first metro sec

Stock Picks For The Week (Sept. 18 - 22, 2017) By First Metro Securities

Check out the Stock Picks for the week by First Metro Securities in this special report which you can find only here in PinoyInvestor.

4

If You Like To Invest In Chelsea Logistics IPO, You Should See What’s Inside In This Post.

chelsea logistics IPO analysis

It's been a while since I did some number crunching. In this post, let's do it with Chelsea Logistics (CLC) IPO.

I'll be giving my personal opinions and insights about the company. May this post help you in your investment decisions.​

pinoyinvestor

Which stocks to BUY or SELL? Find out on PinoyInvestor.com!

Switch from FREE Version to PREMIUM ACCESS now! Subscription starts at P399 per month. Click here and try it today!​

ADVERTISEMENT

Description Of The Offer

Primary Offer: 546,593,000 common shares at Php 10.68 offer price

Chelsea Logistics Holding Corporation (CLC) is a holding company who's engaged in the shipping transport industry through its wholly-owned subsidiaries. The company has around 900+ employees; mostly crewmen while the rest are members of support services.

Their major competitors in the industry are Harbor Star Shipping Services (TUGS) and Malayan Towage And Salvage Corporation.

More details on its business operation, SWOT analysis and industry analysis can be found on its final prospectus so I suggest you read from there​. I will not discuss it here to save time since all the information is already there.

The primary offer consists of 546,593,000 common shares at Php 10.68 offer price. The estimated total net proceeds will be approximately Php 5,503.321 million and will be used for acquisitions of new vessels & vessel equipment, port facilities, containers & terminal equipment and other shipping and logistics companies and general corporate purposes.

Dividend Policy

Good news for dividend investors because CLC has a 20% dividend policy of the prior year's recurring income which will be based on recommendations by the BOD and the existence of unrestricted retained earnings.

Since CLC was only incorporated in 2016, the company hasn't declared any dividends yet but some of its subsidiaries had.​

Analysis Of CLC's Book Value

Book Value after the offer: Php 7.21/share

Net Tangible Book Value after the offer: Php 5.02/share

Before the offer, the book value of CLC equates to Php 7,634 million which is Php 5.99 on a per-share basis. After the offer, the additional Php 5,503 million IPO funds will increase the company's equity to Php 13,137 million or a Php 7.21 on a per-share basis - capital stock will increase from Php 1,275 million to Php 1,822 million and additional paid in capital will increase from Php 5,272 million to Php 10,288 million.

At Php 10.68 offer price, this translates to a price-to-book ratio of 1.48. For investors that typically buys low price-to-book stocks, this is already a deal-breaker.

Further analysis on its balance sheet reveals that it has goodwill that ​amounts to Php 3,992 million that came from the acquisitions of Bunkers Manila Inc. (BMI), Michael Inc. (MI) and Udenna Investments B.V. (UIBV). This translates to 24% of its total assets.

Synergies arising from goodwill is hard to value especially if these intangible assets gives the company a "moat" around them. Intangible assets like goodwill can overstate or understate a company's book value. This is why it's a good practice to exclude this to get the net tangible book value first.​

Removing goodwill from the equation gives us a net tangible book value of Php 3,642 million or Php 2.86 on a per-share basis before the offer. If the IPO proceeds are added, net tangible book value will now amount to Php 9,145 million or Php 5.02 per share. And this translates to a price-to-book ratio of 2.13.

Sounds expensive isn't it?​

CLC's present value of its future cash will need to come higher at Php 5.66 per share for it to be considered fairly priced. So let's see what its earnings have to say.

Analysis Of CLC's Cash Generating Power​

Description (in Mil of PHP)

2016

2015

2014

Net income

131.679

98.608

139.088

Depreciation & amortization

609.090

453.905

331.487

Working capital changes

(1,287.212)

94.565

(149.127)

Average CAPEX (3-yr.)

(1,251.892)

(1,251.892)

(1,251.892)

Owner Earnings

(1,798.335)

(604.814)

(930.444)

Tab. 1 Owner earnings calculations. Average figure amounts to (Php 1,111.198).

Description (in Mil of PHP)

2016

2015

2014

​Cash from operating activities

(195.003)

848.027

450.640

Average CAPEX (3-yr.)

(1,251.892)

(1,251.892)

(1,251.892)

Free cash flow

(1,446.895)

(2,099.919)

(1,702.532)

Tab. 2 FCF calculations. Average figure amounts to (Php 1,749.782).

From the cash flow statement data above, we can infer that the business hasn't generated positive cash for the past three years mainly because of its high CAPEX requirements. CLC should generate positive cash returns on capital once IPO funds are deployed or else, CLC will need to take on loans just to keep its doors open.

It's already evident in CLC's current financial health.​

Description (in Mil of PHP)

1Q17

Interest-bearing loans (current)

4,581.506

Interest-bearing loans (non-current)

2,227.231

Total debt

6,808.737

Total equity

7,634.372

Tab. 3 Total debt and equity comparison

CLC has a lot of debt. Just a little more and it would already exceed its equity. Exceeding it would automatically raise a red flag.

The loans where used to acquire oil tank vessels, tugboats and were spent to other working capital requirements. It's also evident that the returns generated by these loans don't give a satisfactory return on capital invested.

This is the main reason why getting money from investors through this IPO might change the business' cash generating power. The proceeds when used to acquire new vessels will further increase the business' cash generating power without ever worrying to pay it back.

But then, we have to deal with what's currently on the books, and this is what we see - a business that generates negative cash.​

​In my opinion, this is speculative in nature because the present value of this future negative cash flow will almost eat up its current equity, putting the company at an intrinsic value of less than Php 1.00/share assuming a growth of 20% - equal to the growth of its book value after IPO funds are received, and a discount rate of 12%.

We don't have any idea how the IPO funds will contribute to its growth. We can get a clearer insight one or two years from now after we see their next annual report.​

Final Thoughts

As of now, I would contend myself to its book value as its intrinsic value. But the synergies created by its goodwill might be worth more than what is recorded in its book and should be considered. If that's the case, then the current price might be a fair offer.

As far as the tangible assets ​are concerned, I believe that CLC's offer price is already trading at a premium.

Got questions and reactions? ​I want to hear them so leave them in the comments section below.

Happy investing!​


quantitative data solutions

Know The Numbers And Trade Smart Using Quantitative Data Solutions!

Applicable in PSE, Forex and Commodities. Click here and start trading intelligently!​

ADVERTISEMENT

truly rich club

Do You Want to Gain Financial Wealth and Spiritual Abundance at the Same Time?

If you want Bro. Bo to be your personal financial coach and know more about the Truly Rich Club, then click this link here.

ADVERTISEMENT

first metro sec

Model Portfolios: Unloved, Value Play, Yield Seeker, Riding The Momentum (Sept. 20, 2017)

Looking for model portfolios to guide your stock picking decisions? Don't worry, we got you covered! Check out this special stock picks and model portfolio report today!

Click Here to Leave a Comment Below 4 comments