Okay, so Shakey’s (PIZZA) IPO is now set this coming December 15. The offer price is P11.26 – down to the previous ₱15.58 per share. PIZZA will offer 306 Million common shares with an over-allotment option of up to 45,900,000 common shares.

The Primary offer consisting of 104 Million shares would to raise a total of ₱1.171 Billion. The Secondary offer of 202 Million shares will come from the Selling Shareholder, Arran Investments Private Limited.

Is it worth a buy? Is it a good company? These are probably the most frequently asked questions about the IPO.

An exclusive special report by Unicapital Securities, released last November 27 in the PinoyInvestor Stocks Portal will pretty much tell you if the stock would be a good buy or not. If you’re planning to participate in the IPO, you may want to see this report.

In this post, I’ll expound more about the details found in their prospectus and give my own opinion and analysis on one of the leading Pizza restaurant in the Philippines.

So let’s begin.

Few Facts About PIZZA That You Should Know

The chained full-service restaurant is dominated by 3 big players – one of which is PIZZA. The other two are Yum! (Pizza Hut) and Max’s. Out of the 3, PIZZA  gets the largest market share in terms of value at 26.7%.

In the chained pizza full-service restaurant, PIZZA also dominates the market share at 57.7%.

At present, PIZZA has a total of 177 stores. Revenues last year was around ₱5.244 Billion and a Net Income of ₱479.492 Million – a Net Profit Margin of 9.14%.

That’s an average of ₱29.29 Million of Revenue and ₱2.709 Million of Net Income per store.

There are 3 reasons why PIZZA went public;

• PIZZA is planning to expand BMI (Bakemaster’s Inc.). BMI is a subsidy that supplies the dough used to create the original thin crust pizza together with the other ingredients. Apart from this, they are also planning to relocate their new headquarters.
• Some will be used for working capital and potential business acquisitions.
• Debt repayment

Speaking of debt repayment, majority of the proceeds (₱1.250 Billion) will be used to repay the ₱5 Billion loan from BDO Unibank.

But since the offer price was cut down to ₱11.26 per share, the IPO fund allocation would adjust. There’s no updated disclosure as of this writing as to how the IPO funds will likely be distributed on the 3 reasons mentioned above.

One thing I think is certain, the majority of it will still go to debt repayment.

The prospectus explains how this loan came about;

• Shakey’s Asia Food Holdings (SAFHI) refinanced a bridge loan to finance the acquisition of majority control of the Shakey’s group from the Prieto Family.
• Century Pacific Group (CPG) and Arran Investments Private Limited acquired control of Shakey’s group from the Prieto Family through SAFHI. On October 5, 2016, reorganization took place.
• After the reorganization, Shakey’s Pizza Asia Ventures Inc. (SPAVI) is now owned by CPG (55.8%), Arran (37.2%) and the Prieto Family (7.0%) through SAFHI.

Fig. 1.

SPAVI has now 4 subsidiaries following the reorganization;

• GGL – Hong Kong based company which owns certain trademark and brand rights over Shakey’s operations in the Philippines and is engaged in restaurant management consulting.
• ​BMI – Philippine company engaged in manufacturing and distributing fresh, frozen par baked and baked bread, pastries, cakes and other confectionery items.
• ​SIL – Hong Kong base company that holds trademark rights of the Shakey’s trademark for countries in Middle East, Asia (excl. Japan and Malaysia), Australia and Oceania.
• SSI – Newly formed subsidy in June 2016 which will hold certain other trademarks and intellectual property rights in the future.

SWOT Analysis

Now let’s identify PIZZA’s strengths, weaknesses, opportunities and threats.

#1 Strengths

PIZZA is the market leader in the Philippine chained full-service restaurant and chained pizza markets. Four decades of significant brand awareness gives it a competitive advantage (moat).

#2 Weaknesses

While PIZZA offers a well diversified menu to its customers, any changes on its taste, food trends and other economic and demographic factors could result to lower sales. PIZZA must compete with other brands such as Greenwich and Pizza Hut whenever these competitors introduce new products and offers.

#3 Opportunities

Fig. 2

In an industry where the market size of consumer food service has grown at an annual rate of 6.3% from 2011 to 2015 and is expected to grow at 7.8% from 2015 to 2020, PIZZA will benefit from it.

#4 Threats

The consumer food industry is a highly competitive industry. Although the Shakey’s brand gives the company its moat, direct competition can still take away its competitive advantage. ​To avoid that, it should maintain the factors that makes the food quality superb with respect to their brand. There are many restaurant consulting firms out there who they can call on should this ever prove difficult for them. So this may not be too big a threat, just as long as they prove that they are listening and adapting to every situation.

Valuations

The valuations I’ll discuss will focus on the company’s profitability, growth, quality, financial health and intrinsic value.

#1 Profitability & Growth

Fig. 3

PIZZA recorded high returns from 2013 to 2015 as shown in Fig. 3. Margins were also good.

Fig. 4

Looking at the growth rates, we see that the Revenue has grown annually at 12.36% in Fig. 4. But the Earnings Per Share, Cash From Operating Activities and Free Cash Flow has declined annually within the same period.

#2 Quality & Financial Health

The Piotroski F-Score and Altman Z-Score will tell us about the quality of the company and its financial stability.

Fig. 5

A score of 6 tells us that it’s good, better if we could get a 7. The quality of earnings should be improved and all other else should be maintained.

For the Altman Z-Score;

Fig. 6

8.37 is a very high score and means that the company is relatively safe from bankruptcy or liquidation.

#3 Rate Of Return And P/E Valuation

Based on 2015’s financial data and comparing the returns on a 5-year LCY bond rate of 4.973%, an estimated buying price of ₱12.55/share will theoretically give you that same amount of return.

Fig. 7

Using P/E Valuation, I used the 3-yr. Revenue CAGR of 12.36%, 25% Margin Of Safety and a 9% Discount Rate. The estimated present value calculated is ₱11.12 per share.

My verdict? I believe that PIZZA, at an offer price of ₱11.26 per share, is fairly valued based on the calculations I stated above.

Final Thoughts

Investing in one of the market leaders of the chained full-service restaurant industry might be a wise idea considering that the consumer food industry is poised for growth in the next coming years.

Shakey’s is no doubt a good company in my opinion based on profitability and financial health. But investors should be keen on its cash flow growth. The growth decline should be considered when making an investment decision.

I’ve just concluded this Shakey’s IPO analysis. I hope that this would give you an idea if whether the stock would be a good investment or not.

I would love hear your thoughts. Is it a good buy for you? Or you would rather hold your money and find something else? Share your thoughts on the comments section below.

Happy investing!