JFP Limited's initial public offering (IPO) did not garner favour with the brokerage community who have swung against the offer and have recommended clients 'Do Not Participate' in the issue which opened on Monday. The offer closed Tueday and was oversubscribed.
However ahead of that closure, VM (Victoria Mutual) Wealth Management Limited was the first broker to publicly release it's research and swing at the $280-million offer which is split evenly between JFP Limited and selling shareholder, JFP Property Investments Limited. JFP Property Investments' collective legal owners are Metry Seaga, Stephen Sirgany and Richard Sirgany.
“JFP has been experiencing high volatility in net earnings historically, particularly during the period between FY2016 – FY2018. The high volatility in net earnings was attributed to the company's inability to contain its operating expense margin. JFP's profitability will continue to be volatile and erode until an implicit strategy is identified to curtail its operating expenses and generate additional revenues. We believe that the risks associated with investing in this IPO are heavily skewed to the downside and as such, we recommend that investors DO NOT PARTICIPATE in this offer,” the VM Wealth report stated as it got a target price of $0.63 and underweight the stock. The IPO is priced at $1 per share across the four pools.
Barita Investments Limited expressed similar concern about the offer as they contended the business model of JFP creates clear difficulties for continuous, recurring revenues. JFP is a contract furniture manufacturer which requires fresh contracts to maintain revenue generation with no contracts resulting in an impact to revenue and profitability.
“What remains unclear to us is how the company intends to maintain a steady, predictable flow of revenue. This is especially concerning given our earlier note that the company's ability to procure new contracts, particularly for the 2022 financial year, has not been especially robust. Finally, our estimate of the company's fair value suggests that the offer is priced unfavourably, given the associated risk we have attached to the company. With that said, at this time, considering the information presented in the prospectus and our accompanying analysis, we do not recommend that clients participate in this offer,” the Barita report explained to clients. Barita's best case price was $0.88 with a worst case of $0.59 which provides an average of $0.74.
Sagicor Investments Jamaica Limited's gave the offer an underweight recommendation with a price target of $0.72 which was obtained from the average of two different methods. Some of the investment negatives highlighted was the shift of transactions online which reduces the need for extensive built environment and furniture, a small number of high-profile contracts which tend to dominate year-on-year revenue and projects can be postponed which delays the recognition of revenue. Sagicor estimates the forward earnings per share (EPS) of JFP for the 2022FY to be $0.01 which translates to a net profit of $11.20 million.
JN Fund Managers Limited has been the only broker so far to state the shares on offer in the IPO are overvalued based on their fair value of $0.68. This is when considering a forward EPS of $0.04 ($44.80 million net profit) and industry average PE of $16.94 times for Junior Market listed manufacturers.
“While over the five-year period to FY 2020, JFP reported revenue growth at a compounded annual growth rate of 11.6 per cent and recorded profits of $71 million in FY 2020, its pipeline of projects does not appear to be robust enough to support that level of revenue growth and profitability in either the short to medium term to make its offer price justifiable. Based on the foregoing, we DO NOT RECOMMEND this offer,” the JN report noted.
Even chairman of QWI Investments Limited and author of ICinsider.com has noted that JFP's IPO requires careful thought. While comparing JFP to Future Energy Source Company Limited and Spur Tree Spices Jamaica Limited, Jackson contended, “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.”
QWI's IPO was the last major public offer where the brokerage community had a split with some for the offer and others not recommending it. JMMB's research team recommended its clients not expose themselves to the company at its offering price of $1.35 and had QWI as a sell for JMMB. QWI has not traded near its IPO price since its listing.
While the brokerage community swings against the JFP IPO, GK Capital Management Limited's Managing Director Douglas Robinson expressed faith in the company and its prospect at last week's investor briefing. Robinson presented a normalised performance of JFP for the trailing 12 months ended September 2021 had there been no delays to $82 million in revenue in the company's third quarter. This resulted in JFP's profit before tax totalling $83 million compared to the $4.83 million earned in the nine months.
“What we're seeing is that on a normalised basis, this is quite an attractive offer. For 2022, that normalised position to emerge. Next year and into the years beyond, we're really optimistic about what the future looks like for the business,” Robinson explained to the virtual audience.
JFP Chief Executive Officer Metry Seaga explained that the company's first order of business after the offer is to clear its debt and hit the road in trying to secure more jobs from the USA. JFP is currently in the process of purchasing five acres of land from the Government adjacent to the company for future development and expansion. He justified the company's ability as seen with its $153-million contract with the Sangster International Airport that it won over Chinese, Spanish and American companies. He did note that the business was a bit lumpy as noted by the 12 KFC's outfitted in the Dominican Republic in one year which pushed exports to 40 per cent of revenue with slow periods coming to five per cent.
Seaga is the chairman of Spur Tree and AMG Paper and Packaging Company Limited along with being a board member of Paramount Trading (Jamaica) Limited.
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