Stanley Motta IPO – Is it a buy?

Musson Group a major conglomerate, has decided to list its subsidiary Stanley Motta Limited on the Jamaican Stock Exchange. The prospectus dated the 27^th of June 2018 states that some 757,818,862 ordinary shares at $5.31 each are up for offer. What value is this for investors and should anyone put their capital to work on this?

According to the prospectus the selling shares accounts for 99.99% of issued shares which indicates that Musson is not only giving up control of its subsidiary but is in fact selling its subsidiary to the public at valuation of JMD $4,024,069,281.9. The main asset/business being offered is the business process outsourcing and technology park campus at 58 HWT occupying over 200,272 square feet. The campus consists of 5 units with Stanley Motta directly owning Units 1 to 4 and its subsidiary Unity Capital owning Unit 5.

The anchor tenant is Jamaica Agent Services Limited which is the local subsidiary of US based global business process outsourcing firm Alorica Inc. According to the prospectus Alorica serves over 600 companies many of which are on the Fortune magazine 500 list. Alorica took possession of Units 2, 3 and 4 under a five-year lease as well as taking responsibility for completing these units. The second largest tenant who occupies Unit 5 is General Accident which also has a five-year lease term.

All rentable space is currently leased and “tenants are responsible for all expenses arising be reason of occupation including insurance, property tax and maintenance”. Payments of leases and rents are to be made in United States dollars. The annual rent per square foot is $12.09 with average tenor being 4.7 years. Therefore, the maximum potential earnings is US $2,421,288.48 (JMD $317,309,855.30).

58 HWT will be managed by Felton Property Management Services Limited which is a subsidiary of Musson Group. This includes “maintaining and repairing the buildings and grounds; managing services/ responsibilities by service providers, managing tenant relationships, negotiating terms and conditions of occupation with prospective and existing tenants, preparing property management reports and annual budgets, preparing management accounts, coordinating with external auditors, making all tax and other filings among other things”. Felton’s renumeration is at rate of $1.50 per square foot.

Therefore, if Stanley Motta is not managing the property will shareholders have a voice in decisions being made in regard to the property. The only indication given is that the “agreement can be terminated by a simple majority of Stanley Motta’s shareholders for gross negligence, willful misconduct or gross underperformance of its scope of work”.

Investors should understand the risk and benefits before departing with their capital. Stanley Motta income growth is restricted due to its fixed rent charged on each lease contract. However, this rental income gained will be exempted from corporate tax due to 58 HWT being designated a Free Zone. Up to 90% of earnings will be paid as dividends and since no further investments plan to be made on the property itself this seems plausible. Nevertheless, the main source of justification for a $4 billion valuation is the price appreciation of the property. With Kingston being short on land and Jamaica having further room for development expect an appreciation indeed. The 2017 audited financials show the property being valued at $2.4 billion. Another possible benefit for investors is that rental income is based in USD which may act as a hedge against a devaluating currency. However, this devaluation is not guaranteed as the Jamaican Dollar has been moving in both directions as of late.  Below is a list of key metrics from 2017 and 2018 financial results:

The 2017 audited financial is skewed towards ‘revaluation gain on investment property’ which was as a result of the new space added. This resulted in net profit of JMD $853,611,000 and earnings per share (EPS) of $1.12. Without this, profit would have been JMD $10,0571,100 and EPS $0.01. The 2018 financial result is expected to be normalized which would reflect more realistic profit. Already the first quarter of 2018 shows a profit of $10,689,000 and EPS of $0.01. Therefore, the valuation being presented to investors is solely based on the property itself. Investors should not expect any short-term benefit. Any benefit to be had from this would be from the appreciation of the property prices in the coming years.