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Financial Adviser: 5 Things to Know About Lucio Co's The Keepers Holdings' Follow-On Offering and How to Profit from It

Keepers Holdings is the largest distributor of imported spirits and beverages in the Philippines.
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Liquor and specialty beverage distributor The Keepers Holdings (PSE:KEEPR) will be the eighth company that will go public this year via backdoor listing.

KEEPR will be raising up to P4.5 billion through a Follow-On Offering (FOO) by selling up to 3.0 billion shares to the public at a price of P1.50 per share.

A follow-on offering (FOO) typically happens when a listed company issues new shares to the investing public, similar to an Initial Public Offering (IPO) to raise funds for expansion.

The offering period of KEEPR shares, which will comprise about 20.7 percent of the company, will run from November 4 to 10 with a target listing date on November 19, 2021.

Prior to the takeover, KEEPR was known as Da Vinci Capital and its shares were actively speculated in the market, going as high as P45 per share on low volume turnover.

KEEPR shares were suspended last July in preparation for the follow-on offering. Its last traded price was at P12.82 per share, with a market capitalization of P14.4 billion.

KEEPR will have an expected market capitalization of P21.7 billion after the follow-on offering.

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 KEEPR 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 FOO.

Here are the top five things every investor needs to know about The Keepers Holdings’ Follow-On Offering:

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1| Know the background of the company

KEEPR is the largest distributor of imported spirits and beverages in the Philippines, with a market share of 74 percent based on volume and 66.9 percent based on retail sales.

KEEPR is the exclusive distributor of globally renowned brands, which are market leaders in the industry such as Alfonso, Johnnie Walker, Jose Cuervo, Jim Beam, Jinro, Absolut, Bailey’s, Red Bull, and Perrier.

Formerly known as Da Vinci Capital Holdings, KEEPR was formed after it acquired the liquor and specialty beverage distribution business of Lucio Co and family from Cosco Capital (PSE: COSCO) via share swap transaction.

KEEPR issued a total of 11.2 billion shares, equivalent to 97.7 percent control of the company, to COSCO in exchange for the 100 percent ownership interest of Montosco, Inc; Meritus Prime, Inc; and Premier Wine and Spirits, Inc.

The name of the company, “Keeper,” was derived from the title bestowed on KEEPR chairman and founder, Lucio Co by the International Society of the Keepers of the Quaich, a traditional Scottish drinking vessel, based in Scotland for his notable contribution to the Scotch whisky industry.

2| Know the earnings prospects of the company

KEEPR distributes about 30 percent of its total sales to its grocery retail affiliates, Puregold and S&R, which have a total of 423 stores that are strategically located all over the country.

The balance of the 70 percent is contributed by its wide network of on-premise channels and third-party distribution partners such as wholesalers, sub-distributors, e-commerce and online-retailers.

KEEPR’s total sales is primarily driven by its brandy products, which contribute about 78.1 percent. KEEPR’s flagship brand, Alfonso, accounts for about 60 percent of the company’s total sales.

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Last year, KEEPR’s total sales fell by 23.7 percent from P10.7 billion in 2019 to P8.2 billion due to the outbreak of pandemic crisis, but total net income declined only by three percent to P1.18 billion due to higher margins and lower operating expenses.

This year, with the reopening of the economy, KEEPR’s total sales for the first six months recovered by 34.8 percent to P4.3 billion from P3.2 billion in the same period last year.

The increase in total sales enabled KEEPR to grow its total net income by 74.6 percent to P703 million from P403 million in 2020.

If we assume the total sales of KEEPR to contribute 40 percent of its total sales this year, as it did in 2020, we can project its total sales for this year to reach its pre-pandemic level at P11 billion.

Based on projected total sales for 2021, using a conservative 13.7 percent net profit margin, we can estimate KEEPR’s total net income to hit P1.5 billion, which represents a year-on-year growth of 28 percent from last year.

By next year, assuming a minimal growth of 15 percent, we can estimate KEEPR’s total sales to increase further to P12.7 billion with net income of P1.8 billion.

3| Know the risk and opportunities

KEEPR intends to use the net proceeds from the Follow-On Offering to finance its expansion of its product portfolio and distribution capabilities.

About 55 percent of the net proceeds will be used to fund potential acquisition opportunities in the next two years.

KEEPR intends to acquire other liquor businesses that have a strategic fit to the current operations.

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KEEPR also allocates about 36 percent of the net proceeds to develop and launch new products, as well as expand its distribution and logistics network via establishing strategic presence in the e-commerce space and strengthening its channels.

The balance of nine percent shall be used to support the company’s working capital requirements.

KEEPR has a strong balance sheet with almost debt free position. It also generates an average return on equity of 19.7 percent.

Using this average return on equity as benchmark for future returns, the fresh equity of P4.5 billion from the offering should enable KEEPR to generate cumulative earnings of P900 million in the medium term, translating to higher earnings growth in the future.

4| Know the pricing multiple comparables

KEEPR’s pricing multiple based on trailing earnings for the past 12 months stands at 17 times, which is slightly lower than the market average PE of 18.3 times.

But if we compare it to the trailing PE of 29.6 times of its closest comparable, Emperador, Inc (PSE: EMP), KEEPR’s pricing at 17 times offers substantial discount of 42 percent.

To be more conservative, we can peg KEEPR’s target PE ratio at only 75 percent of EMP’s pricing.

At a reduced PE ratio of 22.2 percent, we can price KEEPR’s target at P1.96 per share, which offers 30 percent potential gain.

The other way to price KEEPR is by use of PE-to-Growth (PEG) ratio.

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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If we project KEEPR’s earnings to be at P1.5 billion by end of 2021, we can estimate that the company’s historical compounded earnings growth rate for past three years at 23 percent.

Assuming the company will continue to grow at the minimum rate of 23 percent in the coming years, we can make KEEPR’s PE ratio equal to its average growth at 23 times.

At 23 times Price-to-Earnings (PE) ratio, we can target the stock to trade at P2.03 per share, which offers a potential 35 percent again.

5| Know the pricing target based on volatility

Legendary investor Sir John Templeton, who is regarded as the greatest global stock picker of the 20th century, once said that one of his investing secrets was following stock price fluctuations as proportional to the square root.

According to the square root theory, the magnitude of a stock’s volatility is directly related to its share price. The lower the stock price, the higher its volatility range.

The square root theory works by adding a constant number to the square root of a stock price to predict a future value prior to its high.

If we apply this theory to KEEPR, whose offering price was reduced from a high of P2.50 per share to P1.50 per share, we can expect the stock to be more volatile.

To estimate the maximum price the stock can trade, we can add a constant number to the square root of its stock price.

At a market capitalization of P21 billion, the constant number that we can add, based on historical performance of PSE stocks, is 0.91.

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We can add 0.91 to the square root of P1.50, which is 1.22 to get a total of P2.13, and square it back to derive a target price of P4.54 per share.

Given active trading of the stock, the initial target of KEEPR based on its price volatility within 12 months is P4.54 per share, which offers to triple the returns of its offer price.

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