October 08, 2014

PROFRIENDS attracts cornerstone investors for P7.7b IPO

Quoting the public offering underwriters, news portal interaksyon.com today reported that mass housing developer Profriends Property Group Inc may take in one or two cornerstone investors for its planned P7.7b initial public offering.

Profriends is looking to issue 385.75m shares at up to P20/sh to finance its requirement for housing and land development (P3.1b), land banking (P1.24b), equity investment (P2.48b) in a subsidiary that will manage its receivables and provide in-house financing to buyers, and other purposes (P611m).

Our take: Profriends appear to be an interesting play on the mass housing market given that its products are priced at P600,000-800,000/unit. Based on financial data provided in its prospectus, the company has maintained gross margins of 53% (in 2013) and 55% (in 1H14). Net income has also posted a turnaround in 1H14, growing by 26% YoY following the 13% decline in recurring income in 2013.

The company also has 1,391 hectares of land bank (net of about 441 hectares with ongoing projects), most of which are located in Laguna and Cavite which will directly benefit from various ongoing infrastructure rollout in the region. It has also been expanding in key growth areas outside the region, particularly in Iloilo and Cagayan de Oro. To this end, it will be acquiring about 233 hectares of land.

The company also said it plans to build a portfolio of BPO office assets, initially with about 100,000 sqms in leasable area to create a source of recurring revenues.

A key concern about Profriends is its growing exposure to in-house financing. While it currently maintains a 98% collection ratio, this business model may expose it to financial risks. Profriends also had a net debt/equity of 154% as of end-1H14 and a negative net cash flow from operating activities.

This could improve if the company succeeds in creating a significant recurring revenue stream from its planned venture into BPO office operations. Risks should also be minimized if the company can maintain or raise its downpayment requirement of between 12.5%-30% (in contrast to the 5% downpayment requirement by the more aggressive companies).– WealthSec