Industry

Financial Adviser: 5 Things to Know About A. Brown Company's Preferred Shares Offering and How to Profit from It

Read up on preferred shares and about A. Brown.
ILLUSTRATOR WARREN ESPEJO
Comments

A. Brown is primarily a property developer with bulk of its business focused in Mindanao region such as Cagayan de Oro City; Intao, Misamis Oriental; Valencia City, Bukidnon; and Butuan City, Agusan del Norte.

The offering period of the preferred shares started on Monday, November 15 and will last until November 19, with a target listing date on November 29, 2021. 

Property developer A Brown and Company (PSE:BRN) is raising up to P1.5 billion by selling up to 15 million preferred shares at P100 each this month.

The offering period of the preferred shares started on Monday, November 15 and will last until November 19, with a target listing date on November 29, 2021.

What are preferred shares

Preferred shares are a special class of stocks that have the features of a debt instrument because of its fixed dividend payments. It offers a steady stream of dividends, similar to interest income, regardless of the company’s earnings.

But unlike debt, preferred dividends can be suspended in case of cash flow problems. Because of these risks, preferred dividend yields are always higher than the interest rates offered by debt securities.

Preferred shares are also less volatile than common shares due to its stable returns. Pricing of preferred shares is more dependent on interest rates than its company’s growth outlook.

A rising interest rate can lower the market value of preferred shares, but if interest rate declines, the value of preferred shares can go up.

In a market environment like this where yields are low due to falling interest rates, it may be a good investment strategy to diversify into preferred shares.

ADVERTISEMENT - CONTINUE READING BELOW

But before you invest, you need to make sure that the company is financially capable of paying its dividends on time. Just like buying an IPO, you should review the company’s profitability and financial performance.

Always ask yourself: what is the probability that the company will fulfill its promise to pay dividends consistently? Can it generate enough cash flow to cover the projected dividends aside from the existing interest expenses?

Here are the five things you must know about the preferred share offering of A Brown Company and how you can profit from it:

1| Know the structure of the offering

BRN is selling up to 15 million cumulative, non-voting, non-participating, non-convertible, perpetual preferred shares, the first tranche of its preferred share series.

BRN plans to offer two more tranches within the next three years for a total of 50 million preferred shares.

BRN’s preferred share, which will have the trading code of BRNP, will offer a dividend rate of seven percent per annum that is payable quarterly.

The offered rate is comparatively higher and more aggressive than the recent preferred share offerings this year such as Megawide’s MWP4 at 5.3 percent and Jollibee’s JFCPB at 4.24 percent.

BRNP will have a redemption period of five years. The redemption period, which works like the maturity date for bonds, mandates the company to buy back its preferred shares from its investors at the original offering price.

If, for any reason, BRNP is unable to redeem the shares on the expected date, the company shall pay a minimum dividend rate of eight percent on any of the subseries from there on.

CONTINUE READING BELOW
Recommended Videos

Moreover, if the company fails to pay dividends on time, because the preferred shares are cumulative, such dividends shall be considered in arrears and must be paid before any other dividends.

2| Know the financial background of the company

BRN is primarily a property developer with bulk of its business focused in Mindanao region such as Cagayan de Oro City; Intao, Misamis Oriental; Valencia City, Bukidnon; and Butuan City, Agusan del Norte.

In recent years, BRN has diversified its business interest in power generation, water utility and palm oil production, which contribute roughly 10 percent of its total revenues.

A bulk of BRN’s revenues, comprising about 90 percent of total, comes from its real estate business.

BRN’s total revenues have been growing by an average of 29 percent every year prior to the pandemic, from P484 million in 2016 to P1.03 billion in 2019.

This growth in revenues enabled BRN to increase its net income from a loss of P76 million in 2016 to P494 million in 2019.

But last year, due to the outbreak of the coronavirus, BRN’s total revenues slowed down by 15.8 percent, causing its net income to fall by 40 percent to P294 million.

This year, despite the gradual reopening of the economy, BRN’s revenues for the first six months continued to fall by 11.7 percent to P289 million from P327 million in the same period last year.

Total net income, however, was higher by 5.7 percent at P225.8 million from P213.6 million last year due to higher gross profit margins and increased earnings from affiliates.

ADVERTISEMENT - CONTINUE READING BELOW

3| Know how the company will invest the proceeds

BRN intends to use about 40 percent or P600 million of the maximum proceeds to invest in its property development projects, which has an estimated budget of P5.6 billion.

BRN has a pipeline of projects that include a 300-hectare master planned mixed-use community development in Tanay, Rizal and a 280-hectare agrotourism and retirement estates situated in Manolo Fortich, Bukidnon.

BRN also plans to pursue land banking activities where it has local presence and competitive advantage in the areas of Tanay, Rizal; Cagayan de Oro City, Butuan City, and Bukidnon by using about 27 percent or P400 million of its target proceeds.

BRN is allocating 23 percent or P350 million of its proceeds to construct an E-beam irradiation facility in Tanay, Rizal and cover the operational expenses of its subsidiary, irradiation service provider Irradiation Solutions, Inc.

The balance of 10 percent, or P150 million, will be used for BRN’s working capital requirements.

4| Know the financial risk and opportunities

BRN has a relatively strong balance sheet, with only about 19 percent of its total assets financed by debt. It also has a high current ratio of 2.83 as of June 2021.

If we want to assess how the company’s cash flows can repay its interest expenses and the projected dividends, we can simply compute for the company’s EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization.

Based on depreciation expenses of P20.9 million and operating income of P67.3 million as of the first half of this year, we can estimate BRN’s EBITDA at P88.2 million.

ADVERTISEMENT - CONTINUE READING BELOW

If we annualize this amount, we will derive BRN’s an EBITDA of P176.4 million.

By comparing this against the company’s yearly interest expense of P25.2 million and the projected dividends of P105 million from the preferred share offering, we will get an interest coverage ratio of 1.35 times, which more than covers its financing costs.

5| Know your investment strategy

BRN’s preferred share offer at 7.0 percent will become one of the highest in the market. The average yield of preferred shares in the market is only 6.0 percent.

The other preferred stocks in the market that offer 7.0 percent or higher are Phoenix Petroleum’s preferred shares, PNX3B and PNX4, which have average yields of 7.6 percent, and First Gen’s preferred, FGENG at 7.3 percent.

But since Phoenix and First Gen’s preferred shares have been offered years ago, they have a shorter redemption period than BRN.

The high yield of BRN’s preferred shares is indicative of its risk profile, being a small company with diversified interests.

While BRN is largely a property developer, its various interests in power generation, agribusiness, and others make it like a typical holdings company.

Because of this, it carries the risk of misallocating its capital to segments that have poor investment opportunities. Such risk causes BRN stock to trade a huge discount.

The stock has historically been trading at 50 percent of its book value Currently, the stock has price-to-book ratio of 0.48 and market capitalization of only P2 billion.

BRN’s preferred share offering, in fact, already represents 75 percent of its market capitalization.

ADVERTISEMENT - CONTINUE READING BELOW

If the market will give the same discount to BRN’s preferred stock, we can assume a higher risk premium for the stock.

Let’s say we put a four percent risk premium on the prevailing five-year Philippines bond yield of 4.43 percent to derive our opportunity cost, we will get a rate of 8.43 percent.

Using this rate to compute the expected discounted price of BRN’s preferred share, we can divide the expected dividend of P7 per share by the opportunity cost of 8.43 percent to get a theoretical value of P94.2 per share.

At a discounted market price of P83 per share, we can get a higher yield of 8.4 percent to cover expected risks.

Discover the best of culture, business, and style from Esquire Philippines. Visit Quento for more stories and subscribe to our YouTube channel for new videos. 

Comments
More Videos You Can Watch
About The Author
Henry Ong
View Other Articles From Henry Ong
Latest Feed
Load More Articles
Connect With Us