IPO update: Republic Power Group prepares US $15 million IPO (pending: RPGL)

gorodenkoff

A quick takeover of the Republican power group

Republic Power Group Limited (RPGL) has filed to raise gross proceeds of $15 million from the sale of its common stock in an initial public offering, pursuant to an amended registration statement.

That The Company provides software and related services to organizations and government agencies in Singapore and Indonesia.

RPGL’s financials are stale, and management is asking IPO investors to pay a 13x EV/sales multiple for a company that posts negative sales growth.

I’m awaiting RPGL’s IPO because of the recent sales decline and high valuation, although the shares’ low notional price could attract day traders looking for volatility.

Overview of the Republican power group

Based in Singapore, Republic Power was founded to develop custom software solutions for technology companies, airport operators, cruise terminals and law enforcement agencies.

Management is led by Chairman Sai Bin Loi, who has been with the company since 2015 and was previously the founder of 9G Elevator Pte. Ltd which was later sold to Ryoden in 2008.

The company’s main offerings include:

• real-time monitoring

• resource allocation

• plan monitoring

• threat detection

Republic Power has booked a fair market value investment of $740,000 as of December 31, 2021 from investors including Chairman Sai Bin Loi, Breydales, Cosmic Paramount Enterprises and Lucky Champion Ventures.

Republic Power – Customer Acquisition

The Company generally makes bid-based project proposals to companies or government agencies in the regions in which it operates.

The company plans to hire sales and business development personnel in additional markets in Vietnam, Malaysia and other Southeast Asian countries.

The percentage of sales and marketing expenses as a percentage of total revenue has changed as revenue has declined, as shown in the following figures:

sales and marketing	Expenses vs. Income
Period	percentage
Six months ending December 31, 2021	2.9%
FYE June 30, 2021	9.6%
FYE June 30, 2020	8.6%

click to enlarge

(Source – SEC)

The multiple of sales and marketing efficiency, defined as how many dollars of additional new revenue generated by each dollar of sales and marketing spend, fell to a negative value (11.4x) over the most recent reporting period, as shown in the table below:

sales and marketing	efficiency rate
Period	Several
Six months ending December 31, 2021	-11.4
FYE June 30, 2021	3.5

click to enlarge

(Source – SEC)

The Rule of 40 is a software industry rule of thumb stating that as long as the combined revenue growth rate and EBITDA percentage is 40% or more, the company is on an acceptable growth/EBITDA trajectory.

The most recent calculation of RPGL was negative (5%) as of December 31, 2021, so the company needs significant improvements in this regard according to the table below:

rule 40	calculation
Recent Revenue Growth %	-25%
EBITDA %	20%
In total	-5%

click to enlarge

(Source – SEC)

Republic Power Market and Competition

According to a 2020 market research report by Grand View Research, the global cybersecurity software and services market was estimated at US$157 billion in 2019 and is projected to surpass US$300 billion by 2027.

This represents a projected CAGR of 10.0% from 2020 to 2027.

The main drivers for this expected growth are constantly changing cyber threats against a background of increasingly complicated requirements and infrastructure for consumer and enterprise software.

Also, the transition of enterprise IT from on-premises to the cloud will create significant new opportunities for new services and capabilities.

Key contestants or other industry participants include:

• Singapore Technology Engineering Ltd

• NCS Pte. GmbH.

Financial performance of Republic Power Group

The company’s recent financial results can be summarized as follows:

• Contracting top line revenue

• Reduced gross profit but variable gross margin

• Lower operating income and margin

• Significantly reduced cash flow from operations

The following are relevant financial results arising from the company’s registration statement:

total revenue
Period	total revenue	% variance vs. before
Six months ending December 31, 2021	$915,509	-24.8%
FYE June 30, 2021	$6,554,807	49.3%
FYE June 30, 2020	$4,389,928
gross profit (loss)
Period	gross profit (loss)	% variance vs. before
Six months ending December 31, 2021	$781,030	15.5%
FYE June 30, 2021	$3,358,341	39.8%
FYE June 30, 2020	$2,402,117
gross margin
Period	gross margin
Six months ending December 31, 2021	85.31%
FYE June 30, 2021	51.23%
FYE June 30, 2020	54.72%
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
Six months ending December 31, 2021	$181,917	19.9%
FYE June 30, 2021	$1,966,842	30.0%
FYE June 30, 2020	$1,995,368	45.5%
net income (loss)
Period	net income (loss)	net margin
Six months ending December 31, 2021	$127,797	14.0%
FYE June 30, 2021	$1,617,485	176.7%
FYE June 30, 2020	$1,557,003	170.1%
Cash flow from operations
Period	Cash flow from operations
Six months ending December 31, 2021	$275,074
FYE June 30, 2021	$2,023,967
FYE June 30, 2020	$218,727
(Glossary of terms)

click to enlarge

(Source – SEC)

As of December 31, 2021, Republic Power had $143,969 in cash and $1.3 million in total debt.

Free cash flow for the twelve months ended December 31, 2021 was $1.44 million.

Republic Power Group IPO details

RPGL intends to sell 3 million shares of its common stock at a proposed mid-point price of $5.00 per share for gross proceeds of approximately $15 million, excluding the sale of customary underwriter options.

No existing or potential new shareholders have expressed an interest in purchasing shares at the IPO price.

Assuming a successful IPO in the middle of the proposed price range, the Company’s enterprise value at IPO (excluding underwriter options) would be approximately $81.5 million.

The free float to outstanding share ratio (excluding underwriter options) will be approximately 15.8%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

The company says it will use the net proceeds from the IPO as follows:

20% for research and development;

20% for marketing and branding investments and other capital expenditures;

20% for recruiting talented professionals; and

40% for general corporate purposes and possible future acquisitions and growth opportunities.

(Source – SEC)

Management’s presentation of the company’s roadshow is not available.

With respect to pending litigation, management says that the Company is not currently involved in any litigation that would materially adversely affect its financial condition or operations.

The sole public bookrunner for the IPO is Univest Securities.

Valuation metrics for Republic Power Group

Below is a table of the company’s relevant capitalization and valuation metrics at the IPO, excluding the impact of underwriter options:

Measure [TTM]	Crowd
Market capitalization at IPO	$95,000,000
Enterprise value	$81,505,632
price / sale	15.19
EV / Revenue	03/13
EV / EBITDA	42.49
earnings per share	$0.08
operating margin	30.68%
net margin	25.14%
Ratio of float to shares outstanding	15.79%
Proposed IPO midpoint price per share	$5.00
Net Free Cash Flow	$1,440,948
Free cash flow yield per share	1.52%
Debt / EBITDA multiple	0.17
investment rate	56.76
sales growth rate	-24.79%
(Glossary of terms)

click to enlarge

(Source – SEC)

Comment about Republic Power Group

RPGL is seeking investment in the US public capital market for its corporate expansion plans, which include geographic expansion throughout Southeast Asia.

The company’s financials show lower sales, lower gross profit but variable gross margin, lower operating profit and margin, and lower cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021 was $1.44 million.

Selling and marketing expenses as a percentage of total sales have changed as sales have fluctuated; its sales and marketing efficiency multiple was negative (11.4x) over the last reporting period.

RPGL’s performance under Rule 40 was negative, a poor result.

The company currently plans not to pay any dividends and intends to retain future profits for its future expansion plans.

The company’s investment ratio is high, suggesting that it spends very little on capital expenditure relative to its operating cash flow.

The market opportunity for the deployment of security software is large and is expected to grow at a 10% CAGR through 2027, allowing the Company to benefit from healthy market dynamics.

Univest Securities is the only underwriter and IPOs led by the firm over the past 12 months have generated an average negative return (11.8%) since its listing. This is a lower performance for all major underwriters over the period.

The main risks to the company’s prospects are the potential for pandemic lockdowns and resulting slower sales cycles, and a global economic downturn reducing budgets for new IT initiatives.

Additionally, RPGL is exposed to significant customer concentration risk as three customers accounted for nearly 78% of the Company’s revenue for the six months ended December 31, 2021.

Like other companies with offices abroad looking to enter US markets, the company has operations in the British Virgin Islands and a wholly owned subsidiary in Singapore. US investors would only have an interest in an offshore company with interests in operating subsidiaries. In addition, there may be restrictions on the transfer of funds between affiliates.

Prospective investors are well advised to consider the potential impact of certain profit repatriation laws that may affect such companies and the market value of US stocks.

RPGL’s financials are stale, and management is asking IPO investors to pay a 13x EV/sales multiple for a company that posts negative sales growth.

I’m awaiting RPGL’s IPO because of the recent sales decline and high valuation, although the shares’ low notional price could attract day traders looking for volatility.

Estimated IPO Price Date: To be announced