Aspen is a Malaysian-based developer of residential and mixed development properties. It provides value-added options and services for their completed units, such as quality furnishings and home appliances.

Aspen IPO details

Aspen’s IPO will be offering a total of 173,270,000 invitation shares. That includes 4,348,000 shares for the public and 168,922,000 placement shares. The issue price was S$0.23 per share.

The IPO has opened last Wednesday (19 July 2017) and will close at noon tomorrow (26 July 2017). Its shares are expected to start trading this Friday (28 July 2017).

You can find its prospectus here.

Aspen plans to raise around S$39.9 million from its IPO. The use of proceeds are as follows:

  • S$25 million (62.7%) to acquire development land and future developments
  • S$2 million (5%) to repay bank borrowings
  • S$9.7 million (24.4%) for working capital
  • S$3.1 million (7.9%) for listing expenses

Before you jump on board this IPO, you may want to think twice and read the three things we don’t like about this company.

1. Concentration risk

Firstly, investors should take note that its current projects are all in Penang, Malaysia. The image below summarises its projects.

As we can see, Aspen Vision City takes up the main bulk of the company’s operations. As at 31 March 2017, it accounts for 94.3% of the company’s projected development profits.

Therefore, Aspen businesses are not only dependent on the development of Penang in Malaysia, but it is also heavily dependent on the success of its Vision City.

For Aspen Vision City, Aspen is co-developing it with Ikano, which is the parent company of IKEA. The City is a 245-acres freehold mixed development, located in Batu Kawan, Penang.

The land allocation for the project will be as follows:

  • 170 acres (69.4%) of mixed development land (think of it as residential use)
  • 51 acres (20.8%) for a shopping centre
  • 24 acres (9.8%) for an IKEA store (first IKEA store in northern Peninsula Malaysia)

The project will be completed in phases over the next ten years.

2. Poor profitability

Aspen commenced its property development activities only in FY2015. Therefore, there are no profitability figures as of FY2014.

From FY2015 to FY2016, Aspen’s experienced an 89% growth in its revenue from RM52.5 million to RM99.7 million. This huge increase is mainly attributable to the increase in construction activities and a higher percentage of units sold for both Tri Pinnacle and Vervéa.

However, investors beware!

Its bottom-line suffered a loss in FY2016 despite the surge in its top-line growth. That is because of a further increase in its cost of sales, which diluted its gross profits. In FY2015, the cost of sales accounted for 56.84% of its revenue but increased significantly to 64.44% in FY2016.

What’s worse, its expenses nearly doubled over the same period. That is due to increased development costs for its existing and upcoming projects, accompanied by higher tax expenses.

As of FY2016, Aspen has total debt holdings of RM118.7 million versus a cash pool of RM103.4 million. The total alarming debt is even more than its entire sales figure in FY2016!

3. Uncertainty on future growth

As of FY2016, Tri Pinnacle had 78.77% of units sold, and Vervéa has 82.95% of its units sold. To me, it seems that both projects are tending towards its full capacity. Therefore, Aspen’s future growth hinges greatly on

  • whether it can deliver the Mega Integrated Shopping Centre and
  • its ability to seek more projects going forward

Furthermore, each project may take years to materialise, accompanied by the huge initial outlay of development expenses.

That is not for income investors as well because Aspen has not been distributing cash dividends since its incorporation in 2016.

There is no mention of a fixed dividend policy in the IPO prospectus too.

SCA’s take

Despite an 89% increase in its revenue last year, Aspen suffered a loss at its bottom-line. Moving forward, this growth may be harder to sustain, given that the main contributing projects are hitting full capacity.

Furthermore, its profitability will be further depressed by one-off IPO costs this upcoming year. One big allocation for this IPO is catered towards ‘land purchases and future developments’. As this is a relatively new company, we are hesitant about its track record too.

It is relatively difficult to gauge its future growth solely based on its financials for the past two years. Therefore, investors may want to stay on the sidelines and look out for further proof of its financial strength before jumping on board this company.

And once again, Aspen’s IPO will close at 12 pm on 26 July 2017.

This article originally appeared on Small Cap Asia’s blog.

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