Come Monday March 3, the Margaritaville Turks IPO opens to the public with 21,156,555 ordinary shares on offer at a price of 10 US cents per share payable in US dollars. The IPO aims to raise US$2 million through the issuing of 5,260,740 new shares with the company pocketing the net proceeds. The remainder are existing shares being sold by the parent company Margaritaville Caribbean.

If the issue is successful in selling the minimum amount of 13.5 million shares, they will be listed on the main market of the Jamaica Stock Exchange. The company, incorporated in the Turks & Caicos Islands, now has 62,239,259 issued Ordinary Shares to Margaritaville Caribbean. After the issue, it is expected that the issued shares will climb to 67.5 million units and the ownership of the parent will fall 69 percent. The company is a small one with equity of US$3 million but the only debt are amounts due to creditors of $725,000 and current assets of only $841,000.

Value | For the six months to November 2013, revenues climbed by a strong 38 percent to hit $2.74 million with profit more than doubling to $442,000 and should be approximately US$900,000 for the full year to May 2014. For the year ending May 2013, revenues fell to $4.5 million from $4.79 million in 2012 with profits of $598,000 down from $880,000 in 2012.

Revenues were $4.86 million in 2011, $4.3 million in 2010 and $3.55 million in 2009. Profits during this period have not grown in line with revenues, with profit of $842,000 in 2011, $943,000 in 2010 and $1 million in 2009. No doubt the global downturn had a negative impact on the operations. The worsening profit out turn is tied to slipping margins, which was mostly in the 170 percent range between 2010 and 2011 but fell to 143 percent in 2012 and 105 percent in the 2013 fiscal year, and a recovery to 156 percent in the latest six month period as at November 2013. The level in the November quarter slipped to 149 percent.

The six month earnings to November 2013 work out at 14 cents per share with the PE ratio at 7 times earnings, a bit rich for main market companies. This is like a junior market listing. As such, the valuation is in keeping with those smaller companies.

US$ earnings | As the earnings are in US dollars, many investors may see much more in the IPO than the real numbers suggest. The shares are priced at 2 times book value, which is not out of line with many companies of similar size on the market. In fact, the net book value valuation is below several junior market companies and is selling at roughly one times sales, which seems to be on the high side compared with the majority of listed companies. The above suggests that investors may have to wait sometime for a rich payoff.

There is added risk | For one, the company has managed to cut cost of sales by what it says is “renegotiated price from suppliers” but this cannot go on forever. A positive is that revenues are up in 2013. Income is highly dependent on one location in a small territory, the Turks & Caicos, and continuity is subject to lease arrangements with Carnival Cruise Lines, the only cruise line doing stopovers at that location. The success of the business is highly dependent on visitors coming to the island by cruise ship and the facility is only open on those days that ships are in. In other words, absent the ships, absent the business.

The company appears to have business interruption insurance coverage for a major catastrophe, but it’s unlikely to cover any downturn flowing from less customers going on cruises. This doesn’t seem to be a problem in the short run with the increased revenues generated to date and the promise of increased visitors in 2014, but could occur at any time.

The Directors are planning to roll out a new Margaritaville menu early in calendar year 2014, which aims to increase average consumption per customer. The Directors also anticipate growth in the Company’s revenues in future, given the following factors:

1. A continued increase in the number of ship calls to the Grand Turk Cruise Centre destination.
2. Increase in the number of passengers visiting the Cruise Centre. Data received from the Carnival Corporation show an estimated 750,000 passengers sailed to Grand Turk and the number is expected to reach 1 million in calendar year 2014 based on pre-bookings.
3. The addition of 4 new bars, and the upgrading of existing bar outlets, the addition of a new revenue centre with introduction of the new casual “Grab N Go” convenience dining concept, the opening of the South Beach Bar and Grill, which the directors anticipate will provide an alternative option for passengers who prefer a more sedate dining environment to that of the Company’s main restaurant, Margaritaville.
4. The expected improvement of the Company’s average customer spend resulting from upgrading of remote point of sale (POS) system introduced in calendar year 2013, that facilitate the order process for customers’ convenience.

The Company is a part of the Margaritaville Caribbean Group and a wholly owned subsidiary of Margaritaville Caribbean. The Group operates the Margaritaville chain of restaurants in various Caribbean destinations, inclusive of the flagship restaurant in Montego Bay. The IPO listing will only offer shares in the Grand Turks-based cruise pier operation.

The stock may not take off big time in the short run, but it provides a means for investors to diversify their portfolios if they are prepared to accept what appears to be higher risk.