Lifebrandz @ 12.5 cts ( Lifestyle / Singapore ) 3 comments
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1. Little leverage from past(discontinued) business
2. New business can be volatile
3. Barely profitable
4. Little margin of safety based on P/NTA
Lifebrandz in its previous core business was running several lines of healthcare/slimming products (eg. Extrim) which ultimately proved to have peaked at its time of IPO as new competition entered the fray and shot down its margins. Now it is in the "lifestyle" business which basically is a euphemism for its night entertainment business in the form of the several nightspots that it opened to some degree of success. The main area that it operates is the Cannery at Clarke Quay, where it appears to be one of the main players.
So what is a "lifestyle group" like this worth? It is rather difficult to say, because it has not established a track record of profitability and sustained growth, and I cannot think of similar peers either in Singapore or elsewhere. There appear to be some people who think it is worth at least 11.5 cents, which was the placement price for new and vendor shares recently in February.
I am usually quite cautious towards companies that decide to take 90-degree turns on their corporate direction and take on new core businesses. The market doesn't like it too: just look at how Want Want was shot down years ago when it announced it wanted to build a hospital in China. A recent case is Sun East, which inexplicably announced it is going into the alcoholic beverages industry. In Lifebrandz's case, it discontinued its health and slimming products operations and went into the nightclubs/pubs business. My main gripe on such radical business diversification/restructuring is this: what happens to the brand equity built up, the institutionalised knowledge built up over the years, the contacts and distribution network? All lost. Then it has to build up a new business from scratch.
In Lifebrandz's case, the health/slimming products business was obviously faltering, hence the change in business direction. That was a logical move. But my point is: as investors, do we want to place our faith with an untested business that does not build on previous networks? We have a choice, unlike the owners of Lifebrandz who didn't.
The Ministry of Sound at Clarke Quay opened in December 2005 and from my reading is the one that is driving topline and probably bottomline for Lifebrandz's business. It is still staying strong and I remember reading a recent article citing it, together with Zouk and the new St James' Powerstation, as the three hotspots in Singapore's night entertainment industry. But Singapore's nightclub scene is notoriously fickle, as novelty plays a big part of the attraction, and it remains to be seen whether MOS will be another Zouk whose appeal spans decades. It may be fair to say though, that any growth from now on will be plateauing, rather than exponential.
It is also the case that upfront developmental costs (advertising, setup etc) is likely to increase expenses at the start. That is why I felt the losses incurred in FY06 attributed to this new core business are to be expected and excusable. However, looking at today's newly-released 2Q07 results, it appears that the group is still barely profitable. True, it had set up new eateries and bars at Clarke Quay in late 2006, adding to its operating expenses and investment cash outflow, but surely the setup costs should not be as large as those involved in developing the original concept of MOS, and of the Cannery, from scratch (marketing, publicity expenses especially)? And we are not sure about the future success of these new investments anyway.
Consider the management outlook in the latest 2Q07 statement. The group has "identified several exciting projects in fast-growing markets like Macau, Shanghai, Beijing which it will be pursuing in collaboration
with strategic partners over the next two years", which strikes me as being rather incongruous given that the home base is still developing. It hardly has any "brand equity", being a relatively new business, that would be exportable! (btw: I just watched Channelnewsasia where it was announced that they would be opening Buddhabar, a nightspot, in Macau's Cotai strip, which corroborates their assertion that they would be expanding overseas)
On this basis, let's consider the valuation. Post-placement, the NTA per share would be about 3 cents, so at 12.5 cents Lifebrandz would be trading at >4X NTA. PE is irrelevant for a stock that is barely profitable. The original core business had been discontinued and the new business is barely a year old, so don't talk to me about intangible assets. It is still too early to talk about this as a growth stock which might justify high PEs. Is this a good bargain? One thing I know, and that is the margin of safety is very thin indeed.
Incidentally, regarding the placement: a third of it, or 70 million shares, was vendor placement, which one may interpret as insider cashing out. Of the 122 million new shares, a quarter (29 million) was taken up by UOB Kayhian directors (UOB were the placement agent). It either signals that the UOB directors were extremely bullish on the stock that they didn't want to sell it to outsiders, or that not many was interested and so they have to swallow it themselves and then find some way of disposing later. I tend to believe more in the latter.
I agree that Lifebrandz is a hot-stock-not: Agree/Disagree