Stretch: Tellavo enters Indonesia, from market entry to an acquisition

A fast-growing market with customers who already know us looks attractive, so my hypothesis is that entering makes sense, and that the harder question is whether to build or buy.

1. Step 1: The market in three years

   What a strong candidate does: Candidate: "SGD 3 billion growing 12 percent a year for three years reaches about SGD 4.2 billion a year:"

   Market in three years (SGD million a year): 3,000 × 1.12 × 1.12 × 1.12 = 4,215

2. Step 2: Revenue at the target share

   What a strong candidate does: Candidate: "At 5 percent of that market, Tellavo would earn about:"

   Revenue at 5 percent share (SGD million a year): 3,000 × 1.12 × 1.12 × 1.12 × 0.05 = 211

3. Step 3: Building our own network

   What a strong candidate does: Candidate: "Can I ask what a new network would cost?" Interviewer: "About six warehouses at SGD 40 million each, so SGD 240 million, with about four years to reach full volume and an EBITDA margin of about 20 percent at maturity." Candidate: "Then at full volume we would earn about:"

   EBITDA at maturity, building (SGD million a year): 3,000 × 1.12 × 1.12 × 1.12 × 0.05 × 0.2 = 42.15

4. Step 4: Payback on building

   What a strong candidate does: Candidate: "SGD 240 million pays back in about 5.7 years of full profit, and full profit only starts after a ramp of about four years. So building works in the long run but is slow: even counting some profit during the ramp, payback takes roughly seven to ten years."

   Payback at full profit (years): 240 ÷ (3,000 × 1.12 × 1.12 × 1.12 × 0.05 × 0.2) = 5.69

5. Step 5: Switch to M&A: the asking price

   What a strong candidate does: Interviewer: "The board wants Indonesia to be profitable within two years. A local company, Dinginjaya, is for sale. The owners ask ten times last year's EBITDA. The table has its figures." Candidate: "So the question is now whether to buy, and at what price. I will look at the target's quality, the synergies, and the most we should pay. Ten times SGD 24 million is:"

   Asking price (SGD million): 24 × 10 = 240

6. Step 6: Quality: margin

   What a strong candidate does: Candidate: "Using the table, FY2025 EBITDA margin is:" Candidate: "That is up from about 13 percent in FY2023, a good sign."

   EBITDA margin FY2025 (%): 24 ÷ 150 × 100 = 16

7. Step 7: Quality: growth

   What a strong candidate does: Candidate: "Revenue grew about 12.5 percent in FY2024 and about 11 percent in FY2025, in line with the market:"

   Revenue growth FY2025 (%): (150 - 135) ÷ 135 × 100 = 11.11

8. Step 8: Quality: customers

   What a strong candidate does: Candidate: "The top three customers still bring 45 percent of revenue, so about SGD 67.5 million depends on three contracts. I would check how long each contract runs before signing." Interviewer: "Two of the three run for another four years."

   Revenue from the top 3 customers (SGD million a year): 150 × 0.45 = 67.5

9. Step 9: Synergies

   What a strong candidate does: Interviewer: "The deal team sees SGD 4 million a year of cost savings from shared buying of trucks and energy, and SGD 30 million a year of new medicine contracts from Tellavo's customers at a 25 percent EBITDA margin." Candidate: "The warehouses are 91 percent full, so the new contracts need one more warehouse, about SGD 40 million. With both synergies, EBITDA becomes:"

   EBITDA with synergies (SGD million a year): 24 + 4 + 30 × 0.25 = 35.5

10. Step 10: The real multiple

    What a strong candidate does: Candidate: "Including the extra warehouse, we would invest SGD 280 million for SGD 35.5 million of EBITDA, a multiple of about 7.9 times, and profit from year one rather than year five."

    Multiple paid including the new warehouse and synergies: (240 + 40) ÷ (24 + 4 + 30 × 0.25) = 7.89

11. Step 11: The walk-away price

    What a strong candidate does: Interviewer: "Tellavo's rule is to pay no more than the standalone value at the peer multiple of 9 times EBITDA, plus half the value of cost savings. What is the most it should pay?" Candidate: "Standalone is 9 times 24, which is SGD 216 million. Half of SGD 4 million of savings valued at 9 times is SGD 18 million. So the walk-away price is SGD 234 million, below the SGD 240 million asked."

    Walk-away price (SGD million): 9 × 24 + 0.5 × 9 × 4 = 234

Enter Indonesia by buying Dinginjaya, but at no more than about SGD 234 million, then add warehouses from there. First, the market should reach about SGD 4.2 billion a year in three years, and 5 percent of it is about SGD 210 million of revenue. Second, building alone would cost about SGD 240 million and take roughly seven to ten years to pay back, which misses the board's two-year profit goal. Third, Dinginjaya is growing about 11 percent a year at a 16 percent margin, and with synergies and one new warehouse Tellavo would invest about SGD 280 million for about SGD 35.5 million of EBITDA, about 7.9 times. The asking price of SGD 240 million is above the SGD 234 million walk-away price, so open lower, near the SGD 216 million standalone value. The main risks are customer concentration (45 percent of revenue from three customers) and full warehouses. Next steps: due diligence on the three largest contracts, a site plan for the new warehouse, and an offer near SGD 216 million.

Risks a strong answer names: The third large customer contract may not renew; The new medicine contracts may take longer to win than planned, while the new warehouse is already built; Integration may distract Tellavo's management from its home markets; The return test is not finished: SGD 35.5 million of EBITDA on SGD 280 million is about 12.7 percent a year before tax and upkeep spending, so due diligence must confirm that the cash return after both stays above the 9 percent cost of capital.

Next steps: Due diligence on the top three customer contracts and warehouse condition; Choose a site for the extra warehouse before signing; Open negotiations near SGD 216 million and walk away above SGD 234 million.