VM Wealth bullish on maiden IPO despite market response

Added: 05 Sep 2014

Avia Collinder, Business Reporter

The muted response to the Sweet River initial public offering (IPO) was the result of general market conditions marked by a flight of capital to US dollar securities, while some investors were wary of buying into an industry that is relatively new to them, according to Devon Barrett, general manager of VM Wealth Management Limited.

Pork producer Sweet River Abattoir & Supplies Company hit 65 per cent of its fundraising target in an offer that closed on August 27.

The float of the company’s shares was arranged by VM Wealth and Money Masters Limited.

The offer was meant to raise $180 million, some of which was to be used to pay down the company’s debt, but only secured offers totalling $118 million.

On Wednesday, Barrett said Sweet River Abbattoir had secured a new agreement on new loan terms with its banker, First Global Bank Limited. It extends the loan for 10 years at 9.5 per cent, with a moratorium on principal repayments until March 2015.

Now, instead of debt servicing, the equity capital raised on the junior market, will principally be used for energy retrofitting and the completion of a new processing plant.

double capacity

The plant, to be commissioned by November, should more than double the meat company’s production capacity from 120 slaughters per day to 300 slaughters per day.

The Sweet River IPO is the first stock market float to be arranged by VM Wealth. Barrett, in his assessment of the results, pegged the response to the offer to the conservative nature of investors and a market with a short-term outlook.

“Analysts should make a better job of looking at the future and judging the future of companies, instead of just looking at current market conditions,” he said.

The Sweet River offer was rated as overvalued by Jamaica Money Market Brokers (JMMB) at the IPO price of $3.86.

Based on an estimated P/E ratio of 7.0 times and earnings per share of 37 cents, JMMB valued the shares at $2.58, and on that basis did not recommend the stock as a buy.

The average PE for the junior market was then about 5.83x, and 3.5x for the main market, JMMB said in its August 5 analysis.

The VM Wealth valuation of Sweet River was based on a P/E of 9.2x.

big spending

Barrett rationalised that while price-to-earnings ratios on the stock exchange fell to about 6.0x in August from 10x in December 2013, American investors are paying on average 30 times a company’s earnings per share on exchanges in the US.

VM’s decision to keep the pricing of Sweet River’s P/E at 9.2, at which it was priced in December, he said, was consistent with the value existing within the company, and adjusting it downwards in line with the market would have been “an injustice”. The abbattoir’s return on equity has ranged between 25 and 35 per cent in the last two years, he said.

He cited the example of Access Financial Services, whose stock is currently trading at around $10, saying that at its market debut in 2009, some analysts also assessed the Access IPO as overpriced at $2.90 per share.

Sweet River is the second meat operation on the stock market, but the first abbattoir. The other is the five-decade-old Jamaica Broilers Group, which is engaged in poultry production but also has a presence in other meat segments.

Sweet River is principally engaged in the slaughter of pigs, the sale of pork and other agricultural products. It is the third-largest supplier of pork, with approximately 24 per cent market share. Its main customers include Grace Food Processors Limited, Caribbean Producers Jamaica Limited, and Hamilton’s Smoke House, a subsidiary of Jamaica Broilers Group.

“The Jamaica Stock Exchange index is about 70 per cent concentrated in financial institutions – most of the investing companies know about these – but once you start telling them about other industries … it is a little bit challenging to get them to understand how these companies will grow in the future,” he said.

VM Wealth’s financing deals have largely focused on the debt market, where the company has raised US$150 million on behalf of clients in the past three years, said Barrett.

Though short of the mark, he describes VM Wealth’s first foray into equity fundraising as satisfactory, given the performance of the stock market.

The main market is down 10 per cent and the junior market, 15 per cent since December 2013; and the Jamaican dollar has been losing value – starting the year at $106 and ending at about $113 in August, he said.

“So what has happened is that investors have been moving their monies from the local currency market to the foreign currency market which has affected the stock exchange – both main and junior markets,” said Barrett.

“With the indices falling to the level they did, it also meant that the price-to-earnings ratio on both indices fell very significantly as well.”

Just over 100 individuals bought shares in Sweet River. Barrett described the subscriptions as “a vote of confidence” in a new kind of venture.

VM Wealth itself has taken up about 10 per cent of the shares, he said.

The stock is expected to be listed on the JSE Junior Exchange, pending approval from the JSE.