Valuation Case Study on Declout, Limited By Tay, Hock Meng - - PowerPoint PPT Presentation

Valuation Case Study on Declout, Limited

By Tay, Hock Meng Continuous Support Programme (CSP) Presentation March 15, 2013

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Disclaimer and Declaration

The objective of the presentation is for educational purposes. The full content of the presentation is for illustration purposes only and should not be used as investment

• recommendations. AB Maximus and its presenters are not

responsible for all investment activities conducted by the participants and cannot be held liable for any investment loss. The company and presenters may have personal interest in the particular shares presented.

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Agenda

Company Background 1 Industry Overview 2 Valuation 3 Risk 4

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Company Background

Declout, Limited is a Next Generation Technology Service Provider offering a full suite of information communications technology (ICT) solutions and services to customers.

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Brief points of the company

 Listed on the Catalist Board of SGX on October 24, 2012, at IPO price of SGD 0.25 per share  Market capitalisation as of March 11, 2013 stood at approximately SGD 51.0 million, and market closing price per share was SGD 0.255.  Core of the business – Cloud computing.  Profitable company. FY 2012 total revenues up 40.0%.  Current business focus in helping companies develop IT

• infrastructure. Business might evolve into online gaming as a

result of potential online gaming growth.

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Source: Company IPO Document, Oct. 2012 and Bloomberg.com

Company Background

IT infrastructure Services

• Providing systems integration services and IT

reseller operations.

• Hosting and Managed Services.
• Business continuity and Disaster Recovery

Services.

• IT Asset Recovery Services.
• Independent and Maintenance Services.
• Telco and Network Infrastructure Services.

Source: Company’s IPO Document, Oct 2012

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Company Background

Vertical Domain Clouds

• Providing technology, combining industry

know-how and domain expertise to help enterprises communicate, integrate, and collaborate seamlessly.

• Focus on Online Games Industry; Develop a

replicate methodology to enable Vertical Domain Clouds to be implemented in various jurisdictions.

• 3-tiered R&D and implementation process:
• Games Cloud Infrastructure.
• Unified Payment Infrastructure.
• Gamers Community Portal.

Source: Company’s IPO Document, Oct 2012

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Company Background

Revenue by Segment (FY 2011) IT infrastructure Services is a major part

• f the business (approx. 96.0%)

Source: Company’s IPO Document, Oct 2012 $36.4 $1.7

Segmental Revenue in FY 2011 (SGD’ millions)

IT Infrastruture Services Vertical Domain Clouds

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Company Background

Gross profit by segments (FY 2011)

Source: Company’s IPO Document, Oct 2012 $10.5 $0.3

Segmental gross profits in FY 2011 (SGD' millions)

IT Infrastruture Services Vertical Domain Clouds Segmental gross margin (% terms) FY 2011 IT Infrastructure Services 28.8% Vertical Domain Clouds 17.6%

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Company revenue trends (SGD’ millions)

Revenue growth (SGD’ millions)

Source: Company IPO Document, Oct 2012

833 19,170 38,137 4,973 11,953

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 FY 2009 FY 2010 FY 2011 1Q11 2Q12

Revenue (SGD' millions) Financial year ending Dec 31

Revenue (SGD' millions)

• Revenue increasing by approximately 576.6% for three consecutive years (FY 2009 to

FY 2011).

• Most of the revenues growth came from IT Infrastructure Services as illustrated earlier.
• Next potential growth area could be in the online gaming business.

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Company PATMI growth trends (SGD millions)

Source: Company reports

• Company recorded a PATMI growth of approximately 324.0%
• ver three years since FY 2009 to 2011.
• PATMI growth may expand further, given the relatively new, up and

coming cloud-computing technology.

59 560 1,062 247 297

200 400 600 800 1,000 1,200 FY 2009 FY 2010 FY 2011 1Q11 2Q12

SGD Dollars '000 Financial year end

Profit after tax, minority interests (PATMI) (SGD '000)

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Brief comments on FY 2012 results

 Total revenue increase approx. 39.3% from SGD 38.1 mil in FY 2011 to SGD 53.1 mil, as its IT Infrastructure Services segment saw increased demand for IT Asset Recovery Services, Telco, and Infrastructure segments.  Gross margin increase by approx. 2.3 bps due mainly to professional service revenue contributed by IT Infrastructure Services.  PATMI per share in FY 2012 came in at $0.30, vs. FY 2011 of $0.91, due to increase IPO costs.

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Largest customer base

Source: Company IPO Document, Oct 2012

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Customer Products/services As a percentage of DeClout's revenue (%) FY 2009 FY 2010 FY 2011 1Q2012 Ministry of Home Affairs Hardware, software and IT services 0.0 0.0 0.0 5.7 Neptune Orient Lines Hardware and IT services 0.0 0.0 5.6 4.6 Rabobank International Singapore Branch Hardware, software and IT services 0.0 3.1 1.0 5.3 Singtel group of companies Hardware, software and IT services 3.2 6.0 9.2 10.8

Valuation

Methodology

• Averaging both discounted cash flow (DCF) analysis for a

period of five years (FY 2013 to FY 2018), and 12-month forward enterprise value per share

• Growth rate projections from 10.0% year-over-year (YoY)

during FY 2013 (Year 1), peak around 40.0%, then taper off to 10.0% during FY 2018 (Year 5).

• Terminal growth rate of 3.5% from FY 2019 onwards.
• Main growth drivers expected to include the IT Infrastructure

Services, Vertical Domain Cloud Service, and opportunities in the Games Cloud industry.

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Enterprise (EV) valuation

• Definition of enterprise value (EV): Enterprise value is the

sum of market capitalization of the stock, plus the market value of debt and preferred equity securities, less cash and cash equivalents.

• Enterprise value provides an indication of the entire capital

structure of the Company, excluding the liquidity resources such as cash and cash equivalents. It enables one to analyse the financing sources available, besides cash.

• On the valuation of DeClout Limited, I will be using the 12-

month forward EV/EBITDA approach to assign one of the valuation per share for this exercise.

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EV Valuation (cont’d)

EV Valuation calculation FY 2013 Expected enterprise value (FY 2013) 54,715 Less: Market value of debt (3,510) Equity portion of EV 51,205 Total expected number of shares outstanding (FY 2013 onwards) 500,000 Equity EV per share (SGD/share) 0.102 Forward EBITDA per share (FY 2014) 0.05 Comparable median forward EV/EBITDA multiple using Computer and Technologies Holdings Ltd., 46-HK 1.9 Forward EV per share (SGD/share) SGD 0.088

Brief explanation:

• Number of shares outstanding expected to increase to 500,000 from present

200,000 due to expected future capital funding through equity.

• Purpose of subtracting market value of debt from enterprise value (EV) is to

extract the equity portion of the EV, which is relevant for equity holders.

Source: Company reports, ThomsonOne Research Analytics, own estimates.

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Discounted cash flow (DCF) valuation

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PV of FCFF 322,455 Add: Cash and cash equivalents 4,795 Less: Market value of interest-bearing debt (3,510) Equity free cash flows to the firm (Equity FCFF) 323,740

• No. of shares outstanding

511,270 Target 12-month forward price per share SGD 0.633

Source: Company reports, ThomsonOne Research Analytics, Own estimates.

DCF valuation (Cont’d)

DeClout Limited Price per share (Mar 05, 2013) SGD 0.255 Cost of equity (re) (%) 8.4% Cost of debt (rd) (%) 8.1% After-tax rate (%) 37.1% Wdrd * (1-t) (Weight of debt) (%) 0.2% Were (Weight of equity) (%) 7.8% WACC (%) 8.0%

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Forecast range using 2-step valuation model for five years (FY 2014 to FY 2018). Terminal growth rate estimated at 3.5% in FY 2019.

Source: Company reports, ThomsonReuters Research Analytics, own estimates.

Valuation

EV per share SGD 0.088 Target 12-month DCF per share (SGD/share) SGD 0.633 Average target price per share (SGD/share) SGD 0.361 % incremental increase from market price/share 41.6% IPO price on October 25, 2012 SGD 0.250 % incremental increase from IPO Price 44.2%

• Taking the average of both DCF value per share and EV per

share to come up with 12-month forward target price of SGD 0.361 per share.

• Although growth expected to taper off post FY 2015, stock is

forecasted to see double-digit growth as online gaming is expected to increase significantly with technology advances.

Source: Company reports. ThomsonOne Research Analytics, own estimates. 19

Valuation (EV/EBITDA Comparison)

Source: ThomsonOne Research Analytics

Median EV/EBITDA is an attractive entry point.

Market Capitalisation ($ ' millions) EV/EBITDA Company As of March 08. 2013 Agtech Holdings Limited HKD 1.46 0.1 Beijing Development (Hong Kong) Limited HKD 2.02 2.4 Cpt Global Limited HKD 0.11 2.9 Computer and Technologies Holdings Limited HKD 0.44 2.1 Cold Consulting Company Ltd. HKD 0.65 0.1 Rxp Services Limited 0` 30.0 Declout Ltd. SGD 0.275 0.0 Median EV/EBITDA w/o Declout 2.1 Median EV/EBITDA with Declout 2.1

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Trading Data

52 Weeks Trading Range $0.155 - $0.305 Avg trading volume (30-day) 0.2 mil Market Cap $50.0 mil - $55.0 mil

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Source: ThomsonOne Resesarch Analystics, Bloomberg.com

Declout Inc.

Questions and/or Comments?

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