Analysts Have Mixed Reactions To Honey Bun IPO

Honey Bun's coconut roll
Honey Bun’s coconut roll

Analysts from separate media houses have come to two divergent conclusions on the Honey Bun initial public offering, which aims to raise J$50.8 million of fresh capital for the pastry maker to grow.

Scotia Investments Jamaica Limited has advised investors to stay away from the offer, whose stock it sees as having limited scope. But Stocks and Securities Limited (SSL) considers the offer sweet enough to rate it as a buy.

SSL gives the company credit for having put a growth strategy in place back in 2005 that included the acquisition of assets and equipment, as well as its 2007-2008 rebranding efforts, which the investment house said helped to boost demand for Honey Bun’s pastry products, fattening its bottom line in the process.

SSL contends the company is well positioned for continued growth.

strategic goal

“Overall, the company’s strategic goal is to improve its competitiveness and efficiency. It has purchased Enterprise Resource and Planning (ERP) software to enhance its manufacturing and distribution logistics, and route profitability and is in the process of taking over the distribution routes that were operated by certain of its former contractors,” said SSL’s analysis.

“Furthermore, the company’s recent investments in production equipment will also provide a platform for new product development in the financial year 2011, and new products are proposed for launch in spring 2011 while others are being considered for launch in the financial year 2012.”

Having achieved significant revenue growth over the last five years, SSL expects the IPO to be successful.

The offer is priced at J$3 per share, but only about 9.375 million units of the 18.75 million shares on offer are available to the market; the rest is for special constituents.

Honey Bun’s Chief Executive Officer Michelle Chong has said a portion of the IPO proceeds will fund equipment upgrades, which are ongoing, and position the company to dive into exports.

Scotia Investments’ senior financial analyst, Najja Daley, while he acknowledges the company’s growth and potential, points to two drawbacks.

“A major concern for the Honey Bun stock will be the illiquidity that is expected to accompany an issue with such a small publicly available balance of 9.4 million units or 10 per cent of the total outstanding,” said Daley, analyst at Scotia Investments.

“This factor, combined with the projected price and high comparables, yield the recommendation that investors not participate in this offering,” he said.

Honey Bun IPO opens to the market today and is scheduled to close in a week’s time on Wednesday, May 18.

At the IPO price of J$3, the company would be trading at a trailing price to earnings ratio of 16.4 times and a forward PE of 13.6 times, “both significantly higher than the manufacturing industry and much higher than the junior market average of approximately 11.7 times,” Daley said.

“Also, given the company’s stated dividend payout policy of no less than 20 per cent a DDM (dividend discount model) yields a projected price of J$3.13, a price difference of only four per cent,” he said.

A total of 8.6375 million shares has been reserved for employees of the company at discounted prices of J$2.40 and J$1, while 737,500 has been set aside for key partners at the public offer price of J$3.

If the offer is successful, the company is expected to list on the JSE Junior Exchange within three to four weeks of closure.


Read it in the Gleaner.

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