It won’t be wrong to say that CY14 is the ‘year of IPOs’. Even as the year comes to its close, Synthetic Products Enterprises Limited (SPEL), along with the IPO of Systems Limited, is next in the line of offerings.
A total of 19.35 million ordinary shares are being offered by the company, representing 33 percent of the pre-IPO and 25 percent of the post-IPO paid-up capital of the company. Three-fourth of the issue size or 14.51 million ordinary shares are being offered via the book-building process to institutional and high net worth individual investors in a bidding process today.
The lower and upper limits have been set at Rs23 per share and Rs39.1 per share, respectively. The general public will be offered the remaining 25 percent at the strike price determined via the book-building process.
Having four manufacturing units, SPEL is involved in manufacturing of packaging products for the consumer goods sector. Besides, it also deals in technology-intensive products for auto industry.
With the IPO proceeds, the company aims to expand and upgrade its manufacturing facilities, the estimated cost of which is Rs700 million. Subsequent to this investment, the company projects to generate additional revenue of Rs1.3 billion. This translates into a revenue growth of 76 percent and a per share impact of nearly Rs0.017 to the bottom line compared to FY14 levels.
Be that as it may, the risks of competition getting fierce and the possible strain on SPEL’s market share are always present. Yet, the company’s competitive advantage lies in its domestic designing and moulding facilities. Also, with big names such as Nestle, Unilever, Coca Cola, and Indus Motors among SPEL’s clientele look impressive.
Since SPEL derives the bulk of its revenues (60 percent as of June 2014) from FMCG/food-packaging sector, the company’s growth tags along the performance of this sector. During 2009-2013, Pakistan’s listed consumer sector posted an average annual profit growth of around 20 percent.
In comparison, SPEL’s financial footing has also built up strength over time, with sales growing by an average annual rate of 26 percent and profitability by 44 percent during the last five years. Considering this rapid outburst in consumerism in recent years, the prospects of consumer sector and hence of SPEL are encouraging.
With all the good things, there could be a grain of salt for potential investors. At the lower and upper limits, SPEL demands a premium of 1.6 times and 2.7 times respectively over its book value – perhaps a premium too high for an average investor. But for the consumer sector, an average premium of three times to the book-value is considered to be normal, according to sector analysts. Take the case of Engro Foods (listed in 2011), where the offer price was set at a premium of nearly 2.8 times of its book value.
Directing attention to the comparison illustrated in the prospectus, the floor price depicts a discount of 54 percent to the average P/E of around 24x of selected packaging companies (Cherat Packaging, Tri-Pack Films, Packages, EcoPack and SPEL). However, it is best not to get carried away with these numbers. Tri-Pack and Packages, which are trading at elevated P/Es of over 36x, have been influenced more by the performance of their associate companies and investment portfolios.
After excluding Tri-Pack and Packages, the average P/E of the sample (including SPEL at floor price) comes around 10.88 times. Compared to this average, SPEL’s P/E of 18.6 times at the upper price, in effect, stands at a premium rather than a discount to the average P/E of the sample. However, in light of SPEL modelling on the upward trajectory of consumer sector, the premium seems justified.
All in all, it will be interesting to see how the company is weighed and responded to in the IPO. Fingers crossed!
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