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Financial Adviser: 5 Things to Know About Lester Yu's Balai Ni Fruitas IPO and How to Profit from It

It’s the seventh company to go public this year.
ILLUSTRATOR WARREN ESPEJO
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Bakery chain operator Balai Ni Fruitas  (PSE: BALAI) will be the seventh company that will go public this year after it obtained approval from regulators to raise up to P289 million in an initial public offering.

BALAI will sell up to 325 million primary shares and 50 million secondary shares to the public at a price of P0.70 per share. It will also sell an additional of 37.5 million secondary shares from the controlling shareholder, Fruitas Holdings (PSE: FRUIT), to cover additional demand for the IPO.

The total offer shares, including the secondary and overallotment will comprise about 35 percent of BALAI’s projected market capitalization of P819 million after the IPO.

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BALAI will be the smallest Initial Public Offering in the past three years. The last time a similar IPO of this size was offered was in 2019 when Kepwealth Property Philippines (PSE: KPPI) raised P384 million. At the time, KPPI’s IPO Price of P5.74 per share almost tripled to a high of P15 pesos per share during the first week after it was listed.

The offering period of BALAI shares will run from June 17 to 23 with a target listing date on June 30, 2022.

Bear in mind that when you buy the stock, you are also investing in the business. It will be good to spend some time understanding the business of BALAI 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.

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Here are the top five things every investor needs to know about BALAI’s IPO:

1| Know the background of the company

Formerly known as Buko Ni Fruitas, Balai Ni Fruitas (PSE: BALAI) is a wholly owned subsidiary of Fruitas Holdings, Inc. (PSE: FRUIT), which is majority owned and controlled by entrepreneur Lester Yu.

FRUIT acquired bakery store chain, Balai Pandesal last year, which it quickly expanded from 5 to 23 community stores few months after its acquisition. The change in the name of Buko Ni Fruitas to Balai Ni Fruitas signified FRUIT’s entry into the bakery chain business.

Currently, BALAI has three active brands under its portfolio, namely Buko Ni Fruitas, Fruitas House of Desserts and Balai Pandesal, but it is the Balai Pandesal brand that BALAI will focus its expansion on.

BALAI has a total of 69 stores composed of 37 Buko ni Fruitas outlets, nine Fruitas House of Desserts, and 23 Balai Pandesal stores, which contributed about 10 percent of FRUIT’s total revenues in 2021.

BALAI plans to expand the Balai Pandesal store network up by opening 50 stores this year and another 50 stores by 2023. The company is aiming to open a total of 200 outlets by the end of 2026.

2| Know where the company will spend the proceeds

BALAI plans to use about 81.8 percent of its total net proceeds from the IPO to finance its store network expansion.

The company is targeting to open up new Balai Pandesal stores in key strategic community areas in the country. BALAI is also allocating about 9.1 percent of total proceeds for the capital expenditure requirements of its new commissary operations. The company intends to expand its capacity by setting up satellite commissaries, as well as building of production and warehousing facilities.

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BALAI will keep the remaining 9.1 percent of total proceeds as reserve fund for potential target acquisitions. The company is actively looking to acquire companies that will complement its baked goods product offering and sales channels.

3|Know the earnings prospects of the company

BALAI’s total sales has been growing by an average of 10 percent prior to the pandemic, from P193 million to P233 million by the end of 2019.

BALAI’s net income, however, has been declining from P13.9 million from 2017 to P7.0 million in 2019 due to higher operating costs. Rising distribution and administrative expenses decreased the company’s operating income ratio to sales from 10 percent to only four percent.

During the 2020 pandemic, BALAI’s total sales fell by 52.7 percent to P110 million, which resulted to net loss of P922 thousand.

Last year, with the entry of the Balai Pandesal brand, BALAI’s nine-month total sales recovered by 19 percent to P88.5 million from P74 million in 2020.

This recovery enabled BALAI to register a positive net income of P2.3 million from a net loss of P2.7 million in the same period the previous year.

BALAI’s total sales for the fourth quarter of 2021 was estimated to have reached P60 million, which represents about 68 percent of its total sales for the previous three quarters. This recovery in total sales is projected to generate at least P6.5 million in net income for the fourth quarter alone, resulting to a total of P8.8 million by the end of 2021.

BALAI’s net income is expected to grow further this year as the company embarks on aggressive expansion.

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4| Know the price valuation multiples

Let’s assume that for purposes of pricing, we will conservatively estimate BALAI’s net income to come only from its Balai Pandesal outlets. Given an estimated daily sales of P15,000, we can estimate that BALAI’s full year total sales from its 23 outlets will generate about P124 million this year.

Because it is adding 50 more outlets during the year, we can assume that its contribution to total sales will only be half. Using the same daily sales assumption, we can safely project the expansion will contribute roughly about P135 million in additional sales.

In total, by the end of 2022, BALAI should be able to achieve total sales of P259 million from its 73 outlets, representing over 150 percent growth from last year. At 10 percent net profit margin, its total sales of P259 million should be able to generate a net income of P25.9 million. 

By 2023, assuming the same daily sales target of P15,000, BALAI’s total sales from its 73 outlets on full year scale should increase to P394 million.

With further expansion of 50 more outlets next year, which should bring additional sales of P135 million, BALAI should be able to achieve total sales of P529 million, which again represents more than 100 percent growth.

At this projected total sales in 2023, BALAI’s net income should more than double to P52.9 million.

Using a projected net income for 2022 against its market capitalization of P819 million, BALAI’s prospective Price-to-Earnings (P/E) ratio is 31.6 times.

By next year, BALAI’s prospective earnings multiple should fall to 15.4 times.

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5| Know the intrinsic value of the stock

The other way to value a stock aside from using PE multiples is what we call the Discounted Cash Flow (DCF) method.

In DCF, instead of using earnings as basis for valuation, we use the free cash flows. The free cash flow is computed by deducting the capital expenditure and working capital needs of a company from its operating income.

Let’s say, for purposes of this exercise, we will assume that BALAI’s net income will also be its free cash flows to equity. 

We will also assume that instead of P15,000 daily sales target, we will use a lower sales target of P12,000 and lower net profit margin of eight percent.

Furthermore, we will also assume that instead of 200 outlets target, BALAI will only open up to 120 outlets, which will roughly use up its proceeds allocation of P180 million, given a capex budget of P1.5 million per outlet.

Once we have computed the net income projections for the next four years to 2026, we will need to discount it to present value.

Based on the prevailing 10-year bond yield of 6.88 percent, we estimate BALAI’s discount rate to be at 9.38 percent.

By discounting BALAI’s future income from its expansion at prevailing risks in the market today, with no growth in daily sales over the years, we will derive a conservative equity value of P1.2 billion.

If we divide this value by the company’s shares outstanding of 1.17 billion shares, we will derive BALAI’s intrinsic value of P1.02 per share.

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At IPO price of P0.70 peso per share, BALAI offers 31 percent discount to its intrinsic value, which should provide an attractive margin of safety for long-term investment. 

Of course, this valuation is based only on conservative assumptions that the company will only have 120 outlets up to 2026 with lower daily sales target and lower net profit margins.

In reality, if BALAI is able to achieve its goal of 200 outlets in four years at higher daily sales and higher margin, the stock’s true intrinsic value should be way higher.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888 

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