IPO Review - RH Energy

To Subscribe or Not to Subscribe - That is the question.

And so here I present my fundamental analysis (based on Prospectus dated 2 July 07).

General Info:
Business: Full suite of integrated customised design, engineering, procurement, construction, installation and commissioning services to the oil and gas pipeline and oil companies.
3 Principal activities: (a) Equipment Integration services (contribute to 81% of Revenue)
(b) Manufacture & Procurement services
(c) Consultancy Services
Issue Price: S$0.32

(1) EPS Growth (based on SGD denomination) for past 3 years should be > 25%:
683% from FY2004 - FY2005; and
59.6% from FY2005 - FY2006

(2) Return-on-Equity should be > 30%:
ROE (FY2004): 11.5%;
ROE (FY2005): 47.5%;
ROE (FY2006): 55%
Increasing for the past 3 years.

(3) Current Assets to Current Liabilities Ratio should be > 2
CA/CL (FY2006): 2.15
Company should be able to meet its short term obligations.
Moreoever, there is positive working capital of US$7.9M

(4) Debt-to-Equity Ratio should be less than 1
D/E (FY2006): 0.43

(5) Price-to-Earnings Ratio
Current P/E (based on Issue Price): 10.7X
15X P/E: $0.45 (Target price)

(6) Net Asset Value
NAV (FY2006): 3.92 cents (SGD)
NAV Premium (based on Issue Price): 716%

Issues/Concerns:
(1) Dilution (Pg.43) - Substantial shareholders and Pre-IPO investors paid only 4.95 cents and 11.16 cents per share respectively, so they are sure to sell once the Shares are listed. They are however subjected to a moratorium of 6 months, so that gives us some time for retail investors like us to play around with.
(2) MD&A > FY2006 Revenue VS FY2005 Revenue (Pg.57) - As a result of a strategy change, the Company's contract size decreased in FY2006 while no. of projects more than doubled to 71 (from 33), and this subsequently produced a drop in overall Revenue of 30.8%. However, this also contributed to higher net profits (67% increase) in FY2006 due to higher margins (and lower costs). My concern is: Is this sustainable? The Company doubled its no. of contracts in FY2006, will the Company be able to increase its no. of contracts in FY2007 and beyond (esp. since this strategy is based on quantity rather than contract size per contract)?
(3) Being in the oil industry, RH stock price will undoubtly (but irrationally, to me at least) track the NYMEX sweet crude oil futures which current stands at US$72.81. My take is that as long as prices remain above $70 on its listing day, the stock price will rise.

Recommendation: Subscribe/Buy