Four brokers have given their recommendation on the multi-billion-dollar additional public offering (APO) by 138 Student Living Limited (138SL) which is set to close by October 6, barring any extensions of the offer.

Cumax Wealth Management Limited has given the most bullish price target of $6.10 with an overweight recommendation. This price target was determined using the average of the cash flow to equity and forward earnings per share (EPS) methods which yielded $6.35 and $5.85, respectively. The broker highlighted that 138SL is continuing to reorganise and re-engineer its business and the APO will strengthen its balance sheet.

“The primary risks to the price target include external shocks that would result in a disruption in face-to-face interactions. In addition, external shocks to the global markets and local economy, which would result in increased instability or volatility in the financial markets that adversely impact interest rates and foreign exchange rates,” the Cumax report stated.

JN Fund Managers Limited (JNFM) gave an estimated fair value price of $5.96 which was derived from price to book (P/B) and price to earnings (P/E) methods. The investment positives highlighted included the proof of concept and track record, the concession agreement for long-term revenue and the debt reduction increasing the possibility of sustainable dividends. However, the investment negatives included potential construction risk, exposure to UWI, natural disasters and the level of interest rates increasing the difficulty of raising equity in capital markets.

“However, it’s worth noting that current market conditions and relatively weak investor sentiments towards the equity market may present challenges for the group in meetings its expectations, with this offer impacting the reduction in its interest costs and future dividend payments. Our estimated fair value of the 138SL shares is $5.96, which implies that the shares in this APO are being offered at a discount of 26.17 per cent at its offer price of $4.40. Based on the aforementioned, we recommend that investors participate in this offer and assign a medium- to high-risk rating to the stock,” the JNFM report mentioned.

While Sagicor Investments Jamaica Limited’s gave the offer a participate recommendation, it had the lowest target price of $4.61. It noted that the company faces limited competition within its niche subset of real estate and that lower debt helps in increasing dividend payments to shareholders.

Proven Wealth Limited (PWL) was the only broker to not recommend investors participate in the offer with a P/E valuation price of $4.32. Some of the positives highlighted included the diversification benefit, the growing tenant diversity, indexation of hall fees and high product demand.

While the APO is expected to cut interest costs and give 138SL the room to have an eight to 10 per cent dividend yield, PWL’s report noted the unreliability of ordinary dividends while comparing the existing yield of 8.5 per cent on its preference shares. It noted that the dividend yield on the ordinary shares should be higher given the ranking of the preference shares on 138SL’s capital structure.

“Additionally, the stock is tightly held as 89.06 per cent of the shares outstanding is concentrated within its top ten shareholders, which limits liquidity and the chance of capital gains by extension. The dividend prospect is also weak based on historically low cash, working capital challenges and the lack of consistent dividend payment history. For these reasons we recommend investors DO NOT PARTICIPATE,” the PWL report stated.

The offer is seeking an initial subscription of $2.15 billion subject to a maximum upsize target $3.23 billion with reserved shareholders able to purchase shares at $4.05 and the general public able to purchase at $4.40. Around 60 to 70 per cent of the funds will be used towards reducing the company’s debt, 25 to 36 per cent towards new investment opportunities and the remainder to transaction costs.

The 138SL’s stock price is down 0.69 per cent in September and 13.60 per cent year to date to $4.32 which gives the company a market capitalisation of $1.79 billion. The company’s trailing 12-month EPS was $0.84, which gives it a P/E ratio of 5.14 times. The book value of $11.51 gives it a P/B of 0.38 times. The 138SL paid its first ordinary dividend of $0.13 on February 23 which comes year following its December 2014 listing on the Jamaica Stock Exchange.