Live Case Study: GREEN

Greenergy Holdings, Inc. (GREEN, the Company) has wonderful business developments that are potentially capable of bringing substantial future cash flow for the Company. The recent approval of feed-in tariff rates by the Energy Regulatory Commission (ERC) lowers the riskiness of renewable energy businesses in the future. [1] Feed-in tariff rates are fixed rates payable to renewable energy producers for not less than 12 years. Also, renewable energy producers will have priority purchase and transmission which assures the sale of their produced electricity. [2]

GREEN’s disclosure on November 16, 2012 contains the following: [3]

  1. Investment in companies or acquisition of assets relating to the businesses of Mr. Antonio L. Tiu.
  2. Amendments of the Company’s Articles of Incorporation and By-Laws to effect the following changes:
    1. Change in corporate name
    2. Increase in authorized capital stock up to P10 billion
    3. Issuance of shares through private placement transaction.

     

GREEN is in need of capital for their renewable projects. The Company has a short-term investment commitment of P252 million for the biomass project with Cleantech. [4] GREEN managed to meet the 45-day deadline of the required capital infusion by issuing new 25.2 billion shares and had 25% of the increase in shares issued to investors as private placement. For those new in corporate law, an increase in shares is required to be 25% subscribed and at least 25% of the subscribed be fully paid.

As illustrated above, GREEN still has to raise P167 million (P252m – P85m) in order to comply with commitment with Cleantech.

Other than commitment with Cleantech, GREEN has another upcoming capital intensive projects that are not yet fully funded which are the hydropower projects, currently under a preliminary agreement with Hydroring Capital BV (HC) and subject to financial and technical feasibility. The joint venture agreement is scheduled to be signed until January 13, 2013. [5]

With GREEN’s business development, it could be expected that GREEN will raise capital through the market in the near future but not before increasing shareholder value.

It could then be expected that GREEN may do the following:

  1. Change in corporate name.
  2. Increase in authorized capital stock to P10 billion.
  3. Acquisition of companies owned by Mr. Antonio Tiu through issuance of shares.
  4. Declare as property dividend their 39% interest in Music Semiconductors Philippines, Inc. (MSPI).
  5. Declaration of follow-on offering.

Rationale of the expectations:

  1. The change in name will properly reflect GREEN’s new businesses.
  2. Increase in authorized capital stock will provide GREEN more shares for issuance.
  3. Issuance of GREEN shares to acquire businesses relating to Mr. Antonio L. Tiu will allow GREEN to obtain control without any cash outlay. The issuance of shares will potentially wipe out the deficit of GREEN which stands at 284 million as of September 2012 and increase the assets of GREEN making it more attractive for investors.
  4. Distribution of MSPI shares as property dividend will increase shareholder value.**
  5. The follow-on offering will enable GREEN to raise the much needed cash.

GREEN’s par value could reasonably be expected to be increased from its current P.01 since an authorized capital stock of P10 billion at P.01 par value will translate to 1 trillion shares. There are no regulatory limitations for the number of authorized shares for issuance but 1 trillion shares for issuance sounds awkward in my opinion.

** This expectation was supported in the recent definitive information statement of the company where GREEN includes in the agenda for December 11, 2012 stockholders meeting their intention to list MSPI. [6]Listing of MSPI will most likely be through “listing by way of introduction” which requires distributing the shares to the public through property dividend just as PX and MER did with PXP and ROCK respectively.

Sources:

  1. ERC Approves Feed-in Tariff rates, http://www.erc.gov.ph/PressRelease/ViewPressRelease/ERC-Approves-Feed-in-tariff-rates
  2. RA 9513, http://www.doe.gov.ph/Laws%20and%20Issuances/RA%209513.pdf
  3. Board approval of investment or acquisition of assets, amendments to Articles of Incorporation and By-Laws, issuance of shares through private placement; Lifting of trading suspension, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-8302_GREEN.pdf
  4. Comprehensive Corporate Disclosure re: Investment Agreement with Cleantech; Trading halt, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6341_GREEN.pdf
  5. Preliminary agreement with Hydroring Capital BV re: development operation and management of multiple hydropower projects, infrastructures and/or facilities in the Philippines, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6703_GREEN.pdf
  6. Definitive Information Statement for Annual Stockholder’ Meeting on December 11, 2012, record date November 16, 2012, http://www.pse.com.ph/resource/corpt/2012/GREEN_D20IS_11202012.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

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Stock Selection Dividend Approach

In selecting stocks with dividend as a consideration, take note of the following:

1.   Dividend Paying
2.   Company that is interesting to you
3.   Good payout ratio
4.   Good ROE
5.   Manageable or no debt
6.   Consistent revenue and earnings growth
7.   Business model that you can understand

Dividend Paying
Self explanatory

Company that is interesting to you

A company that is interesting to you is a company that you enjoy following and talking about with others. A company that is interesting to you will motivate you to learn more about that company.

Good payout ratio

The formula for the payout ratio is Dividends/Earnings. Basically, a lower payout ratio is better. Low payout ratios hints that a company may still have the capacity to increase their dividends in the future while plowing back enough money to the company. A good payout ratio is not more than 60%.

Good ROE

ROE or Return on Equity’s formula is profit/equity. A good ROE can roughly be defined as anything more than 10%. A good ROE is important because it indicates that a company can generate profit without much capital outlay. It also indicates that the company has strong market dominance and it should mean that the company is resilient.

Manageable or no debt

This can be determined through the use of debt to equity ratio. A debt to equity ratio of less than 200% is most desirable.

Consistent revenue and earnings growth

Generally, a higher growth rate in earnings and revenue is better than lower growth rate since the value of your shares will rise faster.

Business model that you can understand

Start with a company that you can understand how they make money so that you’ll know when they will make good and when they will do poorly.

Let’s apply what we had learned in real life! 🙂

(Selection is made on May 1, 2012 prices)

STEP 1: Dividend paying?

All of the companies that compose the PSEi are dividend paying except for BEL and FGEN so we are going to eliminate it from the list leaving us only 28.
1.   AC
2.   AEV
3.   AGI
4.   ALI
5.   AP
6.   BDO
7.   BPI
8.   CEB
9.   DMC
10.   EDC
11.   GLO
12.   ICT
13.   JFC
14.   JGS
15.   MBT
16.   MEG
17.   MER
18.   MPI
19.   MWC
20.   PX
21.   RLC
22.   SCC
23.   SM
24.   SMC
25.   SMDC
26.   SMPH
27.   TEL
28.   URC

STEP 2: Interesting to me?
Here, personal preferences vary but let’s just assume that I find all the companies interesting.

STEP 3: Good payout ratio?

Using this formula: Payout ratio = 2011 dividend / 2010 EPS

We are going to screen the stocks with payout ratio not beyond 60%.

STEP 4: Good ROE?

As stated in the previous post, we assumed that a good ROE is above 10%. We used 2010 ROE since some companies had not yet released their
2011 financial statements.

Now we have a narrowed list.

STEP 4: Manageable or no debt?

We are looking for a company that has a debt not more that 200%.

All the companies passed the screen.

STEP 5: Consistent revenue and earnings growth?



It appears that our selection is trimmed down to only two:

STEP 6: Business model that you can understand.
Another subjective criterion in this approach is determining whether the business model is simple to understand or not.

Describing the company in one simple sentence is a good exercise to determine whether it is understandable or not to you.

This is what’s going on in my mind if DMC and JFC are mentioned:

DMC:
uhmmmmmmmmm……….

JFC:
They make money by selling good chicken joy and jollyhotdog and they also have Mang Inasal as a subsidiary which I like to go eat with my family and friends.

Conclusion:
After grueling screening, we ended up selecting JFC.

Selected:
JFC @ 112.10

Case Study – PRC

Let’s improve our learning experience in this thread by taking real life examples.

Case Study – PRC

PHES’s stock price had been soaring in these past few months due to the possible joint venture with Ayala. Ayala is said to invest in PHES’s 60 hectare plastic city estate in Valenzuela City. A company that has a similar story would be PRC.

Philippine Racing Club, Inc. (the Company, PRC), operates a horse racing franchise.  Under the franchise, PRC may take or arrange bets for races conducted in or outside the Philippines.  Currently, the betting operation of the Company is being expanded by the addition of more Off-Track Betting stations (OTBs). The Company’s source of revenue is the 8.5% share in the gross receipts of the betting tickets.

PRC was the largest racing club in the Philippines when it was organized in 1937. The whole racetrack property was located in a 21.6 ha. land in Makati City. On December 21, 2008, the last official horseracing was conducted and starting January 6, 2009, horseracing was conducted in the new racetrack complex in Naic, Cavite.

On February 25, 2011, the Company disclosed that they executed a master development agreement (MDA) with ALI where the company will contribute its 21 ha land in Makati for a mixed-use real estate development. The agreement provides that PRC will have 18% share of the saleable units.

In October 2011, ALI purchased 2.96 ha. of land within the Makati property in compliance with the terms and conditions of the MDA. The selling price of the land sold was not disclosed but on its SEC 17-A filings in 2011, ALI advanced P554.5 million to PRC representing 24% of the agreed price or an implied selling price of P2.3 billion. Currently, no revenue regarding the transaction was recognized by the Company but the cash proceeds given by ALI are lodged as “advances from customer.”

The accounting treatment of the sale of land by PRC might serve as a market surprise as soon as PRC recognizes the transaction as revenue. The effect of the revenue recognition will be a sudden increase in the top line of P 2.3 billion. The cost of the whole 21 ha land was recorded at only P81 million. Assuming that the cost of the 2.96 ha land including cost to prepare it for sale is 50 million, possible increase in the profit of PRC will be 2.25 billion.

Management motivation might be present to recognize the revenues in 2012 as their by-laws stipulate that management bonus shall be 10% of annual income before tax. Also worth noting are the buy-back transactions made by the company since the approval by the Board of the buy-back program on April 17, 2012. The total shares bought back by the company are 5,070,500 shares at 9.50.

The downsides are:
1.   The gain to be recognized is one time only.
2.   There is a probability that the 2.3 billion revenue will not be recognized in 2012.

Let’s wait and see how the market will react as soon as the company presents the information above in their financial statements.

Disclosure: No position in any stock mentioned.