20/20 Hindsight: Access Financial IPO

Your decision to invest in a company should be based on a full assessment of  all the facts. Case in point, the Access Financial Services IPO offer. Below is the full text of my response to an article published in the Jamaica Observer in October, 2009 that I felt was flawed in its valuation of the IPO offer. Rather than the stock being overvalued, the facts indicated that the stock had an above average growth potential that could “far exceed any other stock on the market.” Needless to say, my BUY recommendation was not greeted favuorably by readers.

Many Jamaicans remain poor because they never take the time to find out the facts. The same seems true of an unfortunate assessment of the value of the shares of Access Financial Services in its current IPO carried in the Friday business section of your paper.

Share valuation is not about looking back at pass earnings but at likely future earnings. The article, deals well with many of the attributes of the company, but fails to indicate clearly, a full assessment of the true worth of the shares. In so doing, there seems to no focus on the impact of the removal of the tax on profits and the growth in earnings this year so far that will sharply boost earnings, as well as making the earnings for last year on a performa basis, better than reported.  To attempt to cast aspersions at Mayberry’s integrity in the offer price, is far too unfortunate as there is no evidence to suggest that the broker is trying to milk funds from the proceeds. In fact Mayberry is not selling any of their holdings in the offer and indicates that they have no plans to do so in the future. The gains from their initial investment, is purely on paper at this time.

Critical facts: What are some critical facts? First off the shares are not overvalued. An honest comparison with other listed companies will show that there are none that have the potential to grow as fast. The writer makes some unfortunate comparisons with JMMB and Scotia Group. The former has no chance of growing anywhere close to Access while Scotia Group’s possible growth is around 15-20% per annum. Those who fully understand share valuation know that the higher the growth rate, the higher the valuation.

The market targeted provides very high profit margin not even credit cards offer these margins. The history shows that the company has had very little bad debt even while lending to the riskier clientele. The market here is huge.

Big profit jump: Most importantly, Access earnings for last year, which came in at $69 million, was earned after writing off amounts incurred as loss of funds due to theft of $17m. When the earnings are adjusted for such losses and the tax free profits are factored in, then the earnings last year is around $3 per share. At $18 per share, the PE is 6, a little higher than the market average. But look what is happening in 2009. For the 6 month period from January to June 2009 the Company recorded total revenue of $151 million, an increase of 47% over 2008. Pre-tax net income for the period was $37 million, a 205% increase over the previous year. These 2009 figures clearly indicate that earnings for the full year should jump sharply, all things being equal. By my recognizing earnings for the full year could exceed $100 million or $4 to $5 per share. At just over $18 per share that a PE of 3 or 4, the shares are far from overvalued.

Stock to perform: Investors need also to be aware of the small number of shares that will be in the public’s hands that will exert upward pressure on the price once the company delivers. If management continues to keep bad loans at bay the way they have done so far, the sky is the limit. Investors in the stock will be extremely happy as the return on their investment will far exceed any other stock on the market. Investors who refrain from buying the stock are making a grave error if they really think it is vastly overvalued as the article suggests.

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READER RESPONSES to above:

warren
10/18/2009 8:47 AM

I profoundly disagree with John’s assessment of Access.
John has sought to suggest that the stock is fairly valued, but his assessment is based on future value of existing stock.
I cannot see how one could be willing to be $18.43 per share today, which is what the stock should probably be valued 4-5 years from now.
One never knows what the future hold especially in the financial market hence should never pay so much upfront especially for an IPO.
John has failed to look at the fact the growth rate of this company is most likely to fall once it has gone public, due to a different type of corporate structure and reporting requirement required for a public vs a private company.
The “new” company is likely to be more conservative in risk taking position thus likely to slow down its growth rate.
Based on the above I see the growth rate slowing down, making those who purchased this stock at this inflated rate, likely to lose at least 60% of its valuation weeks are listing.
If Access intends to sustain a pretty good growth rate, it means plowing back the profits into the company, which virtually assures that the investor has no dividend to receive at least in the first 2-3 yrs depending on management plans.
If access intends to pay dividends, this alone means less retained profits to be used in the expansionary mode, this slowing its growth.
Regardless of what John thinks, asking investors to pay so much upfront for a future value which may be justified in the next 4yrs, means investors are in for a raw deal.
I will look to buy when the stock reaches a value lower than its net current assets, which lowers my downside losses.
Persons who bought this stock at 4.35 its net current assets, have zero protection on the downside losses, and are likely to suffer very serious losses once trading begins.

Overvalued IPO
10/18/2009 9:10 AM

This stock is priced at 4.35 its book value per share, meaning it is 4.35 times its net current assets or put another way 4.35 its valuation.
Scotia Group on the other hand @ $17.96 is valued at 1.21 price to book. Scotia group earns close to a billion dollars in profit each month and pays close to a $1.00 per share in dividend each year.
Now access is being offered at a price of $18 per share, a price which is not only greater than a well run and profitable company as Scotia current price of $17.96, but at a value is almost 4 times higher than Scotia, amazing.
Price is what you pay, value is what you get and I fail to see one getting value out of paying $18.43 per share for such a small company as Access.
Personally I would not buy this stock for more than a price to book of 0.75 , which works out to just about $4.60 per share.

Orane
10/18/2009 9:12 AM

I looked over their prospectus the very day it was released and came to the very same conclusion that this price is pie in the sky!! I have a degree in Finance and I invest in companies on the JSE including Mayberry and I think this is a sad day in IPO valuation. They had the opportunity to set the standard for the Jr. JSE and they are muggin it up.
The conclusion I draw from their pricing is that they take the Jamaican investor for idiots, like so many companies in Jamaica. And they are playing on peoples greed. I would love to invest in this company and if it hits the market I will wait for the price to realign to it’s proper valuation before buying.
Mayberry’s behaviour is nothing new as mentioned in the article beyond CCFG look what they did to Salada over the from 2007-08 even though they had no hope whatsover of taking over the company because the majority share holder refused to sell they kept on putting news out into the market about them taking it over. This drove up the price on Salada shares to on speakable heights for a company barely eeking out a profit and not paying any dividend. Salada had to enact a split to create liquidity and something of a normal valuation. Mayberry is a hype machine and this is coming from an investor.

Mark
10/18/2009 12:01 PM

John, I hope you are not doing a favor to yout friends at Access and Mayberry. What you have written about Access share price is pure nonsense. The price is grossly overpriced.
IF THERE WAS AN AWARD FOR FINANCIAL NONSENSE, BASED ON WHAT YOU WROTE, I WOULD NOMINATE JOHN JACKSON!!!

.Mitchell
10/18/2009 5:46 PM

John shame on you, this is the worse crap I have heard since CASH MINUS and OFLINT. How can you look at yourself in the mirror? Bro you and your organization are worst than the THREE CARD man.
Now where the hell is the FSC dont they see the fraud that is been perpetuated on the nation. This is corporate malpractice. SHAME ON YOU ALL

nigel
10/18/2009 7:26 PM

Access financial may have great growth potential, but not great valuation just yet. This is a IPO for the balance sheet valuation somewhere else as an Associated Company. The Lead Broker could have done a better job with this IPO in more ways than one. There is no long term benefit from this IPO and all the initial investors in this IPO will lose money. The stocks will be bought back from the market when the price of the shares hit rock bottom. That is a strategy.

spectator
10/18/2009 7:49 PM

No value. I will repeat, NO VALUE

warren
10/18/2009 9:17 PM

Mayberry is reporting that this IPO has been oversubscribed!!

denise
10/18/2009 10:50 PM

Mr. Jackson everyone has a right to his or her opinion, you Sir should have done your homework. I am not a stock broker, but I was interested in the offer and did my research, after reading the Prospectus I decided not to take up the offer.
Look at likely future earnings, the future of Access Financial looks BAD. WHAT IS THEIR BUSINESS?????? SUB-PRIME LOANS. In the USA a company such as this would be called a predatory Lender.
The business model looked okay 3 to 4 years ago, but now it just looks dismal. Most of the clients the foward looking statement alludes to are people who live paycheck to paycheck. With all the talk of layoffs and cutback in the Jamaican economy, how does the principal of Access expect their business to grow?
One point made in the prospectus is that Government does not regulate this particular company, and therefore they can keep their interest rate on their products higher. Look at the percentage of bad loans recorded for 2008, and then compare that to the 9.09% projected non-performing loans in the prospectus. Come now Mr Jackson, does this sound right to you?
How is the market huge when this company’s business model caters to small and micro business sector? Take an informal survey on how many micro business have pulled down their shutter since the year started.
If i did not have access to information I might have called you for guidance as a stockbroker.,what a disappointment that would have been.

Navek
10/19/2009 8:17 AM

Does anyone still have the Mayberry IPO. Well it is the same way before they go public two years before they have a MASSIVE growth. I read the ACCESS IPO and and decided that i would wait or investigate the financial details. I am in a WAITING mood

Chris Berry
10/19/2009 9:46 AM

Orane,
Your recollection of what happened with Salada is not correct. The current owners made an offer to purchase the outstanding shares of the company, we made an offer which was substantially higher than the current owners offer. At the time many said our offer was too high yet the price passed our offer and remains substantially higher to this day. We sought to purchase an undervalued asset and we were unsuccessful in acquiring it.

Cairy
10/19/2009 11:15 AM

John – A couple of quick questions for you and possibly the Observer. Who is responsible for regulating financial analyst commentary on securities in Jamaica? Are there any rules around disclosure either for the publisher or the analyst? Don’t you think regulation in this area would be welcome? Comments from the BOJ, FSC, FDIC or the JSE would be welcome.

KLE Group — to buy or not?

KLE Group’s entertainment hot spots may be great places to let one’s hair down after a long day but are the shares, placed on the market late last year, good for one’s pocket and peace of mind? That was the challenge many investors faced when the company placed 27 million shares on the market, which was snapped up with great speed. But judging from the small 13 percent level of oversubscription and 198 applicants, seasoned investors had a different picture from that of the promoters and the principal owners.

In 2008, seven young Jamaican entrepreneurs are said to have had a world-class vision to create a unique blend in the local entertainment market-place, thus was born the hybrid lounge/club — Fiction — a new addition to Kingston’s night-life with its über chic design, lavish, intimate VIP booths, premium audio visual equipment and first-rate bar experience.

To rave reviews and patronage from locals and some of the world’s top celebrities, the club imprinted the Fiction Lounge brand on the entertainment industry. The early success attracted one of the world’s most marketable and fastest athlete, Usain Bolt and the Usain Bolt’s Tracks and Records restaurant with its perfect blend of what is termed a “4 dimensional experience of touch, taste, sight and sound” brought together in the same location as the Fiction Lounge.

Expansion | Having raised the desired capital, the KLE Group is to expand into other related ventures including a theme park and villa community on the north coast. The ventures include the following collaborative projects highlighted in the IPO.

“The Secret Room”, said by the promoters to be the first of its kind gaming lounge will be operated in conjunction with Supreme Ventures Ltd., and strategically positioned between Fiction Lounge and Usain Bolt’s Tracks and Records restaurant.

Night life in the second city, Portmore, will be catapulted into a new experience with a coliseum style nightclub to be named FAMOUS. KLE said that the more than 6,000 sq. ft. setting will be decked out with LED screens, projection walls and “unparalleled décor, sound and lighting” that will create an unforgettable nightclub vibe.

KLE Group plans to add BESSA, a lifestyle themed villa community to be built in Oracabessa in partnership with Sagicor Life Jamaica. The 8 acre ocean and river front property will be the site of 45 lavish living spaces with 1 bedroom swim-up suites, condos and 4 bedroom villas.

The expansion plans sound impressive but these are yet to come on stream even as the risk associated with them seems higher than for many other ventures in the country and certainly, the businesses operated by the majority of listed companies.

Priced for future | The numbers in the prospectus did not read impressively and nowhere therein could one find information to justify the $3.70 offer price with a PE ratio around 17. The best that could be gleaned was a price below $2 each which would have been more reasonable.

It was fully priced to sales, which came in at approximately one time sales. That may not have appeared bad and was around the trading point for most of the junior market stocks. However, the price to net book value was 18 times, representing a huge premium over all other junior listed stocks. Cargo Handlers was the highest priced in terms of net assets at 6 times, based on the 2011 audited results.

Pan Caribbean Financial Services (PCFS), financial adviser and broker, indicated how they arrived at the price but unfortunately, investors were not privy to that information as it was not included in the prospectus. A spokesperson for the broker provided some clarification on KLE’s valuation as follows:

  1. DCF (discounted cash flow) methodology was used in computation.
  1. A discount rate of 23% – 26% was applied with terminal multiple of 4.5 – 5.0.
  1. This methodology was chosen based on KLE’s immediate prospects as outlined by the group.
  1. KLE is a true start-up and as such forward looking.
  1. Based on conservative estimates, we see KLE having earnings of between $50 million and $60 million next year.
  1. Any potential earning was excluded from Usain Bolt’s Tracks & Records’ expansion and franchising.
  1. Given the above, post IPO P/BV of 2.9x and forward PE of 6x-7x.

The main issue with this valuation is that the stock market has not priced in 2013 earnings for the vast majority of stocks. So why should that be done for what many see as a very a risky investment in KLE? But even if the company hits the profit target, at the upper end, based on present valuation of stocks, one would be looking at a price around $5 for a gain of a third, several months down the road. Interestingly, subsequent to this issue, there were two others. One, Paramount Trading came out in December at a PE of 3 times earnings before tax, with the price of the stock moving up in value, and before that, Consolidated Bakery (Purity) came out with what then appears to be a PE of 8, more or less in line with the Junior market valuation but has hardly moved up on price, having been barely oversubscribed.

One off cost | One possible hidden factor that could help is the administrative costs for 2011, which has some one off expenses that should not recur and therefore, stands to boost the bottom line, all things being equal. In addition to income and expenses attributable to the restaurant and Fiction Lounge, there were other corporate expenses not directly related to either. These included professional fees, categorized as enterprise management expenses paid to Neustone (provider of managerial and administrative services) in exchange for business development in relation to new and existing business opportunities for the company as well as other services.

If one thinks that Usain Bolt’s name was worth a fortune then his association with the brand may have compelled one to invest. After all, he had indicated his interest in stepping up his investment in the venture. Time will tell if his athletic prowess will be reflected in his financial skill.

Another issue  in the short run is that, so far, there is no evidence that the restaurant’s success to date has been significantly impacted by the worldwide name recognition of the world class athlete. Will it positively impact the fortunes of the company in the future? Only time will tell.

2012 Results | Subsequent to the above, KLE recently released full 2012 results with and reported a loss of J$13 million versus $7.7 million in 2011. In 2012 depreciation charge swelled to $20 million compared to $4.7 million in the previous year, while a $15 million reorganization cost was picked up in 2011. The stock which was issued to the market at $3.70 each last traded at $3.50 on April 4 but the offer is down to $3.20 with no bids as of April 24.

NCB to release post-NDX results today

Update | Click here to view NCB results posted on April 29, 2013

National Commercial Bank (NCB) is expected to release results today for the six months to March this year. This will be the first results for investors to assess the impact that the NDX debt swap of government’s bonds will have on profits. The expectation is for a big hit from the write down of the carrying value of the bonds that was in excess of the face value at which they were issued. At the end of 2012 NCB’s fair value reserves amounted to $1.8 billion. While all of this is unlikely to relate to government of Jamaica bonds, it gives an indication of the likely hit that could be taken against profits. The write down of the fair value reserves will be a one off event, more importantly, is whether the group will be able to adjust rates fast enough on various instruments it offers the public, to make up for lost income from government bonds that were swapped out for lower yielding bonds.

NCB is also expected to declare a dividend when the results are released. In March this year they paid 23 cents per share as dividend. It is unclear what amount will be declared today in light of the hit they took from the debt swap.

Other companies to release results shortly are Mayberry Investments, Barita Investments, Seprod, Grace, Sagicor Life and Sagicor Investments.

Kremi Cream IPO — a strong buy

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Update | The Kremi (Caribbean Cream) IPO was oversubscribed and closed earlier than expected on Wednesday May 1, 2013. Click here to read more . . .

Kremi (Caribbean Cream) racked-up 60% increased sales in the nine months to February this year, consistent with the historical growth of the company. If past history of revenue growth is anything to go by, the immediate future could be bright for the company and investors, who hold on to the stock after the company issues shares to the public officially on Thursday April 25.

The issue, in all likelihood, will be closed minutes after it opens as investors try to get hold of as many shares from a limited amount that will be available to the general public. Just about 68 million of the shares at a $1 each will be available to the general public, which includes 18.9 million reserved for Stocks and Securities Limited or their clients.

Kremi Ice-Cream is the brand; the company is Caribbean Cream Ltd, which started operations in 2008 just before the economic recession commenced.

While net asset value is a mere 15 cents per share — which is very high — the earnings per share work out at 15 cents for the year, it was 10 cents ending May last fiscal year. Investors Choice, a sister publication to ICInsiders.com, projects earnings of 39 cents for the 2013/14 year on the basis that revenues will continue to climb aggressively but at a slightly slower pace. Based on this year’s numbers, the PE is around 6, about the average of the majority of junior market companies. Revenues are growing very strongly and could accelerate if all the expansion plans and new machinery materialize. This suggests that there is considerable ‘upside’ for earnings and the stock value going forward.

Sales for the 2013 fiscal year to November were $462 million compared to $431 million for the full 2012 fiscal year and $289 million for the nine months to November 2011. That’s impressive, and if it continues for some time into the future, profits will increase appreciably. Listing will add some cost to overheads as listing fees and other associated costs increase with more shareholders.    

Earnings Growth | Caribbean Cream’s performance in fiscal year 2012 was impressive as turnover increased 47.44 percent to $431 million while pre tax profits more than tripled to $31 million. This year seems set to surpass 2012 as nine month numbers are already ahead of those for the prior year for the same period.

Pre tax profits for fiscal year 2010 slipped 19.7 percent to $5.3 million, mainly due to increased administrative expenses, which climbed 25.5 percent to $37.6 million; selling and distribution costs were up 47.1 percent to $7.5 million and finance costs rose 36.8 percent to $3.9 million—all costs associated with a planned expansion.

After fiscal year 2010, management invested in production, which helped to grow turnover by 38.2 percent to $292.3 million, and pre tax profits 36.2 percent to $7.2 million in fiscal year 2011, as net profit margin remained low. Gross profit margins have remained consistently above 25 percent for the last four fiscal periods.

The company is sensitive to changes in foreign exchange rates as they import most of their major ingredients. These fluctuations will impact its margins from time to time as input costs adjust accordingly.

Borrowings climbed in the November quarter on that of the prior year as well as inventory, which exploded no doubt to meet high Christmas demand and also to possibly counter the foreign exchange risk from devaluation. At the 2012 year end, debt to equity was almost 1:1 compared to 2.4:1 in the prior year.  As of November 2012, the ratio was slightly less than 1:1 even as borrowed funds climbed to $94 million.

The current asset ratio is low, well below norm, but the company over its recent history carries low levels of receivables and inventory except for except for an substantial increase in the amount tied up at November 2012.

Concerns | There were errors in the report of the auditors that were included in the prospectus. Clearly, the auditors, the executives, the board, brokers, the stock exchange nor the Financial Services Commission (FSC) picked up the errors. Some investors may well ask- if there are errors, could there not be more lurking in the dark?

I am recommending it as a BUY for this stock as the performance to date, suggests strong sales and profit going forward into 2014 fiscal year.

Kremi_Analysis