Differing market valuation on TransJamaican Highway IPO pricing


Differing market valuation on TransJamaican Highway IPO pricing

Wednesday, February 12, 2020

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So far there have been three market valuations on the pricing of TransJamaican Highway (TJH) Initial Public Offer (IPO), with one suggesting that it's over-priced while the other two concluded that the shares are being sold below their fair value price.

Investment and brokerage firm, SSL Investment and NCB Capital Markets have done separate market valuation, which revealed that the IPO price is below fair value. However, these two valuations run counter to one done by financial analyst and company director, John Jackson, who concluded that at the IPO price of $1.41 or US$0.01, the shares are over-priced.

In his assessment Jackson, concluded that the IPO price works out at 1.3 times book value with shareholders' equity amounting to $95 million, borrowings at $245 million inclusive of nearly US$20 million in preference shares. Thus, putting the debt to equity ratio at a high 2.6.

Jackson published on his IC Insider.com online media outfit that, “the stock at the offering price is well ahead of the average of 16 for the market based on 2020 earnings. Investors in the IPO are taking on a considerable risk of a pullback in the value of the stock when things settle sometime after listing.”

The markets valuation done by SSL Investment and NCB Capital Market not only show a discounted IPO price based on the fair value assessment but a recommendation that investors buy into TJH IPO. In its independent market assessment of the IPO, SSL Investment reports that TJH'S shares are being offered at approximately 11% below its IPO offer price.

The SSL analysis determined that TJH's fair market value per share is around $1.56 or US$0.0111, thereby resulting in the shares being offered at approximately 11% below the fair market value. TJH's growth rate decreased from approximately 14% in 2018 to 1.6% 2019.

SSL's assessment showed that if TJH's revenue for 2020 rebounds from a 1.6% growth rate to at least 5%, the company's fair market value could be as high as $2.54 or US$0.018 from the current analysis of $1.56 or US$0.0111.

The TJH IPO valuation report stated, “SSL recommends this investment as a long-term buy for investors who wish to take part in purchasing in the medium-to-long term. This investment may also provide some price appreciation in the short-term. Interested persons should speak to a financial advisor at SSL to find out how this aligns with their needs and fits into their portfolio.”

Though TJH leverage is high and net profit relatively low, SSL says it “does not believe that this will negatively affect the fair market value and its ability to pay dividends or finance their debt. This is due to the fact that the company has a steady cash flow, on a pay as you go basis, which is expected to increase over the next 16 years.”

For its part NCB Capital Markets, which is the lead broker for the IPO in its analysis placed a fair value estimate of US$0.012 or J$1.71 per share, which represents a 21.4% upside to investors.”

NCB Capital Markets estimates that TJH is able to support an annual average dividend payout ratio of 43% to 85% of accumulated earnings based on its stable and predictable cash flows, projected earnings, and financial demands

According to NCB Capital Markets, “this could result in dividend yields ranging from 5.3% to 8.7% over the next five years and as high as 24.5% to 35.8% thereafter. Furthermore, with an internal rate of return of 14.1%, the stock offers returns above our estimated cost of equity of 12.5%.

Considering these factors, NCB Capital Markets concludes that, “the stock offers the potential for above-average returns for its associated risks and, as such, we recommend that investors participate…” TransJamaican Highway IPO opens February 17 with the aim of raising upwards of at $14.1 billion.

The IPO closes on March 9.

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