Financial Adviser: 5 Things to Know About the IPO of Kepwealth Property Philippines
Property investor Kepwealth Property Philippines (PSE:KPPI), Inc is the first company to go public this year after it recently obtained approvals from regulators to raise P384 million in an initial public offering (IPO).
KPPI will sell 67 million new shares to the public at a price of P5.74 per share. The new shares will be equivalent to one-third or 33.3 percent of its total equity after the IPO.
The offering period of KPPI shares is from Monday, August 5, to Friday, August 9, with a target listing date on August 19, 2019. The KPPI shares will be listed on the Small Medium and Emerging (SME) board of the PSE.
The expected market capitalization of KPPI at IPO price will be P1.2 billion. The small size of the IPO offering is not likely to get significant research coverage from institutional brokerage houses.
The lack of analysts following KPPI will keep the company off the radar screens of institutional investors, which may limit any upside potential of the IPO.
Nevertheless, a small cap IPO, because of its speculative nature, may still offer some trading opportunities in the future. Bear in mind that when you trade the stock, you are also investing in the business.
It may be wise to spend some time understanding the business of KPPI and evaluate its growth prospects.
Once you are aware of the fundamentals of the company, you will have a better handle on the risk and return that you can expect from investing in the IPO.
Here are the top five things every investor needs to know about Kepwealth Property Philippines, Inc’s IPO:
1. Know the background of the company
KPPI is in the business of investing and leasing office space.
The company currently owns 77 office condominium units of Kepwealth Center, a 15-storey, PEZA-accredited, commercial building located in Cebu City.
Kepwealth Center, previously known as Keppel Center, is one of the first buildings to be constructed in Cebu Business Park, which was developed in the early 1990s.
The building, which has a total floor area of 18,126 square meters, stands on a lot area of 2,615 square meters. It was acquired by Keppel Bank when it took over the ownership of Monte De Piedad in 1997.
It was only in 2017, 20 years later, when a group of investors led by Euro Capital Land, Inc acquired KPPI, which owns a bulk of the units in the building through share-purchase deal with Keppel Group for P793 million.
The investors of KPPI are composed of three families, namely, Roberto B. Olanday’s family, which owns a combined stake of 37.6 percent through Euro Capital group; Ignacio B. Jimenez’s family, 56.4 percent; and Edmundo G. Las’s family, six percent.
2. Know the business model of the company
The main revenue driver of KPPI is its rental fees from its investment properties, which generated P81.8 million based on 2018 income statement.
Aside from the leasing of office spaces, KPPI is also in the business of asset management of commercial and residential properties.
Only a few months ago, in March 2019, KPPI entered into five-year agreements for the management of 459 units in several building condominiums in Metro Manila.
Some of these buildings include the Oxford Suites, Medical Plaza Ortigas, Burgundy Corporate Tower and Luxe Madrigal.
The total monthly revenue from service fees of the asset management is estimated at P1.3 million, which contributes roughly 15 percent of total revenues.
3. Know the financial track record of the company
KPPI’s revenues have been growing by an average of 7.4 percent since 2016, from P70.8 million to P81.8 million in 2018.
Net income growth, however, has been slower due to rising administrative expenses.
In 2017, net income rose by 7.7 percent to P34.7 million from P32.2 million the previous year. In 2018, net income declined by 1.1 percent to P34.3 million.
Net income margins, as a result, fell from 45 percent in 2016 to 42 percent in 2018. This year, based on first quarter results, margins further deteriorated to 38 percent.
KPPI is relatively financially stable with practically no debt. The company is also awash with cash of P87 million out of P95 million worth of current assets compared to current liabilities of only P37 million.
It is expected that after the IPO, the company will further improve its cash position to over P400 million. The large cash reserves may also help the company increase its net income this year due to higher interest income.
4. Know the risks and opportunities of the company
The challenge of KPPI is how to generate good returns from its investments.
KPPI plans to use 67 percent of its expected P365 million net proceeds from the IPO to acquire leasable office spaces in Metro Manila, particularly in Quezon City, Pasig City and Makati.
The balance of the proceeds, which is P120 million, shall be spent in acquiring office properties in Davao City.
Based on the rental revenues generated by existing properties of KPPI, using the actual acquisition costs of the properties at P793 million, the rental yield in 2017 was 9.5 percent.
This increased to 10.3 percent as rental rates escalated in 2018.
If the current bond yield of six percent is used as cost of capital, the investment returns are acceptable as yields exceed opportunity costs.
But this situation in Cebu City may not be the same when KPPI starts investing in Metro Manila. Higher investment costs of office spaces in prime areas and competitive rental rates may result in lower yields.
Lower rental yields coupled with rising administrative costs mean lower net income growth prospects.
5. Know the prospective valuation of the stock
Based on the first quarter earnings of the company at P8.7 million, the projected core net income for this year will probably be around P35 million.
Let’s assume the company will earn an additional P20 million in interest income from the IPO cash proceeds. The total prospective net income could be around P55 million.
Using post-IPO shares outstanding of 201 million, the earnings per share of the company for this year are estimated at P0.27.
Given the IPO price of P5.74 per share, the prospective Price-to-Earnings (P/E) ratio of KPPI is expensive at 21 times, which is 32 percent premium over market average of only 16 times.
The high premium may be too much for a 20-plus year old, 15-story building single asset company with limited growth prospects.
Moreover, the prospective Price-to-Book Value (P/BV) ratio of the stock is about 2.28 times, which is relatively high compared to market P/BV median of 1.6 times.
Again, the premium of P/BV of the stock may be too high considering the expected decline of its return on equity to 10 percent or less after the capital expansion from IPO.
Given the size of the offering, limited growth prospects and expensive pricing, it will be better to wait for the stock to be listed before making any decision to trade.