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5 Things to Know About the Villar Group's AllHome Corp IPO

The Villar Group's home furnishings retailer is scheduled to be the third company to go public this year.
ILLUSTRATOR Roland Mae Tanglao
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Home furnishing retailer AllHome Corporation (PSE: HOME) will be the third company that will go public this year after it recently obtained approvals from regulators.

HOME initially planned to raise up to P20.6 billion by selling up to 1.29 billion shares to the public at a price of P16 per share. But after the initial book building activities, HOME lowered its offering price by 28 percent to P11.50 per share to attract more investors to subscribe to the IPO.

The lower IPO price will reduce HOME’s initial target proceeds of P20.6 billion to P14.8 billion, representing 34.5 percent of the company.

The offering period of HOME shares is from September 30 to October 4 with a target listing on October 10 on the main board of the Philippine Stock Exchange. The expected market capitalization of HOME at final IPO price of P11.50 per share is set at P43 billion.

Because of the risks that are associated with new stocks, it is always important to spend some time understanding the business and its growth prospects before you invest. Once you have done your homework, you will have a better idea of what you are getting into in terms of potential loss and gain.

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Here are the top five things every investor needs to know about AllHome Corporation’s IPO:

1. Know the structure of the IPO offering

HOME is raising P12.9 billion by selling 1.125 billion shares to the public at an offering price of P11.50 per share. About 67 percent of the offering or 750 million shares shall be issued by the company in the form of primary shares, which means that the proceeds of this sale amounting to P8.6 billion shall go to the company.

The balance of 33 percent of the offering or 350 million shares shall be sold in the form of secondary shares, which are held by All Value Holdings, the majority and controlling shareholder of HOME. There is also an overallotment option of 168.75 million shares that All Value Holdings can sell in case of high demand for the IPO amounting to P1.94 billion.

In total, if all shares are subscribed including the overallotment options, HOME can raise a total of P14.9 billion by selling a total of 1.29 billion shares, representing 34.5 percent of the company. Out of this total amount, only 58 percent or P8.6 billion that will be raised from primary shares will be invested in the company for expansion.

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2. Know the business prospects of the company

HOME is positioning to be a pioneering “one-stop shop” home store in the Philippines from home building to furnishing. The company has been growing steadily in the past six years since it was formed in 2013 with 27 stores to date or total net selling space of 215,994 square meters across 22 cities and municipalities.

HOME is majority-owned and controlled by the Villar group of companies under the leadership of former Senator and business tycoon Manny Villar. Through its strategic relationship with Villar Group of Companies, HOME aims to capitalize its affiliation with Vista Land (PSE: VLL) and Golden Bria Holdings (PSE: HVN) for expansion.

The Villar Group has a land bank of over 3,000 hectares across the country and is one of the largest integrated property developers in the Philippines with a presence in more than 145 cities and municipalities nationwide.

HOME currently has a pipeline of 20 sites for new store openings in the second half of 2019 and another 25 sites next year. The total number of stores of HOME is expected to increase to 70 with a total net selling space of 460,188 square meters by end of 2020. The company has allocated 43 percent of the proceeds from the sale of primary shares to fund store expansion and working capital requirements.

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3. Know the financial track record of the company

Rapid store network expansion has enabled HOME to increase its revenues in 2017 by 42.7 percent to P4.9 billion from P3.4 billion in 2016. HOME’s operating profit margin also improved from 1.8 percent in 2016 to 2.6 percent in 2017. The improvement in margins coupled by increase in revenues boosted HOME’s net income to grow by more than six times from P5.2 million in 2016 to P34.1 million in 2017.

In 2018, the opening of five new stores, which increased total net selling spaces by 32 percent, further boosted HOME’s total revenues by 46.9 percent to P7.2 billion. The increase in total revenues, which was supported by a sustained improvement in operating profit margin to 7.9 percent, increased HOME’s net income by almost five times to P164.8 million.

This year, HOME reported that its total revenues for the first half increased by 67 percent from P3 billion last year to P5.1 billion, enabling its net income to increase by almost four times to P434 million from P110 million in 2018.

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Based on the strong performance of HOME this year, it is projected that its total revenues this year could reach P12 billion with net income of P1.5 billion.

4. Know the risk and opportunities of the company

Although aggressive revenue growth of HOME was impressive over the past years, it was notable that its accounts receivable has also increased from 13 percent as percentage of sales in 2016 to 16.6 percent in 2018.

Because of this, write-offs of uncollected receivables have tripled to P19.4 million in 2018 from P5.8 million in 2016. The amount, however, represents only 0.3 percent of sales and 1.6 percent of accounts receivable balance.

HOME’s expansion also increased its total inventory by more than four times to P2.7 billion in 2018 from P668 million in 2015. The increase in inventory slightly slowed down the average turnover from 128 days in 2016 to 151 days.

HOME’s total debt also increased as a result of the expansion from P200 million in 2015 to P4.3 billion in 2018. This led interest expenses to increase to P46.4 million from P21.9 million in 2016.

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For the first six months of this year, HOME’s total debt has ballooned to P4.65 billion as interest expenses further increased to P177.8 million. HOME announced that it plans to use the 57 percent balance of the proceeds from sale of primary shares to pay off its loan balance of P4.65 billion.

It is projected that after the IPO, HOME will be practically debt-free with a strengthened financial position.

5. Know the prospective valuation of the company

The increase in receivables and inventories of HOME over the past three years has resulted in negative operating cash flows from P465 million in 2016 to P250 million in 2018.

The operating cash flow, considered to be the lifeblood of the business, indicates the capacity of a company to generate cash from the business. As an indicator of earnings quality, the operating cash flow is used to compare with reporting income.

Historically, PSE stocks tend to trade with higher P/E multiples when their operating cash flows are higher than their reported net income in 18.5 percent of the time. Unless HOME’s operating cash flows start to turn positive in the years to come, the stock’s premium valuation may be limited.

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Assuming we project HOME’s revenues to grow by 50 percent to achieve net income of P1.8 billion, the stock’s prospective P/E ratio will be about 23 times, which is 35 percent higher than market average of 17 times.

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Henry Ong
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