【IPO New Stocks】Ocean sky intl | 12Invest

It seems like yesterday was a very good day, as three companies released their prospectuses preparing for listing at once?

And among these three IPOs, the moderator has also selected the company that is thought to be the most interesting for discussion; but first, it is important to mention that this is not a recommendation to buy or sell, and by the end, everyone needs to filter it themselves.

Let's first talk about why there is a perception that Ocean Fresh Berhad (OFS, 0312) is so interesting; firstly, OFS has only 210.1 million shares in this IPO, priced at RM0.280 per share, which means that after listing, the company's market cap will be RM58.8 million, considered relatively small for IPOs within 2024.

Furthermore, OFS's IPO this time did not include MITI's subscription, nor did any shareholders sell their equity (referred to as Offer for Sale, coincidentally also 'OFS'), quite intriguing.

In other words, OFS falls under the category of small-cap stocks, with low selling pressure, and upon further investigation, the background of a few major shareholders is also remarkable. If interested, you can browse through the prospectus and delve deeper into research...

Okay, the practical operation, and the interesting points related to Malaysian stocks, end here for now; next, let's look at this company's business!

OFS's main business is the processing and trading of frozen seafood ('Seafood Processing and Trading'), as well as providing seafood processing services only ('Seafood Processing Services'). In simple terms, the former involves purchasing raw materials for customers, such as marine invertebrates (Molluscs), fish, or other seafood products, such as prawns, abalones, sea cucumbers, and more.

The latter involves customers providing raw materials, and the company completing the processing service, the difference lies here.

So, what does 'processing' here actually include? First, OFS will purchase raw materials (i.e., frozen seafood) from local or foreign suppliers, or even purchase seafood from fisheries, then clean it up, fillet or shell it, and so on, before packaging, which we will continue to discuss.

In FY2023, approximately 30.97% of the company's seafood purchases are made from local distributors or processing plants, another 50.94% are contributed by foreign markets, and only 18.09% comes from local fisheries; however, the company buys seafood from different suppliers based on market supply and demand, for instance, if seafood is currently at a low price, they can purchase it cheaply and store it in a cold room at -20°C as inventory.

In fact, as long as the storage is done properly, generally, seafood can be stored in Shanghai for 6 months, or even 12 months or more without any issues, but it highly depends on how each company handles frozen seafood. Also, as consumers, we may be concerned that seafood stored for too long may lose its flavor, so consumer perceptions are also very important.

However, OFS's main customers are mainly B2B, so this shouldn't be a big issue.

Next, let's talk about the other processing steps; after purchasing frozen seafood (seafood that has not been processed yet), OFS will thaw, then screen, clean, cut, including filleting as mentioned earlier, and separate storage. The company will freeze again, glaze (a process to protect seafood), then package for sale.

OFS mainly sells their products under their own Sea Planet brand, or in an OEM form to produce seafood for customers, but apparently, the prospectus does not clearly mention this proportion.

In FY2023, OFS's total revenue amounted to RM159.5 million, where 17.21% is contributed by the Malaysian market, and the rest comes from foreign markets, including Turkey (24.83%), China (33.49%), Thailand (3.56%), Vietnam (6.49%), Japan (3.49%), and other countries (10.93%).

Recently, we have seen that although China's economic data has slowed down, from the OFS prospectus, they have steadily increasing demand for OFS products, especially for dried seafood like scallops, dried sea cucumbers, and abalone. The prospectus mentions that customer demand is on the rise.

Moreover, due to the smaller storage space and relatively cheaper transportation of dried seafood, the moderator personally believes that the demand in this area is not low (after all, customers usually bear the transportation costs), especially for dried sea cucumbers that are not easily obtainable export permits for.

Interestingly, it seems that the company only needs to invest around RM0.5 million to produce new dried seafood products, but currently the biggest obstacle for OFS is their storage space.

Of course, being in the food industry is not that simple; OFS itself has multiple licenses including local food-related ones like HACCP, GMP, MeSTI, HALAL certificates, and to cater to different markets, the company also holds other licenses such as the EU Number 75 Certificate for the European market, DAH for Vietnam, GACC for China, and FDA for the USA (the most difficult license to obtain, although the company exports less to the USA).

Therefore, the threshold for this industry is indeed not low.

However, OFS has not signed exclusive supply contracts with customer groups (unlike the previous frozen seafood company), so there is still a certain level of risk in securing seafood supplies.

Let's talk about the allocation of funds raised by OFS in this IPO; Through this IPO, OFS is expected to raise RM14.0 million, and the vast majority will be used to expand cold storage facilities. The company's current 1,700 tons of freezing facilities were already at 99.71% capacity in FY2023, and in the future, the company will be able to store up to 4,700 tons of frozen seafood, but production is expected to start only after 18 months.

During this period, if the company needs additional cold storage space, they can rent external space for temporary use.

In conclusion, the future growth story of Ocean Sky Intl mainly revolves around the rising demand in China and the company's 'new product' dried seafood; however, according to the IMR report, the average seafood consumption per capita in Malaysia was 52.7 KG in 2021, while in China it was only 39.9 KG. It seems that we really enjoy eating seafood.

In terms of financial performance, Ocean Sky Intl's revenue also increased from RM94.1 million in FY2020 to RM159.5 million in FY2023. Post-tax profit ('PAT') also rose from RM2.4 million to RM6.9 million (approximately RM0.9 million from forex gains, as the company's exports are mainly in usd), showing an overall impressive performance.

However, seafood products have always been a very sensitive topic, so specific incidents could potentially affect the company's sales, which is also a potential risk that investors need to be aware of.

Given the factors mentioned above (small market cap, low selling pressure, hot market, and what I personally believe to be a reasonable PE), Ocean Sky Intl's IPO should be quite interesting on the first day. How do you all view this?

Photo Source: Ocean Fresh Facebook

Disclaimer:

As the moderator is not a licensed stock analyst, we will not provide you with any buying or selling advice. If needed, you can consult a licensed stock analyst or broker.

The moderator's current role is a Marketing Representative for iFast Capital Sdn. Bhd. and TA Securities Holdings Berhad. They are also an independent financial content writer and do not provide financial advisory services.

When writing this article, or in the short term (within 3 months), the moderator itself may be interested in investing or already hold the above-mentioned companies, unless new factors emerge, so readers must check the independence of the content.

Finally, all the shared content is information, news, and content obtained by the individual moderator through various sources. All the mentioned content in the article is only for reference, learning, education, and informational purposes, and not professional financial, investment, or trading advice. If you want to get trading advice, please consult professional stock analysts or investment banks and determine their risks and potential returns on your own. Once again, 12Invest is not responsible for the accuracy, completeness, correctness, or expiry of any shared content or opinions. Any decision made by the reader after reading the article is their own responsibility. Remember, all investments carry risks, so take measures to protect yourself.

#12INVEST

#IPO

#BURSA

#OFS