AKD Securities Limited – AKD Daily (07 August 2023)

Karachi, August 07, 2023 (PPI-OT): Symmetry SGL - Subscribe at PkR4.25sh

A new tech listing in the offering, with Symmetry Group Limited (SGL) listing on the main board at the PSX. Book building dates are set for the 8th and 9th of August, 2023. SGL is primarily a digital technology and experiences company specializing in digital marketing strategies, content creation, app development, etc. SGL aims to develop and market AI enabled products to assist in making smarter marketing and sales strategies for their existing and potential clientele. These products will be unique intellectual properties (IPs) of SGL.

Total issue size is 101mn shares (new issue of 88mn share and offer for sale of 13mn shares), translating into PkR430mn at a floor price of PkR4.25/sh to primarily fund the creation of said IPs (utilization: 55% of total proceeds). Remaining funds will be used to develop office furniture and equipment, human capital and marketing of products and services.

With the age of digitization, where businesses need to tailor products and services to consumer habits, the products introduced by SGL will provide their clientele with the tools to target consumer spending effectively and maintain higher customer retention.

Based on company projections, while SGL trades at FY23 and FY24 P/E of 6.34x and 5.38x respectively, the company’s comparison to Tech Sector’s P/E at 8.64x is not valid given diversity of earnings (away from tech), as well as concentration risk.

About the Company: SGL started its journey as a small interactive agency in 2003 to later convert into a group of companies, engaging in the digitization of marketing and sales functions for their customers through various products and services aimed at formulation of digital strategies, content creation, advertising, data analytics, web and apps development, etc. SGL has 2 subsidiaries under its banner, namely Symmetry Digital (Pvt.) Ltd and Iris Digital (Pvt.) Ltd operating as digital marketing agencies. The company, through the development of the IPs aims to cement its position in the tech Industry, claiming to have no comparable locally or internationally in relation to its new products. Brief description of the products is listed below:

I. Cartsight: Measuring consumer spending habits at the time of purchase to deliver targeted content.

II. Corral: Analyzing the utility of advertising mediums currently in use for actionable insights to advertisers.

III. Survit: Measuring of customer satisfaction levels.

IV. Mobits: Targeted content, messaging, etc. through web based mobile marketing.

V. Influsense: Easing marketing for influencers by providing them audience analysis, campaign management and other tools.

The Company plans to market their IPs locally and internationally, in a bid to increase its export earnings and benefit from lower taxation; SGL has obtained membership of Pakistan Software Exports Board (PSEB) in April’23 to benefit from a 0.25% tax rate on IT exports’ proceeds. SGL currently caters to big names in the Industry such as HBL, JS bank, P and G, Engro Fertilizers, Jazz, Khaadi, amongst others.

Financial Performance and Transaction Details: Historically, the company’s net revenues have grown at a CAGR of 20% till FY22 with costs gradually increasing (as a % of revenue, FY21: 40% and FY22: 61%) mainly on the back of increased fees of content creators. The company reports revenues under 2 heads, gross and net, with the former representing total proceeds including revenues attributable to 3rd party vendors, and the latter representing revenues net of external payments. The largest customers of SGL comprise of HBL, JS bank, P and G, Advertech solutions and Jazz where cumulatively, these account for over 67% of total revenues posing sizeable customer concentration risks. However, SGL keeps adding new customers to its base attempting to diversify the risk. Further, the company expects to start rolling out the new products from FY24 with marketing activities to continue until FY26.

The management claims to have no comparable in the local or international market in relation to its new products, with basic versions of some already deployed at various clients. Management estimates suggest a considerable increase in the top and bottom line owing to new IPs, which we deem to be highly optimistic since estimates are subject to uncertainty surrounding product adoption. As for the capital structure, SGL has no long term borrowings currently form any formal lenders, however a 12% interest bearing loan remains due to a related party amounting to PkR26mn and short term borrowing of PkR25mn. However, with increasing trade debts owing to an increase in receivable days as per management disclosure, working capital requirements are expected to increase moving forward possibly incurring significant finance costs on the back of record high interest rates. Management is confident that there is a low risk of bad debts as per past practice and a reputable customer base (FY22 receivables impairment amounts to a mere PkR0.075mn).

The total offer size of 101mn shares will comprise of 88mn new shares and 13mn OFS by the sponsors, representing 35.49% of the post IPO share capital. The total aimed proceeds amount to PkR430mn at a floor price of PkR4.25/sh.

Valuation and Future Outlook: We advise subscription of SGL at the floor price of PkR4.25/sh representing a FY23 and FY24 P/E of 6.34x and 5.38x respectively, compared to average peer FY23 P/E of 8.64x. Our advice is based on macroeconomic and company specific risks (discussed below). Also, it is difficult to compare SGL to any other tech company given the company’s existing business model, focused significantly on marketing and advertising activities and development of websites, apps, etc. which primarily come under the tech banner. Further, the proposed IPs cover a vast majority of activities, deeming it difficult to find suitable comparable since no one company offers all products.

Conclusion: In general, our outlook is positive given the upcoming listing being the first IPO of the calendar year, combined with the extensive business experience of the company's two founders, namely, Sarocsh Ahmed and Adil Ahmed spanning over two decades. Additionally, with the inclusion of Artificial Intelligence in the company's future business plans, we hold a supportive stance for the company, valuing it at the floor price of PkR4.25/sh with a forward P/E of 5.38x.

Risks associated with the company:

I. Low barriers to entry due to the nature of the industry and the larger players benefiting from a second movers’ advantage in certain SGL’s product offerings given a loophole in IP defensibility.

II. Entrance of the larger global players in Pakistan, or eating away at SGL’s export share.

III. Technological obsolescence.

IV. High cost of R and D, implementation, etc. associated with AI creating further need for capital.

V. Lack of regulatory support and high taxation as seen through FY24 Finance Act enacted super tax.

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