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Financial Adviser: 5 Things to Know About Manny Villar's AllDay Marts' IPO

It’s the sixth IPO in the country this year.
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Supermarket operator AllDay Marts, Inc (PSE:ALLDY) will be the sixth company that will go public this year after it recently obtained approvals from regulators to raise up to P4.5 billion in an initial public offering (IPO).

Allday IPO

ALLDY will sell up to 7.5 billion new shares to the public at a price of P0.60 per share. The new shares will be equivalent to 33 percent of its total equity after the IPO.

The offering period of ALLDY shares will run from October 18 to 25 with a target listing date on November 3, 2021.

ALLDY will be the fourth supermarket company that will be listed in the company with expected market capitalization of P13.7 billion.

The other three companies are Puregold Price Club, Inc (PSE: PGOLD), which has the largest market capitalization at P121.3 billion, followed by Robinson’s Retail Holdings (PSE: RRHI) with P91 billion, and MerryMart Consumer Corp (PSE: MM) with P26.9 billion.

Bear in mind that when you trade the stock, you are also investing in the business. It may be wise to spend some time understanding the business of ALLDY and evaluate its growth opportunities.

Once you are aware of the fundamentals of the company, you will have a better handle on the risk and return that you can expect from investing in the IPO.

Here are the top five things every investor needs to know about AllDay Marts’ IPO:

1| Know the background of the company

ALLDY is the leading mid-premium supermarket operator in the country, primarily serving the upper income market with total 33 operating stores to date.

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ALLDY is a wholly-owned company by Manny Villar group through its investment company, AllValue Holdings Corporation.

AllValue Holdings owns the retail businesses of the Villar group that include AllHome Corp (PSE:HOME), AllToys, AllSports, AllBikes, AllDay Convenience, AllDay Rx, Coffee Project, Bake My Day, Finds, and other concept stores that are primarily located in sister company Vista Malls.  

ALLDY is also aiming to become the largest digital platform in the supermarket retail industry with its latest innovation to transform its in-store business model.

ALLDY recently introduced its innovative self-checkout kiosks and the “dark store” fulfillment centers for its e-commerce transactions as part of its campaign to promote health and safety protocols and encourage customers to observe social distancing measures.

2| Know the earnings prospects of the company

ALLDY has been expanding its store network aggressively in the past three years, increasing from 17 stores in 2018 to 29 stores in 2020.

This expansion has more than doubled its total sales from P3.0 billion in 2018 to P7.9 billion in 2020 that resulted to quadrupled rise in its net income from P57.8 million in 2018 to P219.6 million last year.

This year, ALLDY continued to open more stores, adding four more to a total of 33 stores, boosting its total sales for the first six months by 19.4 percent to P4.5 billion from P3.7 billion in the same period last year.

Higher first half sales enabled ALLDY to grow its net income by 58.8 percent to P179.8 million from P113.2 million last year.

If we annualize ALLDY’s financials, we can estimate its net income to reach P414.5 million, an increase of 89 percent from P219 million last year on the strength of P9.5 billion sales by year-end.

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ALLDY is also planning to further expand its network to 45 stores by end of 2022 and 100 stores by 2026.

Assuming an average size of 1,600 square meters per store, the additional 12 stores next year could increase total sales to P11.4 billion with a net income of P498 million by 2022.

3| Know the risk and opportunities

ALLDY plans to spend a bulk of its IPO proceeds, about 73.7 percent or P3.3 billion, for debt repayment

ALLDY’s total debt has grown from P1.2 billion in 2018 to P4.7 billion this year, as the company leveraged its expansion on borrowings.

About 60 percent of ALLDY’s total assets is financed by debt, representing a debt-to-equity ratio of 2.2 times.

With the debt repayment, ALLDY’s total debt will be reduced to P1.4 billion, strengthening its balance sheet and improving its debt-to-equity ratio to less than 1.0.

Furthermore, the repayment will also save ALLDY about P58 million in interest expenses every year.

For the balance of 26.3 percent or P1.2 billion, ALLDY will spend it to finance the construction of additional 12 stores next year.

The total amount will be divided into P712 million for capital expenditures and P480 million for initial working capital.

4| Know the pricing multiple comparables 

ALLDY initially priced its IPO at P0.80 per share but had to reduce it to P0.60 per share to make it more attractive to the market.

But even at a lower offer price, ALLDY’s pricing multiple appears to be relatively more expensive than its large retailer counterparts.

For example, ALLDY’s pricing multiple based on trailing earnings is 47.9 times, which is comparatively higher than the industry leader, Puregold’s (PSE: PGOLD) PE multiple at 14 times and Robinsons Retail Holdings’ (PSE:RRHI) PE at 26 times.

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If we price ALLDY based on sales, we will still get relatively high Price-to-Sales ratio of 1.53 times compared to PGOLD’s Price-to-Sales multiple of 0.80.

By rule of thumb, a stock can justify a higher Price-to-Sales if it has a higher net profit margin.

But in this case, ALLDY’s net profit margin at 5.4 percent is no way higher than PGOLD’s 8.06 percent.

ALLDY is also pricing its net selling space higher than the market leaders. Its market cap-to-net selling space per square meter is valued at P245,419 compared to PGOLD’s P202,642 and RRHI’s P64,992.

5| Know the intrinsic value of the stock

Now, we can argue that ALLDY, being a new player in the industry, has more growth to offer compared to its more mature counterparts, and so therefore warrants a higher pricing.

If we assume that ALLDY will add new stores every year so that by end of 2026, it will achieve a total of 100 stores, we can project its total net selling space to increase from 55,881 square meters to 160,000 square meters.

At a conservative estimate of average annual sales of P150,000 per square meter, assuming five percent inflation growth ever year, we can project ALLDAY’s total sales by 2026 to reach P29.9 billion.

At this level of sales, given average net profit margin of 4.4 percent, we can estimate ALLDAY’s net profit to reach P1.4 billion.

According to legendary investor Peter Lynch, a stock is considered fairly valued if its PE ratio is equal to its growth ratio, meaning its PEG ratio is equal to 1.0, but when a PEG ratio falls below 1.0, the stock is deemed undervalued.

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Given average annual earnings growth for the next five years at 27 percent, we can assume a PEG ratio of 1.0 by multiplying ALLDY’s projected net profit against its growth rate to derive its market value in five years at P37 billion.

Because this amount is projected in the future, we need to bring this to the present by discounting its market capitalization at prevailing risk.

Given the current 10-year bond yield and risk premium, we can estimate ALLDY’s discount rate at 8.2 percent. Using this rate to discount the future, we can derive ALLDY’s project market value in present terms at P24.9 billion.

If we divide this value with its post-IPO shares outstanding, we will derive ALLDY’s intrinsic value at P1.10 per share, which offers a potential 83 percent upside at offer price.

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