SGCM Company Background
SGCM was started in 2004 by three NUS sophomore engineering students Henry Seah, Tan Jing Lun and Vincent Tan. The firm was incorporated after the market exploration of various other options like property, jobs and travel. With the rapid growth of the Internet and no other company in the online space for car retail in Singapore, the founders determined that it was a feasible option.
Having hailed from an engineering background and not considered the degree of local acceptance of an online forum to sell used cars, the three friends had to buckle down immensely to persuade the local dealers to list their inventory of used cars on SgCarMart, citing expected significant improvements to the turnover. 2 years later, the company has scaled new heights with 60,000 views on average per month. By April 2010, the company was riding on 10,000 car listings and a whopping 1.5 million views per month with net profit of SGD 1.72 million.
In its most primitive form, SGCM's business model is advertising-based, an online portal for sale and resale of cars. This covers two aspects – agent advertising and direct advertising.
In its initial phase, the portal offered a platform for second-hand dealers to list their inventory online, thereby reducing their sales time and loss to depreciation. Soon, the same facility was extended to car owners looking to sell their cars directly. A fee was charged for every advertisement that was posted on the portal. The next phase of expansion saw the mediation by an agent for owners who want to list their cars online but not deal with advertising, negotiating and the paperwork. This was followed by the inclusion of an auction platform through its subsidiary, Quotz Pte Ltd.
This business model soon gained inclusivity in the field of related services like car loans, insurance and settlement with its 30% stake in SCMC (sgCarMartConnect). The vision of creating an online portal for advertising cars was molded into that of creating a one-stop-shop for all automotive related needs.
Being the dominant player in the field of online advertising for automotive retail and related needs, SGCM, in 2010, took a leap forward with the partnership with PropertyGuru, the leading provider of similar services in the domain of housing. The synergy of the two leaders expanded the reach for both companies as they were able to lure consumers looking to buy a house and a car. Moreover, by advertising each other's listings in their respective portals and the newsletters, they were looking at more views, more avenues of branding and revenue.
With the acquisition of 45% stake in Conversion Hub Marketing, SGCM entered into yet another symbiotic relationship to achieve user segmentation and targeting, while at the same time providing access to its user database for marketing purposes.
SGCM shows strong financial figures from 2010 to 2012. Net Income grew substantially by 36% and CAGR for revenue from 2010 to 2012 is 40% (Table 6), which is an outstanding number for a small company and they were successful in doing so by conquering majority market share of car listing portal.
Source of revenue streams for SGCM remains stable over the years, with almost 90% generated from web advertisement by charging customers a flat S$48 fare per week. SGCM successfully increased their web advertisement numbers by leveraging on strategic partnerships with similar online advertisement websites such as iProperty & PropertyGuru (property), and TyrePac (online tire shop). Table 1 shows revenue streams and their contribution.
Besides maintaining their sources of revenue, SGCM was also success in keeping operating expenses to the minimum as shown by EBITDA margins at around 49% from 2010 to 2012 (Table 6). As a service company, their main expenses are staff costs and SGCM did not have any inventory in their assets. All their operations are through online website portal. There are three main fixed assets based on financial statement; motor vehicles, office equipment, and furniture & fittings. This value remains stable over the years, because there is no expansion on infrastructure or R&D.
Balance sheet shows healthy figures. Majority of current assets are in form of cash and fixed deposits which gives a good current ratio, indicating high liquidity. SGCM was able to pay dividends of S$840,000, S$1,000,000 and S$1,860,000 for 2010, 2011 and 2012 respectively.
SGCM currently has already captured 90% of the market share in Singapore online car-selling market. At the same time, based on the COE trend, there has been a reduction of COE quotas yearly. Due to the saturated market and downward trend of new vehicle, SGCM growth revenue will to drop to 25% and a further 5% for the next 2 years. SGCM will sustain a 15% growth of revenue for the subsequent 2 years due to the increasing trend of COE quota (COE cycle).
Table 3. Financial projection using the DCF approach
Assuming no debt on company,
WACC = Cost of capital = Return on Equity = 6.98%
VOA = PV(FCF) + PV (TV) over 5 year period
Terminal Value = (FCF (1+G))/(WACC-G)
Assuming Growth rate (G) = 4%
Enterprise Value can be calculated by adding the present value of the free cash flow and the terminal value (4% growth). Assuming, no debt on company as they have positive cash flow,
VOA = Enterprise Value DCF = S$57,466,560.60
Price-to-Earning Ratio & EBITDA Approach
An average P/E ratio of 19.79 and EV/EBITDA ratio of 17.27 was obtained based on similar sector.
Table 10. Average P/E ratio and EV/EBITDA ratio of companies in similar sector
Using the P/E Ratio approach, SGCM has the following valuation:
〖EV〗_(P/E)=S$3,198,880 x 19.79
Using the EV/EBITDA approach, SGCM has the following valuation:
Opportunity for IPO
A business generally goes public to raise capital in hopes of expanding their operations, enhancing the status and financial standing of the company or for increasing public awareness and public interest in the company and its products. For a company to go public, there are certain requirements set by the market that it must meet. As with any business strategy, going public has its own set of pros and cons, which are listed below:
Advantages - Strengthens capital base, makes acquisitions easier, diversifies ownership and increases prestige.
Disadvantages - Puts pressure on short-term growth, increases costs, imposes more restrictions on management and on trading, forces disclosure to the public, makes former business owners lose control of decision making.
Prerequisites to IPO
For a company to be listed on the mainboard of the Singapore Exchange Securities Trading Ltd (hereafter referred to as SGX), it must meet a certain criteria. SGX offers three options for companies to be eligible for declaring an IPO.
Minimum consolidated pre-tax profit (based on full year consolidated audited accounts) of at least S$30 million for the latest financial year and has an operating track record of at least three years.
Profitable in the latest financial year (pre-tax profit based on the latest full year consolidated audited accounts), has an operating track record of at least three years and has a market capitalization of not less than S$150 million based on the issue price and post - invitation issued share capital.
Operating revenue (actual or pro forma) in the latest completed financial year and a market capitalization of not less than S$300 million based on the issue price and post - invitation issued share capital. Real Estate Investment Trusts and Business Trusts who have met the S$300 million market capitalization test but do not have historical financial information may apply under this rule if they are able to demonstrate that they will generate operating revenue immediately upon listing.
Prospects for SGCM
As can be seen from the financial statements of SGCM, we can discount the possibility that SGCM can go IPO using option 1 and 3. The most viable option for SGCM to go public is choosing option 2 as it has been profitable in the latest financial year (FY2012, Gross Profit: S$ 6,536,225; EBITDA: S$3,591,826), and has had a favorable track record for the last three years. The only challenge to going public that SGCM faces in terms of SGX requirements is the market capitalization. In order to successfully gain a market capitalization of not less than S$150Million, and considering that current number of outstanding shares is 100,000, they will have to issue the shares at $150 per share, which is not viable. A way to work around the high offering price is to increase the number of outstanding shares. But this alone does not necessarily make SGCM an ideal candidate for going public. Even if SGCM meets the requirements from SGX, it still has to bear the costs of regulatory requirements and financial obligations, including the high cost of listing. That, combined with all the other disadvantages mentioned above, might deter SGCM from going public.
The best strategy for SGCM to follow (as of the time of the financial reports, 2013), would be to raise more funding for their expansion from venture capitalists and investors, over going public, in order to ensure that the company management does not lose control over the direction that they want the company to take. Going public will also increase pressure on the company to capture the market within a restricted timeframe in a time of slow growth, and increase the costs that the company has to bear. SGCM should instead focus on expanding their operations into neighbouring countries in order to increase their financial strength and wait for an appropriate time when the company can justify issuing their shares at a higher price, supported by their financials and company market status.
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