Bartleet Religare gives thumbs down for latest IPO

The research arm of Bartleet Religare Securities (BRS) has given thumbs down for the latest Initial Public Offering (IPO) that is to be listed in the Colombo Stock Exchange (CSE).

Sinhe Hospitals Limited, a 50-bed hospital in Ratnapura recently received approval to raise Rs.250 million through an IPO.

However BRS Research in a brief note recommended their investors not to subscribe to the Singhe Hospitals’ IPO.

According to IPO prospectus, the funds are raised to settle loans amounting to Rs.170 million and for capital expenditure of Rs.80 million.

The reduction in loans is estimated to cut finance costs of the hospital company by 63 percent. The Rs.80 million capex will be used to purchase machinery, set up three

the only point of attraction we see now for sihl is the low price point the iPo comes at. however, we feel the sl investors are maturing in and would look for value

micro labs, eye surgical unit and increase pharmacy stocks.

“Although we only see EBIDA positivity in FY 2015E, NAPT remains negative until FY 2016E. We have arrived at a DFC based target price of Rs. 2.00 given the absence of profits and recommend investors not to subscribe,” BRS Research said.

Singhe Hospitals made a net loss of Rs.53.54 million for the 9 months ending December, down from a net loss of Rs.93.11 million in the previous year. “The company will generate a net profit of Rs.10.3 million for year 2016 and the net asset value per share will increase to Rs.1.36,” the IPO prospectus said.

Justifying its position further, BRS Research noted that private healthcare space in Sri Lanka generally has a long payback period and for outstation hospitals that principally depend on pharmaceutical and laboratory services, that period could even get longer.

They further said for the medium term, Sinhe Hospitals would be a high-end lab tests/pharma provider than a hospital because in Sri Lanka, patients generally show loyalty to the specialists as opposed to healthcare providers.

Meanwhile, Sinhe Hospitals when compared with other listed hospitals, offers the lowest value given its lack of profitability in the medium term comparables, BRS Research pointed out. “The only point of attraction we see now for SIHL is the low price point the IPO comes at. However, we feel the SL investors are maturing in and would look for value.” The company is offering Rs.2.50 per share. CSE’s listing rules require minimum US $ 0.75 million capitalization for a company to qualify for a listing. This makes it easier for smaller firms to go public and raise funds through IPOs.

However, as Colombo-based private equity firm Jupiter Capital Partners recently said in one of their news letters, this rule also allows companies to go public without reaching financial or operational stability.

“Another interesting observation we can make when we examine IPOs since 2012 is that many companies go public when they are still making losses,” Jupiter Capital noted.

In fact, 6 out of the 11 firms that raised funds since 2012 were making losses or showed highly volatile or low profit patterns at the time of their IPOs.

In Sri Lanka, there is no regulatory requirement for a company to be profitable to raise funds through an IPO.

Moreover, some firms had very short operating history. Firms with limited track record and/or companies making losses are usually perceived as high risk companies.

However, CSE’s listing rules allow firms with minimum one year of operating history to file for an IPO.