist centres in operation, 6 are jointly owned by resident surgeons in charge of leading the centres.
Its second liner management team holds shares in the Company and were
also offered to subscribe to the IPO shares. This include 2 Senior
Medical Directors, 1 Medical Director, the Group Accountant, and the
Operations Manager.
By aligning key management’s interests as shareholders, key management
are be more motivated to grow the business and operate the centres with
the best foot forward.
However, there are areas that can potentially damper share price for the longer term.
Lower than expected growth due to COVID19 and poorer economic environment faced by its customers.
A global and local slowdown in the economy could negatively impact
consumers’ discretionary spending. There have been salary reductions,
retrenchments and close down of businesses across Malaysia. Potential
customers may defer their non-urgent cataract treatments, or not spend
on vision correction / refractive surgeries (and instead use glasses or
contact lens).
Will the Company be able to replicate the growth across all key segments as evident in the last 3 years.
The slowdown in growth has been reflected in the Company’s Q1 FY2020
results released today (14 August 2020). Comparing to Q1 FY2019, revenue
was down 4%, profit was down 19%, Free Cash Flow was down 34%. Comparing with the preceding quarter, revenue was down 22%, profit was down 37%.
Management attributed the decline to the MCO, which has resulted in the
Company temporary closing some of its centres and opening some of its
centre on alternate days. A great number of its customers have deferred
their refractive surgeries and non-urgent cataract treatments. Q1 FY2020
has less than 15 days of MCO. Hence, we can expect a greater decline in
the business for Q2 FY2020 which has more than a month of MCO.
Downwards pricing pressure due to competition
Optimax’s average selling price (ASP) per surgeries remains healthy in
the past 4 years as disclosed in its IPO prospectus. Vision correction /
refractive surgeries ASP has increased from RM4.8k in 2016 to RM5.8k in
2019. Cataract treatments ASP has remain flattish around the RM5.0k to
RM5.3k region in the past 4 years.
We can observe competition’s impact on pricing when comparing ASPs for
the more competitive cataract treatments to the less competitive vision
correction / refractive surgeries.
Should competition intensifies, a lower pricing will results in lower
profitability and cash flow to the Company. Hence, in order to grow its
number of centres and upgrade / invest in equipment, Optimax will have
to utilise borrowings instead of internally generated cash. This may
weaken the Company’s balance sheet further, which is …
Currently in a net debt position
As at 31 March 2020, The Company proforma balance sheet (after
factoring in its IPO proceeds plans) is at a net debt position of RM 14.4 million – borrowings and lease liabilities of RM 24.3 million and cash of RM 9.8 million.
Proforma gearing ratio (includes all borrowings and lease liabilities)
for the Company was at 55% of equity as at 31 March 2020. There is still
decent room to increase its gearing. However, in the current pandemic
environment with uncertain economic outlook, it is wise for Management
to reduce their gearing and attempt to achieve a net cash position
instead. With that in mind, Optimax growth may be limited to organic
growth from its existing 13 centres.
Valuation Considerations
At its IPO pricing of RM 0.30 per share,
- Market Capitalisation = RM 81.0 million
- Enterprise Value = RM 95.4 million
- TTM PE (Adjusted) = 8.6x
- TTM EV/EBITDA (Adjusted) = 4.7x
- TTM Price / Free Cash Flow = 7.9x (Free Cash Flow yield of 13%)
Valuation at IPO price looks fairly reasonable at single digit multiples.
With share price potentially reaching higher than IPO pricing on its
first trading day, investors interested in Optimax can consider the
following valuation matrix in assessing their purchase price. Make a
subjective decision on the potential nnual growth rate for the Company
and your required annual rate of return over the next 5 years. Apply a
discount to the price as a measure of margin of safety.
For example, should you expect a 9% growth in the business annually and you require a 11% return annually on your investment, the fair value for the Company will fall around RM 0.44. Apply as further 10% discount as margin of safety (in case of lapse in your judgement), your fair value for purchase will be around RM 0.40.
(Notes on assumptions taken: 2020 FCF
of RM 5.2 million (50% reduction on 2019 FCF of RM 10.5 million due to
impact from MCO / COVID19). 2021 FCF recover to 90% of 2019 FCF levels.
Subsequently, FCF grow at the defined annual growth rates from 2022 to
2025. Terminal growth rate of 1%. FCF is then discounted on the above
defined required rate of return to arrive at the valuation.)
Optimax value today could be as high as RM 0.55,
should one believe the company could achieve more than 13% growth in
the next few years. Coupled with a low yield / interest rate
environment, investors may just be willing to invest in equities for a
lower required rate of return of just 10%.
Disclaimer: This
publication is for information and entertainment purposes only. This
publication is based on information obtained from sources believed to be
reliable but we do not make any presentations as to its accuracy or
completeness. Any recommendation contained in this publication does not
have any regard to the specific investment objectives, financial situation
and particular needs of any specific addressee. It is published for the
assistance of recipients but it is not to be relied upon as
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recipient. This document is not or nor should it be construed as an offer
or a solicitation of an offer to buy or sell any securities mentioned
herein. Readers should not assume that recommendations made in the
future will be profitable or will equal performance listed here or
recommended in the past. All information and opinions expressed are
subject to change without notice. The publisher, its associates and/or
its employees may from time to time have a position in the securities
mentioned.
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