Cuckoo International (MAL) Berhad IPO. Good to buy?

The Malaysian stock market index may be down -6% YTD, but investor appetite for IPO remains strong.

Singaporeans might be aware of this particular company and the brand of products it carries, as it also has a presence in Singapore.

In an age where everything is moving towards subscriptions, Cuckoo International (Mal) Berhad is tapping on the trend by offering rental and trading services of home appliances, mattresses and furniture.

Cuckoo’s Business Model

What?!

For the oldies, this might seem like a preposterous business model. But for the younger generation, we have our fair share of transitioning from buy to own, to the subscription model.

I am old enough to remember owning my own songs on my Nokia N73 or buying DVDs for movies that I want to watch. Good times, but YouTube Premium and Netflix subscription do away with the pain of buying, owning and storing physical stuff, which eventually just add to the clutter that needs spring-cleaning.

Cuckoo does the same, but for home appliances and certain types of furniture. The major bulk of its business lies in renting out Cuckoo-branded products. And since these products also require servicing, Cuckoo also earns a revenue whenever it completes after-sales or preset services.

These products range from water filters, rice cookers, massage chairs, air purifiers and many more. And these appliances would require maintenance, just like the predecessors that our parents bought. Just that most of our parents probably skipped the maintenance part completely.

While there are some customers who opt to outright buy-to-own Cuckoo’s products, 56% of its total sales come from rental revenue of its products. Another 38% come from the after-sales maintenance services that it levies on clients who rents its products. So it’s straightforward to see the flywheel model of Cuckoo’s business.

Cuckoo derives most if not all of its sales from Malaysia, but has a presence in Singapore and Brunei that it aims to grow.

IPO proceeds utilisation and share ownership

Cuckoo will be raising RM 184.8 million in this IPO exercise. RM 105 million, which is 56.7% will be earmarked to fund product purchases for expansion of its rental business. RM40 million will be for bank borrowings repayment, while RM10 million will be for its Singapore business expansion. RM 10.6 million will be for capital expenditure, which includes the setting up of more “Brandshops” and upgrading of IT systems.

Financial snapshot

To complement the P&L statements, I took the liberty of creating some supporting matrices.

Compared to other IPOs we previously covered, Cuckoo’s revenue growth trend is on the lower end. Not to mention revenue shrunk by -8.3% YoY for FY2022.

Gross margin ranges around 33-36%. Being the distribution and rental arm of its ultimate holding company Cuckoo Holdings Co Ltd (KRX: 192400), which manufactures the electronics and home appliances for rice cookers and other major items, there likely isn’t much room for significant gross margin expansion.

Although Cuckoo is being innovative by co-creating products that its parents company doesn’t manufacture (mattresses, air conditioners, massage chairs), it is still operating in a retailer business model, which comes with predictable reliance on after-sales services.

In a nutshell, the after-sales services would rely on the rental of products revenue, and the products need to be of a certain quality to gain and grow market share for the flywheel to continue turning.

Valuation

With an IPO price of RM1.29 per share, Cuckoo International would have a market capitalisation of RM1.85 billion. Upon listing, the company will be valued at 21.2 times its earnings per share of 6.1 sen in the financial year ended Dec 31, 2023 (FY2023).

There are two sides to a coin on judging the valuation. On one side, it is a pure retailing business with a robust after-sales service revenue generating model. It is not necessarily an asset intensive business as it does not venture into manufacturing.

On the flip side, margins in the retailing business is notoriously razor-thin. To grow shareholder value, it boils down to ruthless cost management and also aggressive top line growth.

How big is Cuckoo compared to existing Malaysia listed companies?

With a FY 2023 revenue of RM 1.1 billion and profit after tax of RM 86.7 million, Cuckoo’s size is similar to Lay Hong Berhad (KLSE: LAYHONG). Lay Hong achieved RM 1.0 billion in revenue and a net income of RM 90 million.

In terms of market cap, Lay Hong trades at a market cap of RM 250.2 million. With slightly better margins than Cuckoo, Cuckoo’s implied market cap will be more than 7.0x larger than Lay Hong.

The Singapore & Malaysia growth catalyst

Not all Malaysian companies ventures and grow its business outside of Malaysia. Thus kudos for Cuckoo for trying to grow its presence in Singapore and Brunei.

That said, the total population and addressable market of both countries are far smaller than Malaysia. So automatically even if Cuckoo can capture all of the available market, it should not move the needle much.

The Singapore market has its fair share of competition, with the likes of Sterra, Happie Joy and Novita to name a few.

Moreover, Cuckoo mentioned that it plans to grow its presence outside of the Klang Valley, focusing more on Sabah, Perak, Kedah and so on. These states, apart from Selangor, are less affluent when it comes to spending. While the higher income groups might feel obliged to invest in frequently service water filters, this might not be so receptive. So the growth plans for the next quarters need to be further scrutinised.

Not to also mention, Cuckoo faces a stiff competitor in this segment in Malaysia – Coway. According to Frost and Sullivan, Coway owns the major market share in the home appliances rental business. Its parent company Coway Co Ltd (KRX: 021240) is also a listed company in Korea.

My verdict

Both Coway and Cuckoo offer similar offerings in Malaysia, with Coway’s pricing slightly on the premium side. Both also offer after-sales services, so there really isn’t an edge between both of the same companies.

Cuckoo’s latest 3 years growth does not pique my interests and I feel that even if there is still growth in the high income states of KL, Penang and Johor, the growth spurt might have passed. The contributions from the other states remain a question mark, although worth monitoring for those still interested in the growth story.

I view water filters, especially in Malaysia, as a necessity, compared to Singapore where tap water is always proudly proclaimed as potable from the tap.

It might be a resilient business model with good recurring visibility, but with my perceived growth runway of the company, the current valuation is a bit on the high side.

That said, don’t come knocking on my door if prices pop over the next few days – it is definitely not a fundamental play, but rather scalpers chasing after yet another hot IPO stock on Bursa.

p.s. if you want to learn how to analyse and find the best stocks to buy, Alvin shares our strategy at this live webinar.