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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.
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.
Historical Financial Performance (RM thousands)
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.
Revenue growth by store
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%.
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