FESCO worth a buy-in

Investors need to separate investments that can make them money from a great investment to hold long term. It is against this background that the latest IPO should be viewed.
Future Energy Source Company Limited (Fesco) initial public offer is set to open on February 25, with 500 million shares for sale at 80 cents each, with 200 million units being sold by existing shareholders.
Of the total, 325 million units are reserved for priority applicants and 175 million for the wider public to list on the Junior Market. The shares are not a great investment on the surface, but an opportunity exists to profit from an investment in the short to medium term. If all the shares offered for sale are subscribed to, the number of issued shares will rise to 2.5 billion units and the company will collect $240 million before expenses for the portion offered by them.
Proceeds from the company’s subscription of shares will support the growth of the existing businesses and allow the company to pursue strategic investment opportunities and pay the expenses of the issue.
The company was incorporated in February 2013 and made the first fuel sale in November of that year. In 2014, the first FESCO branded service station was unveiled in Mandeville and have grown to fourteen branded Service Stations. Two additional service stations, are to be opened this year, one at Ferry on Mandela Highway by April and the second at Beechwood Avenue, St. Andrew in June.
”Our current market share for transportation fuel is approximately 4.65 percent (April 2020- September 2020) and is expected to increase to 5.3 percent by March 2021 and 7 percent by December 2021. We estimate that FESCO’s market share reflects three (3) main facts: a) we are a relatively new company (operating for just over six (6) years) whose initial strategy has been to grow organically rather than through acquisitions; b) as at September 2020, we have very little presence in the Kingston and St. Andrew (KSA) fuel market. Our KSA offerings are limited to FESCO Stony Hill and FESCO Rock Hall, both of which are in the more rural parts of St. Andrew; and c) the dominance of the multinational brands in the industrial and commercial space where they provide fuels to private clients”, the prospectus states.
”FESCO’s current market share of transportation fuels at September 2020 is 4.65 percent up from 3.8 percent in 2019 and 3.5 percent in 2018 and it estimates that its market share will increase to 5.3 percent by March 2021 and 7 percent by December 2021”, the prospectus further stated.
FESCO’s sales significantly outstripped the 2019 performance in litres sold. In fact, FESCO’s April through September 2020 sales in litres of transportation fuels sold is 6.6 percent ahead of its performance for the same period in 2019 despite the impact of COVID-19 and the overall market declining 13.9 percent.
FESCO is yet to enter the commercial or retail LPG market estimated at 13,957,716 or between J$1.5 billion to $1.9 billion monthly.
Revenues increased from $3.754 billion in 2016 to $5.94 billion in 2020 representing a compounded average growth (CAGR) of 12.1 percent.  Over the period, gross profits increased from $28.2 million to $178.3 million, with a CAGR of 58.6 percent. FESCO increased its gross profit margin to its dealers as its brands became more recognized and demanded by customers from 0.75 percent in 2016 to 3 percent in 2020.
From the 2015 financial year through to the 2020 financial year, average monthly volumes increased from 2,502 million litres to 3,743 million litres, a CAGR of 8.4 percent. Pre-tax profits increased by J$87 million or 172 percent to $137 million in 2020 up from $50 million in 2019.
Revenues over the period April 2020 to September 2020 was $2.811 billion down 5.84 percent from the comparative period of September 2019, a decline of $175 million from 2019 turnover of $2.99 billion. Profit before taxes for the period to September 2020 was $65 million, similar to that earned in 2019. The projection for revenues to March this year is $6 billion, with profit of $151 million for earnings per share before tax of 7 cents and a price earnings ratio of 11.4 that compares well to Tropical Battery that listed in January and now has a PE of 14.6. ICInsider.com forecasts 13 cents per share to March 2022 with the PE at 6 and the price rising to $2.50 by then.  The prospectus was withdrawn due to projections to 2025 that appears to overstate the forecasted administrative costs by approximately $100 million per annum.
The company’s financial status strong with Shareholders’ equity at the end of September at $255 million, borrowings amount to just $63 million and cash on hand of $99 million.
First, the negatives. If the company succeeds with the IPO, it will have the largest board of directors of any Junior Market company, with 11 members. That is a great sign of management weakness. Grace Kennedy and NCB Financial have nine directors, while Scotia Group has 11. Those are vastly bigger and more complex entities that FESCO. The company relies solely on distributors for revenues in a sector that has been subject to industrial disputes from time to time and government regulations. Gross profit margin is primarily subject to worldwide price fluctuation in global petroleum prices.
On a positive note, the downturn in demand for petrol seems to be easing and should help boost revenues in the immediate period ahead. This year’s opening of two new service stations will help grow revenues by ten to twenty percent in a full year. One of the new stations will be owned and operated by the company. The company is relatively small, commanding less than 10 percent of the market, leaving much room for above-average growth with good scope for gain in market share. Additional, with the local economy poised to grow that, should aid growth as well.