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A Quick Take On SAG Holdings Limited
SAG Holdings Limited (SAG) has filed to raise an undisclosed amount in an IPO of its ordinary shares, according to an F-1 registration statement.
The firm operates as a distributor of replacement parts for motor vehicles and combustion engines.
SAG operates in a low net margin business and has produced decreasing topline revenue.
When we learn more about the IPO’s pricing and valuation assumptions, I’ll provide a final opinion.
SAG Overview
Singapore-based SAG Holdings Limited was founded to distribute parts for motor vehicles and non-vehicle combustion engines in Singapore and throughout the Middle East and Asia.
Management is headed by CEO Mr. Chin Heng Neo (Jimmy Neo), who was previously in management roles at Spare-Parts Zone Pte Ltd.
The company’s primary offerings include:
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On-Highway – OEM and aftermarket parts
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Off-Highway – components and spare parts
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In-house replacement parts
As of December 31, 2021, SAG has booked fair market value investment of $1.2 million as of December 31, 2021 from investors including the founders.
SAG – Customer Acquisition
For its On-Highway segment, the company operates Autozone retail outlets in Singapore and Malaysia. The outlets are not affiliated with U.S.-based Autozone.
Approximately 54% of the firm’s revenue in 2021 was derived from its On-Highway segment. Its Off-Highway segment accounted for 45% of revenue in 2021.
Selling & Distribution expenses as a percentage of total revenue have risen as revenues have decreased, as the figures below indicate:
|
Selling & Distribution |
Expenses vs. Revenue |
|
Period |
Percentage |
|
2021 |
4.4% |
|
2020 |
3.5% |
(Source – SEC)
The Selling & Distribution efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling & Distribution spend, was negative (3.0x) in the most recent reporting period. (Source – SEC)
SAG’s Market & Competition
According to a 2022 market research report by Global Market Insights, the Asia Pacific automotive aftermarket was an estimated $127 billion in 2021 and is expected to reach $205 billion by 2028.
This represents a forecast CAGR of 7.1% from 2022 to 2028.
The main drivers for this expected growth are a consolidation of parts distributors and increasing vehicle sales due to a growing middle-class population as more people move to urban areas from poorer rural areas.
Also, an increase in automotive production and usage in China, Japan, India, S. Korea, Australia, and Southeast Asia will add to market demand.
Major competitive or other industry participants include:
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Kian Ann Engineering
-
Kee Beng Filters
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Tye Soon Limited
-
SPK Singapore Pte
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Golden Spring Export Pte
-
Others
SAG Holdings Limited Financial Performance
The company’s recent financial results can be summarized as follows:
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Decreasing topline revenue
-
Increased gross profit and gross margin
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Growing operating profit
-
Higher cash flow from operations
Below are relevant financial results derived from the firm’s registration statement:
|
Total Revenue |
||
|
Period |
Total Revenue |
% Variance vs. Prior |
|
2021 |
$ 43,220,552 |
-11.7% |
|
2020 |
$ 48,938,180 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
2021 |
$ 7,953,893 |
2.6% |
|
2020 |
$ 7,749,469 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
|
|
2021 |
18.40% |
|
|
2020 |
15.84% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
2021 |
$ 1,104,863 |
2.6% |
|
2020 |
$ 1,002,955 |
2.0% |
|
Comprehensive Income (Loss) |
||
|
Period |
Comprehensive Income (Loss) |
Net Margin |
|
2021 |
$ 1,062,755 |
2.5% |
|
2020 |
$ 1,253,220 |
2.9% |
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
2021 |
$ 3,122,996 |
|
|
2020 |
$ 3,022,409 |
|
As of December 31, 2021, SAG had $1.1 million in cash and $33.1 million in total liabilities.
Free cash flow during the twelve months ended December 31, 2021, was $3.1 million.
SAG Holdings Limited IPO Details
SAG intends to raise an undisclosed amount in gross proceeds from an IPO of its ordinary shares, although management has indicated it plans to offer 3.125 million shares and selling shareholders intend to sell 625,000 shares.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Management says it will use the net proceeds from the IPO as follows:
Approximately 20% in order to digitize systems and equipment and investment in software
Approximately 30% to explore growth through acquiring businesses in geographic areas where we have historically not had reach or to extend our footprint
Approximately 20% to build out our business development team
Approximately 5% to expand our product portfolio
Approximately 5% to develop new business segments
Approximately 20% to partially repay an interest-free intracompany loan in the amount of $10.9 million to our controlling shareholder Soon Aik
(Source – SEC)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, management says the firm is not currently ‘a party to any significant proceedings.’
The sole listed bookrunner of the IPO is Spartan Capital Securities.
Commentary About SAG’s IPO
SAG is seeking U.S. public capital market investment for its general corporate needs and to pay down debt.
The company’s financials have generated reduced topline revenue, higher gross profit and gross margin, increasing operating profit, and growing cash flow from operations.
Free cash flow for the twelve months ended December 31, 2021, was $3.1 million.
Selling & Distribution expenses as a percentage of total revenue have risen as revenue has decreased; its Selling & Distribution efficiency multiple was negative (3.0x) in 2021.
The firm currently plans to pay no dividends at this time.
SAG’s financials are only through the end of 2021, so are largely outdated as they don’t contain any 2022 activity.
The market opportunity for automotive aftermarket parts is large and expected to grow at a reasonably robust 7.1% in the coming years, but the industry features large players with the potential for further consolidation to gain economies of scale.
Like other firms with Asian country operations seeking to tap U.S. markets, the proposed listing entity operates as a Cayman Islands corporation which owns interests in its other country operations.
U.S. investors would only have an interest in an offshore firm with interests in or only agreements with operating subsidiaries (i.e., potentially no equity interests), some of which may be located in or have substantial operations in China or other Asian countries with restrictions or unpredictable regulatory environments regarding those interests.
Additionally, restrictions on the transfer of funds between subsidiaries within China or other Asian countries may exist.
Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable regulatory rulings that may affect such companies and their U.S. stock listings.
Spartan Capital Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (82.1%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.
The primary risks to the company’s outlook are its decreasing revenue results, exposure to currency risk against a strong US dollar, and the generally low net margin in the auto parts distribution business.
When we learn more about the IPO’s pricing and valuation assumptions, I’ll provide a final opinion.
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