March 23, 2014

DoubleDragon sets P2/sh IPO price

DoubleDragon Properties Corp, the real estate venture of the founders of Jollibee Foods Corp and Mang Inasal Philippines Inc, has set its IPO price at P2/sh. This should bring the issue size to P1.6b. The company is offering around 579.7m new shares, the proceeds of which will partly be used to finance its land banking and construction of community malls under its malls subsidiary CityMall Commercial Center Inc. The latter is 34% owned by SM Investment Corp. No valuations were indicated by the company. The offer period is set for 26 Mar-1Apr with the listing date is tentatively set for April 7. The offering is reportedly 14x oversubscribed.

Our take: We identify certain catalysts and risks for the company as follows:

Key catalysts: The company should see strong support from its shareholders which have set a strong track record in building brands. We believe that the plan to build small-sized community malls (7,000sqm-10,000sqm) holds promise as this will cater to a niche market that is not particularly served by the bigger malls. Leasing income from these malls should be underpinned by potential support from the shareholders’ branded retail establishments such as those under the Jollibee group and SM retail units.

The company’s key shareholders have established strong management and marketing acumen as well as proven ability to grow one-branch businesses into national or international (in the case of Jollibee and SM) chains.

The company can also benefit from its expansion into fast-growing regions across the country which should further benefit from the infrastructure rollout plans of the government.

Possible key risks: Near-term profitability will depend on the ability of the company to accelerate sales from its existing residential projects. For some of its projects, sales take-up has significantly lagged the level of project completion.

Also, the gross profit margin in its residential business (at around 25%-27% based on financial statements in the preliminary prospectus) is rather low compared to the 35%-40% margins achieved by other listed companies. Finally, last year’s net profit grew 32% YoY to P122m but the income statement listed some P127m in unrealized gains from change in fair values of investments. Taking this out would have yielded a net loss.

Entry to mall operations should provide recurring cash flows and earnings. However, this may take time to be realized as the company intends to complete just five malls this year, ramping it up to 20 malls next year and 100 malls in five years.

With only P200m from the IPO to be used for the mall construction, the company is reportedly planning to tap the debt market to partly finance its mall construction capex. Thus, interest costs will potentially reduce cash flows and earnings from the malls.

CityMall can depend on the strong brands of its shareholders for support but this assumes that there will be arms-length negotiations on lease rates between the company and the shareholders. – WealthSec