ARB IOT Group Readies Micro-IPO Plan

Oct. 07, 2022 1:43 PM ETARB IOT Group Limited (ARBB)

Summary

  • ARB IOT Group Limited has filed proposed terms for a $6 million micro-IPO.
  • The firm designs and sells Internet of Things products and software in a variety of industries in ASEAN countries.
  • ARBB has grown revenue and profit impressively, but faces a dropping Malaysian currency against the strong US dollar.
  • Given the stock will be priced at a low nominal price, the IPO may attract day traders; but most $5.00 IPOs have performed poorly after their IPO, so I'm on Hold for ARBB's IPO.
  • Looking for more investing ideas like this one? Get them exclusively at IPO Edge. Learn More »

Internet of thing develop smart solution to people life. Businessman point at virtual IOT network connecting service with graphical icons in science, business marketing, innovation technology industry

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What Is ARB IOT Group Limited?

Kuala Lumpur, Malaysia-based ARB IOT Group Limited (ARBB) was founded to develop a range of internet connected products and software for various applications and environments.

Management is headed by Chairman and CEO Dato’ Sri Liew Kok Leong, who has been with the firm since inception and is also Executive Director of Ageson Berhad, a construction and property development company.

The company’s primary offerings include:

  • Smart home and building

  • Smart agriculture

  • System development

  • IoT gadget distribution

As of June 30, 2022, ARB IOT has booked fair market value investment of $43.6 million as of June 30, 2022 from investors including ARB IOT Limited (controlled by Chairman and CEO Leong).

ARB IOT’s Market & Competition

According to a 2022 market research report by ResearchAndMarkets, the Asia Pacific market for industrial internet of things products and services was an estimated $23.7 billion in 2021 and is forecast to reach $46.2 billion by 2030.

This represents a forecast CAGR of 8% from 2022 to 2030.

The main drivers for this expected growth are a rising adoption of IoT devices and related software to increase operational efficiencies, reduce costs and improve facility up-time.

Also, on the consumer side, the rise of 'smart city' technologies in the region is expected to drive growth for new technologies.

Major competitive or other industry participants include:

  • BB Ability

  • Aveva Wonderware

  • Cisco IoT

  • Fanuc Field System

  • GE Digital

  • HCL Technologies

  • IBM

  • Intel

  • Linx Asia Pacific Manufacturing

  • Rockwell Automation

  • ORANGE

  • Plataine

  • PTC

  • Robert Bosch

  • Others

The company is active in other IoT markets including consumer, which are very large and fast-growing markets that feature significant competition from major players.

ARB IOT Group's IPO Date & Details

The initial public offering date, or IPO, for ARB IOT Group has not yet been announced by the company or its underwriter.

(Warning: Compared to stocks with more history, IPOs typically have less information for investors to review and analyze. For this reason, investors should use caution when thinking about investing in an IPO, or immediately post-IPO. Also, investors should keep in mind that many IPOs are heavily marketed, past company performance is not a guarantee of future results and potential risks may be understated.)

ARB IOT intends to raise $6 million in gross proceeds from an IPO of its ordinary shares, offering 1.2 million shares at a proposed midpoint price of $5.00.

Post-IPO, the company will be 95% owned and controlled by parent firm ARB Berhad.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $120 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 4.58%. This will be a very low float stock. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

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

approximately 60%, or $2.7 million, for strategic acquisitions or investment in complementary businesses and/or assets within, or similar, to our existing business. As of the date of this prospectus, our board of directors has not identified any specific projects to be undertaken or businesses and/or assets to be acquired or invested;

approximately 10%, or $0.5 million, for research and development activities, including setting up new centers and offices, acquiring new talent and expanding our R&D team, and investing in new systems and applications; and

approximately 30%, or $1.4 million, for working capital and general corporate purposes.

(Source - SEC)

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

Regarding outstanding legal proceedings, management says the firm 'is not presently a party to any legal proceedings' that would 'have a material adverse effect on [its] business, results of operations and financial condition.'

The sole listed bookrunner of the IPO is Maxim Group.

How To Invest In The Company’s Stock: 7 Steps

Investors can buy shares of the stock in the same way they may buy stocks of other publicly traded companies, or as part of the pre-IPO allocation.

Note: This report is not a recommendation to purchase stock or any other security. For investors who are interested in pursuing a potential investment after the IPO is complete, the following steps for buying stocks will be helpful.

Step 1: Understand The Company's Financial History

Although there is not much public financial information available about the company, investors can look at the company's financial history on their form S-1 or F-1 SEC filing (Source).

Step 2: Assess The Company's Financial Reports

The primary financial statements available for publicly-traded companies include the income statement, balance sheet, and statement of cash flows. These financial statements can help investors learn about a company's cash capitalization structure, cash flow trends and financial position.

My summary of the firm's recent financial results is below:

The company’s financials have generated quickly growing topline revenue, a sharp increase in gross profit and gross margin, higher before tax income and margin and increasing cash flow from operations.

Free cash flow for the twelve months ended June 30, 2022, was negative ($23.7 million).

Administrative expenses as a percentage of total revenue have dropped as revenue has increased; its Administrative efficiency multiple was 38.5x in the most recent fiscal year.

The firm currently plans to pay no dividends and to retain any future earnings to reinvest back into the company's growth initiatives.

ARBB’s trailing twelve-month CapEx Ratio was 0.22, which indicates it has spent heavily on capital expenditures as a percentage of its operating cash flow.

Step 3: Evaluate The Company's Potential Compared To Your Investment Horizon

When investors evaluate potential stocks to buy, it's important to consider their time horizon and risk tolerance before buying shares. For example, a swing-trader may be interested in short-term growth potential, whereas a long-term investor may prioritize strong financials ahead of short-term price movements.

Step 4: Select A Brokerage

Investors who do not already have a trading account will begin with the selection of a brokerage firm. The account types commonly used for trading stocks include a standard brokerage account or a retirement account like an IRA.

Investors who prefer advice for a fee can open a trading account with a full-service broker or an independent investment advisor and those who want to manage their portfolio for a reduced cost may choose a discount brokerage company.

Step 5: Choose An Investment Size And Strategy

Investors who have decided to buy shares of company stock should consider how many shares to purchase and what investment strategy to adopt for their new position. The investment strategy will guide an investors' holding period and exit strategy.

Many investors choose to buy and hold stocks for lengthy periods. Examples of basic investing strategies include swing trading, short-term trading or investing over a long-term holding period.

For investors wishing to gain a pre-IPO allocation of shares at the IPO price, they would ‘indicate interest’ with their broker in advance of the IPO. Indicating an interest is not a guarantee that the investor will receive an allocation of pre-IPO shares.

Step 6: Choose An Order Type

Investors have many choices for placing orders to purchase stocks, including market orders, limit orders and stop orders.

  • Market order: This is the most common type of order made by retail traders. A market order executes a trade immediately at the best available transaction price.

  • Limit order: When an investor places a buy limit order, they specify a maximum price to be paid for the shares.

  • Stop order: A buy-stop order is an order to buy at a specified price, known as the stop price, which will be higher than the current market price. In the case of buy-stop, the stop price will be lower than the current market price.

Step 7: Submit The Trade

After investors have funded their account with cash, they may decide an investment size and order type, then submit the trade to place an order. If the trade is a market order, it will be filled immediately at the best available market price.

However, if investors submit a limit order or stop order, the investor may have to wait until the stock reaches their target price or stop-loss price for the trade to be completed.

The Bottom Line

ARBB is seeking U.S. public capital market investment for unspecified acquisitions, increased R&D and general working capital.

The market opportunities for the firm's product are large and expected to grow substantially in the coming years, so the company enjoys strong industry dynamics but also material competition from major market participants.

Maxim Group is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (66.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is its exposure to the Malaysian Ringgit currency, which has fallen significantly against the US dollar for years now.

As for valuation, management is asking investors to pay an EV/Revenue multiple of 1.2x, a very low multiple given the firm’s revenue growth rate of 779% over the last year.

This low nominal priced stock will likely attract day traders and the low float of only 1.2 million shares despite a very high growth profile will probably create the conditions for very high volatility.

For a company that is growing so quickly, producing profits and operating cash flow, the IPO appears attractively priced.

However, I’m generally suspicious of companies seeking to IPO at $5.00 per share, since those IPOs are usually aimed squarely at retail investors.

While prospective investors may wish to take a close look at the IPO and day traders may be drawn to it for its potential high volatility, I’m more cautious since these $5.00 stocks have generally performed poorly post-IPO, with many of them now well below their IPO price.

So, I’m on Hold for the ARB IOT Group IPO.

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This article was written by

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Additional disclosure: This report is for educational purposes only and is not financial, legal or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or removed at any time without notice. You should perform your own research for your particular financial situation before making any decisions. IPO investing can involve significant volatility and risk of loss.

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