Roma Green IPO underwhelms as investors fail to see green in its ESG story

The environment, social and governance advisory firm priced its shares at the bottom of their target range in their modest New York IPO

Key Takeaways:

• Roma Green priced its shares at $4, representing the bottom of their target range, in a New York IPO that raised about $9.8 million in gross proceeds
• The loss-making company’s revenue, which is small to begin with, declined in its fiscal year to March last year as it slashed its marketing costs

By Warren Yang

It’s no news that environmental, social and governance, or ESG, is one of the most trending acronyms for companies nowadays as investors increasingly demand they do something good for society, instead of just pursuing profits. So, it may also seem like a no-brainer that businesses dedicated to this emerging investment theme should proliferate and thrive as well.

But the reality isn’t so straightforward, as newly listed Roma Green Finance Ltd.’s (ROMA.US) struggle to boost its revenue shows.

Last Tuesday, Roma Green, which provides ESG-related advisory services, raised about $9.8 million in gross proceeds by listing about 2.4 million shares in New York at $4 apiece. The company has some potentially exciting plans for the new funds, including a potential acquisition and the creation of an ESG academy.

But investors didn’t seem too excited about the company. Its IPO shares priced at the bottom end of a target range of $4 to $5. The stock popped at one point on its first trading day, hitting as high as $11.80. But it quickly retreated and gave back all the gains and more to close down 27.5% for the day. The shares have regained ground since then, but still trade mostly at or below the IPO price, suggesting lukewarm investor interest as trading volumes have dwindled.

Hong Kong-based Roma Green provides a range of ESG-related advisory services, including sustainability program development, ESG reporting and governance risk management. The company derives most of its revenue from Hong Kong and the rest from Singapore. In its IPO prospectus, it touted a large pool of more than 140 clients as one of its key strengths.

But Roma Green is quite green itself in terms of its small size. What’s worse, its revenue shrank about 4% to HK$13.6 million ($1.7 million) in the company’s fiscal year that ended last March from the previous fiscal year.

The company managed to shrink its net loss by more than a quarter in its latest fiscal year, but only by slashing marketing costs. In its prospectus, Roma Green explained the cost-cutting by noting it generally brings in new business through senior management networks, referrals and direct approaches by potential clients, instead of through its own direct marketing, which it outsources to third-party agencies.

Such an approach doesn’t seem too aggressive for a small firm like Roma Green, which will need to show stronger growth to impress investors. And it doesn’t help that the company already faces quite a lot of competition in the emerging ESG arena from large international consulting firms like McKinsey & Co. and Boston Consulting Group, to smaller local shops like itself.

Key vulnerability

A key vulnerability of Roma Green’s business model is its clients’ payment for services on a project basis. That means its sales are non-recurring, and there’s no guarantee that its customers will come back for more as they develop their own in-house capabilities to deal with ESG issues.

ESG reporting can be a daunting task for businesses unfamiliar with what it entails across a wide range of topics, many with very specific metrics for measuring performance. But once businesses establish processes to track and meet requirements with initial help from external advisors like Roma Green, they may be able to handle the obligations on their own. Cutting such spending on advisory services is something many companies might consider, especially in economically difficult times.  

While ESG has been around for quite some time now, the concept and related requirements are still new for many companies, which means Roma Green’s services should be in demand for at least the next few years. But the company isn’t expanding its clientele very quickly, at least not yet, managing to increase the number of its customers by just one in its latest fiscal year. 

The company was founded in 2018 as a provider of customized ESG and sustainability-related services. Then in 2022, Roma Green went through a reorganization that resulted in then-outsider Luk Huen Ling Claire taking over the company as its CEO and majority shareholder with a stake of more than 90%. Her ownership was reduced to about 63% after the IPO.

So, Luk is pretty new to Roma Green, and she also appears relatively new to ESG as well. Her biography in Roma Green’s prospectus says her background is in corporate communications and marketing, rather than anything specific to ESG.

Its other key executives have more direct credentials in ESG. The company’s CFO previously held a senior position at a listed company engaged in the renewable energy industry that is often a key part of the “environmental” aspect of ESG. And its key Singapore sales executive’s credentials include overseeing ESG reporting services at one of his former employers, and working at a Singaporean company that emphasizes inclusivity on its website – a major element behind the “governance” element of ESG.

Personnel costs, including compensation for management, are the largest single expense item for Roma Green and amounted to more than half of its revenue last fiscal year. That quickly eroded the company’s margins, going against the conventional notion that advisory services is a high-margin business due to its relatively low capital costs. That could partly explain the underwhelming reaction to the company’s IPO.

Roma Green is currently valued at an inflated price-to-sales (P/S) ratio of nearly 24, well above the 3.5 for Accenture Plc (US.ACN), among other big-name consulting or advisory firms. Obviously, such a high multiple is largely a function of the company’s small revenue base, and seems to imply that its current shareholders have big hopes for future revenue growth. But if it fails to grow its revenue substantially, its stock price could quickly come back to earth. A shortcut in that direction could be an acquisition of another ESG specialty firm, which the prospectus lists as a possible use for its IPO proceeds.

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