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A Quick Take On Davis Commodities Limited
Davis Commodities Limited (DTCK) has filed to raise $13.6 million in an IPO of its ordinary shares, according to an amended F-1/A registration statement.
The firm operates as an agricultural products trading firm for major commodities.
Davis Commodities Limited has experienced significant fluctuation in top line revenue growth in recent reporting periods, and its low-margin profits have plateaued.
My outlook on DTCK’s IPO is Neutral [Hold].
Davis Overview
Singapore-based Davis Commodities Limited was founded to distribute commodities to various global market regions, including Asia, the Middle East and Africa.
Management is headed by Executive Chairwoman and Executive Director Ms. Li Peng Leck, who has been with the firm since 2003 and was previously co-founder of Maxwill [Asia] and also serves as a Director of various firm subsidiaries.
The company’s primary offerings are the following:
-
Sugar
-
Rice
-
Oil and fat products
-
Warehouse handling
-
Storage and logistics services.
For the year ended December 31, 2022, its activity in sugar products accounted for 74.9% of the firm’s total revenue.
Davis has received investment from investors, including Davis & KT Holdings Pte. Ltd. (Ms. Leck) and Mr. Ng Hong Whee.
Davis – Customer Acquisition
The firm sources and markets sugar and other commodities via its two brands, Maxwill and Taffy.
The company has various distribution relationships covering the countries and regions in which it operates.
Selling and Marketing expenses as a percentage of total revenue have fallen slightly in the two most recent full calendar years, as the figures below indicate:
|
Selling & Marketing |
Expenses vs. Revenue |
|
Period |
Percentage |
|
Year Ended Dec. 31, 2022 |
2.6% |
|
Year Ended Dec. 31, 2021 |
2.8% |
(Source – SEC.)
The Selling and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing expense, fell to 2.4x in the most recent reporting period. (Source – SEC.)
Davis’ Market & Competition
According to a 2022 market research report by ResearchAndMarkets, the global sugar market was an estimated $67.6 billion in 2021 and is forecast to reach $76.6 billion by 2027.
This represents a forecast CAGR of 2.1% from 2022 to 2027.
The main drivers for this expected growth are moderate growth in consumption by end users in a variety of markets.
Also, large market players include India, China, the EU, the United States, Indonesia, Brazil, Russia, Pakistan, Mexico and Egypt.
Major competitive or other industry participants include the following:
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SIS ’88 Pte. Ltd.
-
Cheng Yew Heng Candy Factory Pte Ltd.
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International trading firms.
Davis Commodities Limited Financial Performance
The company’s recent financial results can be summarized as follows:
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Increasing topline revenue growth
-
Growing gross profit but lower gross margin percentage
-
Higher operating profit
-
A swing to cash used in operations.
Below are relevant financial results derived from the firm’s registration statement:
|
Total Revenue |
||
|
Period |
Total Revenue |
% Variance vs. Prior |
|
Year Ended Dec. 31, 2022 |
$ 206,717,000 |
6.4% |
|
Year Ended Dec. 31, 2021 |
$ 194,239,000 |
|
|
Gross Profit (Loss) |
||
|
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
|
Year Ended Dec. 31, 2022 |
$ 12,877,000 |
5.2% |
|
Year Ended Dec. 31, 2021 |
$ 12,245,000 |
|
|
Gross Margin |
||
|
Period |
Gross Margin |
% Variance vs. Prior |
|
Year Ended Dec. 31, 2022 |
6.23% |
-1.2% |
|
Year Ended Dec. 31, 2021 |
6.30% |
|
|
Operating Profit (Loss) |
||
|
Period |
Operating Profit (Loss) |
Operating Margin |
|
Year Ended Dec. 31, 2022 |
$ 5,283,000 |
2.6% |
|
Year Ended Dec. 31, 2021 |
$ 4,978,000 |
2.6% |
|
Net Income (Loss) |
||
|
Period |
Net Income (Loss) |
Net Margin |
|
Year Ended Dec. 31, 2022 |
$ 4,615,000 |
2.2% |
|
Year Ended Dec. 31, 2021 |
$ 4,700,000 |
2.3% |
|
Cash Flow From Operations |
||
|
Period |
Cash Flow From Operations |
|
|
Year Ended Dec. 31, 2022 |
$ (1,946,000) |
|
|
Year Ended Dec. 31, 2021 |
$ 3,215,000 |
|
(Source – SEC.)
As of December 31, 2022, Davis had $2.5 million in cash and $11.9 million in total liabilities.
Free cash flow during the twelve months ending December 31, 2022, was negative ($1.96 million).
Davis Commodities’ IPO Details
DTCK intends to sell 1.522 million shares, and selling shareholders will offer 1.875 million shares of common stock at a proposed midpoint price of $4.00 per share for gross proceeds of approximately $13.6 million, not including the sale of customary underwriter options.
No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price.
Immediately after the IPO, the firm will be controlled by the Executive Chairwoman, Ms. Li Peng Leck.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $91.9 million.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 13.71%. A figure under 10% is generally considered a “low float” stock which can be subject to significant price volatility.
As a foreign private issuer, the company can choose to take advantage of reduced, delayed or exempted financial and senior officer disclosure requirements versus those that domestic U.S. firms are required to follow.
The firm is an “emerging growth company” as defined by the 2012 JOBS Act and may elect to take advantage of reduced public company reporting requirements; prospective shareholders would receive less information for the IPO and, in the future, as a publicly-held company within the requirements of the Act.
Immediately after the IPO, the company will be controlled by Executive Chairwoman and Executive Director, Ms. Li Peng Leck.
Management says it will use the net proceeds from the IPO as follows:
approximately 75% for business expansion, including strengthening our market position, expanding the scope of our product offerings, engaging in strategic acquisitions and investments, joint venture partnerships, and investing in equipment and technology;
approximately 10% for repayment of bank borrowings with the incurred interest expenses*; and
approximately 15% for working capital and general corporate matters.
(Source – SEC.)
Management’s presentation of the company roadshow is not available.
Regarding outstanding legal proceedings, “there were no pending or, to the knowledge of management, threatened claims and litigation as of December 31, 2021 and 2022 and through the date of this prospectus.”
The sole listed bookrunner of the IPO is Univest Securities.
Valuation Metrics For Davis Commodities
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
|
Measure [TTM] |
Amount |
|
Market Capitalization at IPO |
$99,088,000 |
|
Enterprise Value |
$91,914,685 |
|
Price / Sales |
0.48 |
|
EV / Revenue |
0.44 |
|
EV / EBITDA |
17.40 |
|
Earnings Per Share |
$0.18 |
|
Operating Margin |
2.56% |
|
Net Margin |
2.23% |
|
Float To Outstanding Shares Ratio |
13.71% |
|
Proposed IPO Midpoint Price per Share |
$4.00 |
|
Net Free Cash Flow |
-$1,960,000 |
|
Free Cash Flow Yield Per Share |
-1.98% |
|
Debt / EBITDA Multiple |
0.13 |
|
CapEx Ratio |
-139.00 |
|
Revenue Growth Rate |
6.42% |
(Source – SEC.)
Commentary About Davis Commodities
DTCK is seeking U.S. public capital market investment to fund its general growth and expansion initiatives.
The company’s financials have produced growing topline revenue, increased gross profit but lower gross margin, higher operating profit and a swing to cash used in operations.
Free cash flow for the twelve months ending December 31, 2022, was negative ($1.96 million).
Selling and Marketing expenses as a percentage of total revenue have varied as revenue has increased; its Selling and Marketing efficiency multiple fell to 2.4x in the most recent reporting period.
The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into its growth and working capital requirements.
Davis’ CapEx Ratio indicates it has spent lightly on capital expenditures as a percentage of its operating cash flow.
The market opportunity for trading in sugar, the firm’s primary focus, is large but slow-growing.
Univest Securities is the sole underwriter, and the five IPOs led by the firm over the last 12-month period have generated an average return of negative (33.9%) since their IPO. This is a bottom-tier performance for all significant underwriters during the period.
As for valuation expectations, management is asking IPO investors to pay an Enterprise Value / EBITDA multiple of 17.4x.
Business risks to the company’s outlook as a public company include actions taken by governments to restrict commodity flows that may hamper the firm’s ability to procure or move commodities and the fast-moving nature of commodity markets.
While the company has produced revenue growth, its low-margin profits have flatlined, and cash flow has turned negative.
My outlook on Davis Commodities Limited’s IPO is Neutral [Hold].
Expected IPO Pricing Date: To be announced