Financial Adviser: 5 Things to Know About Globe Telecom's Stock Rights Offering and How to Profit from It
Globe Telecoms (PSE: GLO) is raising up to P17 billion in fresh capital after it recently obtained approvals from regulators to issue up to 10.12 million new common shares via stock rights offering.
What is a stock rights offering
A stock rights offering happens when a listed company plans to raise funds by issuing rights to its shareholders to purchase additional stocks at a discounted price in proportion to their existing holdings.
The terms of the rights such as the entitlement ratio and discount offered differ for every company. Some may be more generous while others may be less attractive.
In the case of Globe, its existing shareholders will be entitled to subscribe to the new shares at P1,680 for every 13.2366 common shares held, which represents 21.1 percent discount to current market price of stock at P2,130.
Only shareholders as of September 16 will be allowed to buy the new shares offering. The offer period for entitled shareholders to pay will run from October 3 to 7 with a target listing date on October 28, 2022.
Similar to an Initial Public Offering (IPO), subscribing to the rights offer is like investing in the business. You should spend some time understanding the business of Globe 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 stock.
Here are five things every market investor needs to know about stock rights offerings of GLO and how to profit from it:
1| Know the earnings outlook
Globe is the leading telecommunications and technology provider in the country with 87.4 million mobile subscribers, 3.1 million home broadband customers, and over 1.1 million landline subscribers.
About 62.1 percent of Globe’s revenues comes from mobile service, 17.2 percent from home broadband, and the 20.6 percent from corporate data, fixed line voice, and non-service revenues.
Last year, Globe’s total revenues grew 4.0 percent to P167.7 billion from P160.5 billion in 2020, but operating income margins declined from 15.8 percent in 2020 to 13.7 percent due to higher general and administrative expenses and financing costs.
Despite the lower operating income, Globe booked a one-time gain of P4.3 billion, resulting from the dilution of its ownership in Mynt, the operator of GCash.
The one time-gain enabled Globe’s net income to increase 27 percent from P18.6 billion in 2020 to P23.7 billion in 2021. But without it, the company’s income before income tax would have declined by 8.8 percent.
This year, Globe’s total revenues for the first six months continued to slow down, growing marginally by 3.2 percent to P87.3 billion from P84.6 billion in the same period last year.
But Globe managed to report a 51 percent increase in net income of P19.7 billion from P13.0 billion in 2021 due to the one-time booking of non-recurring income of P10.7 billion from the sale of its data center business.
Again, without it, the company’s pre-tax income would have declined by 12.2 percent to P13.5 billion from P15.4 billion.
One of the causes for the decline in Globe’s core earnings can be traced to its rising depreciation costs. The company’s depreciation expense for the first six months increased by 20 percent from P18.5 billion last year to P22.3 billion.
The increase in depreciation expenses lowered Globe’s operating income by three percent, but if we put this non-cash item back, EBITDA actually increased by eight percent to P40.5 billion from P37.3 billion last year.
Globe’s EBITDA margin improved by eight percent from 49 percent last year to 51 percent this year due to lower cost of sales and operating expenses.
Improving EBITDA margins along with a sustained revenue recovery in the second half should help Globe end the year with positive growth in its core earnings.
2| Know financial strength of the company
Globe’s financial leverage has been increasing this year due to higher debt position, which grew by 14 percent during the first six months of the year to P240 billion from P210 billion in December 2021.
The increase in debts translated to higher debt-to-equity ratio of 1.9 times from 1.8 times last year and higher interest expenses, which increased by 17 percent to P4.6 billion from P3.9 billion in the same period last year.
With the stock rights offering, Globe will be able to raise up to P17 billion, which it can use to repay portions of its debt. The rights offer will also enable the company to lower its debt-to-equity ratio by expanding its capital.
Assuming Globe uses 50 percent of the proceeds to pay off some of its loan, its total gross debt will fall to P231.5 billion from P240 billion, while its equity, as a result of the new shares issued, will increase to P142.7 billion.
This will result to a lower debt-to-equity ratio of 1.62 times.
Now, Globe also announced that it has signed agreements with MIESCOR Infrastructure Development Corporation, a subsidiary of Meralco (PSE: MER) and Frontier Tower Associates for the sale and leaseback arrangement of its 7,000 towers for P71 billion.
A sale-leaseback does not increase a company’s debt load because it is not a debt financing. It is also not an equity financing because it doesn’t involve issuance of shares.
The sale-leaseback arrangement will allow Globe to redeploy its capital from passive infrastructure to active investment. The company plans to use P17.7 billion of the proceeds to pay off its loans and P53.2 billion for capital expenditures.
The sale of Globe’s towers will also result to deferred gain on sale of P25 billion and estimated one-time non-recurring gain on sale of P18 billion.
The expected repayment of loan will further lower Globe’s total debt position to P213.8 billion, while equity will increase to P156.7 billion due to the recognition of gain on sale from the transaction, resulting to a lower debt-to-equity ratio of 1.37.
Globe is expected to raise a total of P87 billion from the rights offer and sales and leaseback arrangement.
Assuming it will use half of the stock rights proceeds for loan repayment, Globe will have over P70 billion in cash for capital expenditures, which should support its long-term earnings growth.
3| Know the pricing multiples
If the Price-to-Earnings (PE) ratio is a multiple that values the equity of a firm, the Enterprise Value (EV)-to-EBITDA ratio is a multiple that determines the entire worth of a firm.
The EV of a company is computed by simply taking the sum of the market value of its equity and book value of its debt minus its cash reserve.
The EBITDA, on the other hand, stands for earnings before interest, tax, depreciation and amortization, which represents the “cash earnings” of the company.
EBITDA, as a broad measure of cash flows, helps determine the true earnings potential of a company by adding back its financing costs and noncash expenses such as depreciation expense.
Similar to the P/E ratio, the lower the EV/EBITDA ratio, the more attractive the investment.
If we get the sum of Globe’s current market cap at P279 billion and its debt of P240 billion minus its cash of P16 billion, we will derive an EV of P503 billion.
To get the EV/EBITDA of Globe, we simply divide this by an estimated EBITDA for the year at P81 billion to derive a ratio of 6.27 times.
Last year, the company’s average EV/EBITDA was 8.25 times. If we price Globe at least at seven times EV/EBITDA, which is roughly 85 percent of its average last year, we will get an EV for GLO at P567 billion.
Using this target EV of P567 billion, we can work backward to get the implied market cap of Globe at P343 billion, which translates to a target price of P2,524 per share.
Now, we have simulated earlier that the projected debt could decline to P213 billion while cash reserves could increase to P77 billion after the rights offer and sale-and-leaseback transaction.
Using these assumptions, we can project that Globe’s EV/EBITDA ratio could fall to 5.19 times.
Again, given the same EV of Globe at P567 billion at EV/EBITDA ratio of 7.0 but different debt and cash profile, we can derive that its implied market cap at P431 billion will mean that the target price of the stock is at P3,170 per share.
4| Know the dividend history
Globe has been paying dividends every year consistently for the past 19 years since 2003.
It pays out an average of 60 to 70 percent of its annual core earnings every year. During the 2020 pandemic, GLO paid out about 67 percent of its earnings in 2019 at P108 per share
GLO’s cash dividend has increased by a compounded average growth rate of 12 percent annually, from P14 per share in 2003 to P107.99 per share in 2021.
In 2021, Globe distributed roughly the same cash dividend of P108 per share despite lower net income from the pandemic, representing 80 percent dividend payout.
This year, the company has already paid a total of P81 per share in the past three quarters and it is likely that it will pay the balance of P27 per share this November totaling P108 per share, same as last year at 62 percent dividend payout.
With its income up by more than 50 percent this year due to one-time non-recurring gains on sale of its assets, cash dividends of P108 per share will most likely be maintained at the minimum for next year.
At P108 per share, the dividend yield at current share price stands at 5.07 percent.
If we will price Globe’s at its pre-pandemic average dividend yield of 4.69 percent, we should expect the stock price to trade at least at P2,300 level.
5| Know your rights and options
There are two items that you need to know about the rights offer: the entitlement ratio and the discount.
As a shareholder, you will have the right to buy additional shares in proportion to your holdings at a discounted price.
Globe’s terms entitle you to buy one new share at P1,680 for every 13.2366 of common shares you own.
If you buy 13.2366 shares of GLO at current price of P2,130 and you exercise you right to buy one share at P1,680, you will get an average cost of P2,098 per share.
If you choose not to subscribe and do nothing, you can also buy the stock on ex-rights date. Theoretically, the stock should adjust lower and fall to P2,098. This is assuming GLO’s stock price at P2,130 will stay the same until the September 15.
You may or may not be able to buy the stock at its adjusted price. If market demand is strong, share price may immediately go up after adjustment, and you might miss buying at the target price.
In this case, it will be good to buy the stock now and avail of the rights to buy at a discounted price to average down your price.
On the other hand, if market sentiment is poor, the stock could decline further and possibly sink even lower than its ex-right price. If this happens, with the positive fundamentals of the stock, a lower price should offer a great buying opportunity.
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