If You Like To Invest In Chelsea Logistics IPO, You Should See What’s Inside In This Post.
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.
Description Of The Offer
Primary Offer: 546,593,000 common shares at ₱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 ₱10.68 offer price. The estimated total net proceeds will be approximately ₱5,503 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: ₱7.21/share
Net Tangible Book Value after the offer: ₱5.02/share
Before the offer, the book value of CLC equates to ₱7,634 million which is ₱5.99 on a per-share basis. After the offer, the additional ₱5,503 million IPO funds will increase the company's equity to ₱13,137 million or a ₱7.21 on a per-share basis - capital stock will increase from ₱1,275 million to ₱1,822 million and additional paid in capital will increase from ₱5,272 million to ₱10,288 million.
At ₱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 ₱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 ₱3,642 million or ₱2.86 on a per-share basis before the offer. If the IPO proceeds are added, net tangible book value will now amount to ₱9,145 million or ₱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 ₱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 (₱1,111.20).
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 (₱1,749.78).
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 ₱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!
Hi Mark good pm ask kolang kung ano nangyari sa CLI, base sa findings moganda FA niya, baka me idea ka tnx?
That’s the stock market sir Ernie. Anything can happen. I sold my CLI when I reached 5% gain. Mispricings create opportunities for patient investors. CLI has its own advantages and disadvantages. Kailangan lang muna maideploy yang mga IPO funds and being in a real estate business, hindi mabilis ang cashflow niyan. Magpapatayo ka pa ng high rise buildings that can tale 2 to 3 years and pag naibenta na, monthly amortization pa ang bayad ng customers. Parang MEG lang yan, mabagal pero may laman.
maganda and review mo sir, tunas lang ng jauntily sa CLC @ 11.22 per share has bombs superior na pababa umabot pa ng 9.58 per share… mag pagasa pa kaya yung mga nag invest sa IPO sir. Engineer?
I’m not sure exactly as anything can happen. The whole point is there are some factors sa financial statements niya na kung value investor ka eh mapapawait-a-minute-ka-muna.
My strategy involves looking at value even if you have to wait for at least a year for it to realize. Sa CLC, I find the value to be much lower compared sa IPO so I stick with that. And besides, is there any worth paying a premium for? If meron, then siguro maganda maginvest. Malay natin after a quarterly report or annual report may makita na significant changes sa value, by then siguro we can consider buying basta on a good price.