JFP ipo requires careful thought

Jamaican investors will get another shot of investing in a new initial public offer of shares when JFP Limited issue of 280 million ordinary shares opens on February 21 at a price of $1 each on the Jamaican market as the second such issue for the year to date.
The company, a custom manufacturer of furniture was formerly operated as Jamaica Fibreglass Products Limited, up to December last year. The Company manufactures furniture for offices, hotels, restaurants and laboratories, schools, point-of-sale items and boasts many large companies in Jamaica and internationally as customers. “Historically, the Company’s revenues have been derived from the hotel industry, government agencies and restaurants. Combined, these three (3) industries have been the source of an average of 72 percent of revenues for the past five (5) years with one third of the Company’s revenues being earned from the restaurant industry,” the prospectus states.
The share offer is set to close on February 28, with such a small amount is expected to close earlier. Half of the offering is being sold by one existing shareholder, with the balance of 140 million units is offered by the company, with the proceeds to boost working capital to enable it to mobilize efficiently and take advantage of more opportunities for revenue and profit growth.
The company is slated to list on the Junior Market of the Jamaica Stock Exchange shortly after the offer closes. A total of 111.6 million of the shares are Reserved Shares, not initially available to the wider public. The company currently has 980 million shares issued and after the issue closes will end at 1.12 billion units.
The prospectus states that the directors intend to pursue a liberal dividend policy that projects an annual dividend of between forty percent and eighty percent of net profits available for distribution, subject to the need for reinvestment in the Company from time to time.
Metry Seaga is the Chief Executive officer and Ian Levy is the chairman of the board that comprises seven members in total.
Historical operating performance has not been all perfect with sales declining between 2016 and 2018 from $285 million to $244 million with negligible profit and loss, but sales rose to $503 million in 2019 and slipped to $443 million in 2020, but profit before tax rose to $69 million from a small $2 million loss and climbed further in 2020 to $83 million. While profit to September 2020 amounted to $87 million from revenues of $312 million but profit dropped to a mere $4.8 million from sales of $210 million for the nine months to September last year.
Indications are that revenues could get back to the $400 million region, in 2022 and profit around $75 million for earnings per share of 7 cents. With the company producing to order there are likely to be swings in revenues and profit that could result in big swings in the price of the stock. Of course, results could be better or worse as past results show.
Gross profit for the 2020 financial year was $233 million and was flat compared to the year prior.  Gross margins increased from 46.5 percent in 2019 to 52.5 percent. The prospectus stated that improved margins were due to a reduction in staff complement and streamlining its importation process as well as sourcing material locally where possible. Over the past five years, gross margin averaged 52 percent.
The Company’s revenues from contracted work for the nine (9) months to September last year was said to be delayed as a result of multiple unforeseen contract delays caused by the Covid-19 pandemic and the various COVID– 19 containment measures reduced the number of working hours which slowed the production and completion of work. The expected revenues from these delayed projects were $81 million.
The company reports a pipeline of $255 million in contracts for the nine months to September this year and includes a $153 million contract awarded to the Company to manufacture and outfit the check in counters and baggage scales at Sangster International Airport in Montego Bay, slated to be completed in the September quarter of 2022 and $32 million in revenues remaining to be recognized from a contract to furnish the ROK Hotel to be completed in the second quarter.
Investment in the stock carries added risk, but it is well noted that the last two Junior Market listings are trading well over the market average of 17.5, based on 2021 earnings and 10 times 2022 projected earnings, with Future Energy Source trading at an incredible PE of 40 times last year earnings and 29 times 2022/23 earnings, with Spur Tree Spices at 28 times last year’s earnings and 16 times that of 2022, both having strong medium term growth prospects.
There are distinct differences between the two previous listings and the latter. The former two have a very clear path that suggests fairly consistent growth, the same is not so for JFP as such the latter should trade at a discount to the former in a rational market.