2129.HK - Legion Consortium

[RVP]

Legion is your typical local small business grinding day in, day out in a boring industry, while quietly shooting the lights out.

The company is a Singaporean logistics service provider primarily in the business of trucking, freight forwarding, and warehousing. They recently IPO'd beginning of this year, and shares have cratered since. The company was founded in 1995 and has a roughly 0.5% market share in SG. Their business is incredibly profitable with stellar margins, but 2020 saw some contraction on both the top and bottom line due to pandemic and weakness in container throughput as a result of disrupted trade flows.

As global trade flows normalizes, Singapore (as a primary port of call and main hub in Southeast Asia for shippers) is well positioned to ride the recovery, and Legion's business should likewise benefit. Longer term, e-commerce growth and rising wealth in the region offers attractive tailwinds for the SG logistics industry. 

Meanwhile, the company trades at ~9x trough earnings, with a net cash pile almost 40% of the entire market cap. In addition, they own roughly 13k sq ft of industrial properties/ warehouses (recorded at cost) that are leased to external customers, while leasing another 410k sq ft of yards for their business. Because SG is a very dense city with limited land, well located warehouses/ logistic yards act as barriers to entry, which has allowed Legion to maintain long-term relationships with some of their largest customers for a decade and longer.     

[BroKon]

Hi RVP,

I took a quick look at this, but stopped as the whole IPO process seemed a little concerning. I am not an expert on HK listings, but as I was curious why a Singapore company that needed to raise SGD would look to list in HK, I had a look at the offering doc. 

My concern stems from the fact that company sold 281m shares at 0.40 at IPO and the owner sold 78m for his account, so before expenses the company should have received around HKD112m, but it actually only received 40.5m, the rest seems to have gone on listing expenses (ie 64% of the proceeds). What's more the company paid the owner the equivalent of HKD23m in a dividend before the IPO so they probably didn't really need to money in the first place, and certainly not at that cost.   

There may be a perfectly good reason for the above, I am just not entirely sure what it could be --- to be clear though I didn't spend much time digging after I saw the above facts.

[RVP]

Hi BroKon, thanks for raising these points. Had to revisit the IPO docs to double-check that I gave you the correct figures. Here goes:

According to the final IPO allotment results, the company issued 234.4m new shares at $0.40 (156.3m public shares, 78.1m placement shares), netting roughly $93.8M in proceeds before costs. Another 78.1m shares were sold from the owner's own account (as you correctly mention above), so no cash raised for the company here.

https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0112/9580810/2021011200025.pdf

The owner still owns 75% of the entire company currently, which is the max insiders can own without breaching minimum float requirements in HK, so really the 78.1M shares sold prior to listing was just to bring it down to that level.

The IPO expenses being 57% of gross proceeds raised is indeed steep. But on a nominal basis ($53.3m), it doesn't appear that outrageous considering how many bookrunners they had. They probably chose to list in HK over SG because of the former's deeper capital markets, as did many SG companies before them. Could they have gotten more bang for their buck? Probably. But not every company has the best IB connections, and I would imagine a company of their size even more so. Should they just have stayed private? Maybe. But considering they already began paying listing expenses since 2018 (not to mention the time investment), they may not have wanted it all to go to "waste". Why they wanted to go public only they'll know, but my best guesses would be to have potential currency for future expansion and/or enhanced company image. The silver lining here is they were probably fortunate to list on the main board when they did, as the profit requirements to list today just got raised last month.

Dividends before IPO aren't all that uncommon, especially among smaller companies. Often the founders just want to diversify their wealth. I'm not too concerned here, given the company is still way overcapitalized (they didn't cash out and cripple the company), and the owner still owns 75%.              

[Spekulatius]

Why would anyone with a clear mind pay 57% of gross proceeds to investment bankers for an IPO? In that case, they should have sold the Company privately. The listing in HK while operating in Singapore does not quite make sense either in above context. Even though HK has deeper capital markets than Singapore.

My hunch is the IPO was overpriced and they needed to pay the investment bankers dearly to dump this one investors. This just looks smells really fishy.

[RVP]

Thanks for the pushback Spek, it's much appreciated. Your hunch is possible, there is valid logic behind it. To be fair, part of the expenses (~6%) were fees to the auditors, but nonetheless, they definitely paid quite the ransom to their horde of bookrunners (14!). 

I'm not quite ready to draw a clear line of motive in regards to wanting to dump the company to investors though. For one, they could've drained the balance sheet of more cash and lined their own pockets before listing. And they could've also done a sale-leaseback transaction internally on their owned properties at less than arms-length terms to further extract value. Finally, why only sell 25% of the company and retain 75%? Perhaps their bankers read the market demand wrong and screwed up, but the shares ended up being oversubscribed more than 400x. That's a big whiff on the bankers' part.

The company explained why they chose to list in HK over SG on page 329 of the prospectus, which was basically what I surmised earlier. But it's typical boilerplate language, so I don't know that you'd want to take it too seriously:

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1230/2020123000007.pdf                      

Again, I won't rule out nefarious intentions here. But on the other hand, there is a certain prestige to be listed on the main board, and public stock currency can be very appealing in certain scenarios (AMC...), and especially so when you're a smaller player.    

[BroKon]

Hi RVP,

Yes your numbers are correct (I added the wrong cell in my excel).

In terms of the dividend, I was trying to point out that they probably had enough money already, so they didn't need to go through a capital raise.

Finally to your point about the oversubscription, even though it was oversubscribed, it came at the absolute low of the price range stated at the initial IPO circular.

Overall, it just doesn't feel right to me. That said an Asia-based logistics company that is cheap, well-funded and has a long growth runway, is a great find, if you either know or can get comfortable with what happened at IPO.

 

[Cicero]

Hey RVP,

No view on the business. Just wanted to share a few thoughts: 

The fixed fees for bookrunners in Asia are typically pretty low. These guys are paid based on the demand they bring into the book. So 1) I would assume that a big chunk of the economics go to the sponsor/ global coordinator and 2) there is some relationship between overall consortium size and fees paid but I would not assume that the number of bookrunners explains the fees paid here. 

HKD 53 MM does not sound low in absolute terms to be honest. Especially for Asia where fees are rock bottom and considering the fairly poor quality of the "banks" on this. 

 

[RVP]

Thanks for the feedback all. I don't have a definitive conclusion as to why they had to pay so much. But my guess is that they're a small SG family business who spent more time running their business than running around financiers. (The CEO (who's 58) has been working in logistics since 22 starting from a clerk, while his son (who's 29) joined the group at 25 after spending 2 years working at Bollore logistics). They might've wanted to go public as a means to have a platform for growth and/ or raise the profile of the group. Given they're a minnow and management being basically operations folks in SG, they could've gotten run roughshod by the bankers during the process. The "fee", let's say, for gaining entry (sadly) to the financial league of the big boys. This is just my two cents.    

[kab60]

It's probably the ESG report in their AR which has cost them a fortune... Looks like an interesting Company, I love freight forwarders. Any idea what they wanna acquire since they have earmarked most of IPO proceeds for that? Not sure if it's cheap enough, considering decent to good companies with fat payouts and longer track records can be found around net net levels in HK, but it does seem like an above average business. ROE looks good but probably boosted by depreciated warehouses or do they get those appraised and marked to market?

Edited June 8, 2021 by kab60

[RVP]

Hi kab, their owned properties are recorded at cost, and it's about 5-10% benefit to equity. The rest of the properties are leased and accounted at fair value during each signing, with the associated annual lease depreciation flowing through COGS. I think ROE is probably understated because of the excess cash. You're right there are other cheaper companies in HK at the moment (on a trailing basis), but this starts to look competitive if the business recovers along with the broader SG economy, and if they can maintain similar economics as pre-ipo (25%-30%+ ROE vs. ~19% now). Operating leverage is relatively high in this business (double-edged sword).

 

Not sure what they will buy, but I doubt the $17M earmarked for acquisitions is enough to buyout another company. Perhaps they use it to lease a few more logistic yards. It's their most attractive segment (~50% EBIT margins), so if the incremental dollars can really be reinvested at those kind of rates, this thing could work out pretty nicely. Honestly not sure how sustainable these margins are though, only have 4 years of financials to work with. Time will tell.          

[RVP]

Managed to get ahold of IR. They said the high costs were mainly due to professional fees incurred over the multiple submissions made to HKEX from 2018 until the company's final approval for listing.

[kab60]

Thanks for the additional info, RVP.

 

Their website is strange. I really wanna learn more about their FF business, but when you go to their services & facilities' page, there's just six pictures of trucks and forklifts. Often, when you go to a FF website, you're bombarded with phone numbers to call to get a quote. It seems the FF market is extremely fragmented in Singapore, which could be an interesting opportunity. But it doesn't seem like these guys are focused on consolidating things.

 

Took a look at the prospectus and they seem pretty clear in what they wanna buy:

 

We have engaged a Business Advisory Consultant to identify and select the Potential TargetCompanies based on a set of selection criteria. Please refer to the section headed “Business— Business strategies — Expand and enhance our value added transport services andoperational scale through the strategic acquisition of a logistics company which provideswarehousing services and the expansion of our open-yard storage services — A. StrategicAcquisition — (b). Benefits of a warehouse — IV. Identification and selection of PotentialTarget Companies” for details of our selection criteria.As at the Latest Practicable Date, we had not reached a decision on any Potential TargetCompany to acquire or committed to the acquisition of any Potential Target Companies, norentered into any formal negotiation or signed any definitive and finalised understanding,commitment or agreement with any Potential Target Companies or any of their respectivevendor(s). We intend to approach these Potential Target Companies following the Listing,during the first half of 2021, and once the Business Advisory Consultant has identified andshortlisted suitable target companies. We plan to complete the Strategic Acquisition by theend of 2021. In the event that the negotiations with the Potential Target Company do notmaterialize, the Business Advisory Consultant will continue to identify and shortlistsuitable target companies for our further selection until we have reached a final decisionon the Potential Target Company to acquire. Our Directors confirm that we will finance theremaining balance of the Strategic Acquisition with our own internal resources

[RVP]

Thanks for flagging the acquisition notes in the prospectus kab. Makes it more feasible to acquire another company using additional internal resources on top of the IPO proceeds. 

 

I like that they seem focused on expanding their asset-heavy businesses (trucking and VAT). Yes it's more economically sensitive with higher fixed costs, but they can generate healthy margins in tight markets like SG and probably have less long-term disruption risk because they are the direct service provider (their trucks, their yards). Although the FF business is great from a capital efficiency angle (asset-light), I question how durable a tiny player can be in the long run in a business that is heavily dependent on economies of scale/ network effects. Not to mention there are very deep pockets in the space (Cainiao, DHL, CHRW, etc.). The switching costs from a small FF to a larger one doesn't seem very high IMO, especially when you can get better availability, pricing, and other value added services from the latter.