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PULSE Investments "tenuous at best and unsustainable at worst" Michelle Hirst, Research Manager, Stocks & Securities Ltd. (SSL)

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15 years ago

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Over the past year, the price of Pulse Investments (PULS) shares has more than doubled, increasing by over 148%. Currently, at $5.70 per share, PULS’ market capitalization is J$1.5Bn – more than Radio Jamaica or Salada.

Our work finds that the market is severely overvaluing PULS. Accounting treatments on PULS’ financial statements, especially with regards to in-kind sponsorship, vary significantly from economic reality. Revenues, operating income and assets are all accounted for at levels significantly higher than their true economic value.

In addition, related party transactions such as real estate transfers and excessive management fees are value destructive to public shareholders in our view and are indicative of weak corporate governance more generally.

The sustainability of a business whose primary operation is obtaining sponsorship funds and capturing some of these funds for itself and its shareholders is tenuous at best and unsustainable at worst.

We recommend with conviction that clients SELL shares at current levels and believe that the Company’s fair value is between $0.45 to $0.60 per share.

Economic Value Only 1/10th of Accounting Value
According to PULS’ financial statements, the Company generated J$1.4Bn of revenue and $442MM of EBITDA in 2008. While the derivation of these figures may (and we emphasize may) be technically permissible from an accounting perspective, they bear no relationship whatsoever to PULS actual cash flow generation or the true economic value of PULS business. We believe that cash revenues are closer to J$161MM and cash EBITDA is closer J$41MM, both only about 1/10 of their “accounting” values (see Exhibit 1).

PULS generates revenue in four ways: receiving agency fees for fashion models it represents, receiving rental income for properties it sublets and receiving ticket sales and sponsorship consideration for events it promotes. Agency revenues, sublet income and ticket sales are all legitimate sources of revenue, reflected accurately by PULS in both accounting and economic terms. That said, they account for just $J37MM million or less than 3.0% of PULS revenues. The vast majority of PULS “revenues”, or over $J1.4Bn, come from sponsorship.

We do no believe that most of PULS sponsorship receipts are “revenue” in the economic sense of the word. Sponsorship consideration paid to PULS is meant to cover the cost of events, not to hit PULS bottom-line or ultimately be distributed to PULS shareholders. That is, every dollar of sponsorship received should be matched by a dollar of expense. In that sense, one can either count sponsorship as revenue with an equal offsetting cost or not count it at all; the end result in both cases should be the same: no impact on operating income or cash flow.

In the case of cash sponsorship, it is possible for PULS to capture a portion of payments either through explicit contracts with sponsors or more likely through indirect means (cutting event expenses below budget, etc). While this is good for PULS in the short-term, it is terrible for sponsors, PULS’ defacto customers. After all, if PULS can afford to keep excess sponsorship funds and still execute its events, sponsors will eventually argue (quite, reasonably) that they should contribute less. After all, sponsors are paying to promote their products by enabling the execution of events the PULS promotes, not to compensate PULS shareholders. In our view, this arrangement is unsustainable on an ongoing basis. That said, for the purposes of this analysis we conservatively assume that PULS is capable of retaining 15% of the J$146MM in cash it receives from sponsors.

The vast majority or 91% of PULS sponsorship “revenue” is not in the form of cash, but is paid in-kind. Like cash sponsorship, in-kind sponsorship should be matched by an expense or use of that in-kind contribution and therefore should not be income generating. Even worse however, in-kind sponsorship is much more difficult to convert to cash for the benefit of PULS and its shareholders. While in theory excess in-kind sponsorships of products like liquor could be sold for cash, this tactic is untenable in PULS’ case since its largest in-kind sponsorship contributions are multiyear entitlements to advertising and not product donations. As a result, from a cash flow or fundamental economic perspective, we believe with strong conviction that in-kind sponsorship contributions should not be considered revenue. PULS true cash or economic revenue is therefore merely: the sum of agency revenues, sublet income, ticket sales and cash sponsorship or J$161MM, roughly 1/10th of its accounting revenue.

PULS disclosure on the cost side is non-existent. However, for the purpose of this analysis we conservatively assume that PULS incurs only two operating cash expenses: the 85% of cash sponsorship that is used to fund events or J$105MM and the $17MM PULS it uses to pay management. This implies an EBITDA of J$40MM or once again only 1/10th of the EBITDA PULS reports on its financial statements.

After making these adjustments, it appears that the market is valuing PULS at 38x EV/EBITDA. A highly aggressive implied growth rate for any company, but especially one whose business model is essentially to get sponsorship, use as little of it as possible on its actual events and somehow capture as much of it as possible for itself and its shareholders. Applying a more reasonable 5x EV / EBTIDA multiple to our economic EBITDA implies an equity value for PULS of J$163MM or $0.60 per share. Once again this valuation is roughly 1/10th of its current market capitalization (see Exhibit 2).

A thorough examination of PULS balance sheet confirms our work (see Exhibit 3). The vast majority of PULS assets are in-kind sponsorship entitlements to advertising in future years which PULS capitalizes. Accounting for in-kind sponsorship as assets, particular advertising entitlements, is problematic for the same reasons discussed above with regards to revenues. In addition, because PULS must estimate the cost of future of advertising to arrive at an asset value, it’s even more problematic and subject to significant “judgments” from PULS management. We therefore assign no economic value to the advertising entitlements and unexpired sponsorship “assets” marked at J$953MM on PULS’ balance sheet.

Similarly, we assign no value to PULS’ patents which are currently being carried at over J$90MM or its leasehold real estate of J$353 which it after all does not own. PULS’ remaining book asset value consists of the cash on its balance sheet and its accounts receivables which collectively amount to US$158MM.

After subtracting PULS’ liabilities, excluding those due to related parties, we arrive at a book equity value of PULS of J$113MM or $0.42 per share – in line with our multiples-based valuation above and once again only a fraction of its current

market capitalization.
Corporate Governance and Value Destruction
In March, PULS executed a rights offering and obtained proceeds of J$127MM. It used these funds to retire debt and preference shares and pad its balance sheet. In addition, it acquired J$59MM of investment properties from related parties. Related parties also received J$17MM in fee based compensation. In aggregate, these transactions result in a net out flow of value to related parties funded by public shareholders. We believe both these transactions are value destructive and result in a misalignment of related party distributions from those received by public shareholders. In addition to our concerns on PULS business model and valuation, these corporate governance concerns further inform our bearish investment thesis.

Conclusion
We believe that PULS is significantly overvalued by the public market. PULS share price has increased dramatically in the last twelve months and now implies an equity value of J$1.5Bn which is difficult to reconcile on a relative value basis with other investment opportunities. PULS accounting treatment of its primary source of revenue and assets, in-kind sponsorship, severely overstates the economic value of these activities. Once these activities are accurately reflected, we find PULS to be worth only a fraction of its current trading value. In addition, we believe that PULS’ corporate governance structure and the sustainability of its sponsorship driven business should be worrisome to investors (especially given that PULS has already once been de-listed from the JSE).

We recommend with conviction that clients SELL shares at current levels and believe that the Company’s fair value is between $0.45 to $0.60 per share.

To see full article with table etc please contact businessuitemagazine@gmail.com for subscription details or call 1-876-754-2293/2295

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Businessuite Markets

Prestige Holdings Enjoyed A Strong Performance For First Quarter Of Fiscal 2024.

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3 days ago

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April 23, 2024

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Christian E. Mouttet Chairman for Prestige Holdings has released the following Consolidated Unaudited Results for the Three Months Ended 29 February 2024

I am pleased to report that Prestige Holdings enjoyed a strong performance for the First Quarter of fiscal 2024. Group sales increased by 10% to $341 million from $309 million in the prior year, which resulted in a Profit Before Tax of $15.3 million compared to a profit of $11.6 million for the same period in 2023, a 32% increase. Profit After Tax, attributable to shareholders, increased by 25% from $7.8 million to $9.8 million. Cash flow from operations was $26.9 million and we ended the quarter with $100 million in cash having reduced total borrowings by $5.8 million. During the period we remodelled 2 restaurants and ended the period with 134 restaurants.

All brands posted solid performances during the quarter, with our Subway and Pizza Hut results driven by improved operations, efficiencies and strong demand for our innovative menu items and value offerings. Top line sales were impacted by the opening of five new Starbucks restaurants at Brentwood, Aranguez, O’Meara, St. Augustine and Amazonia Mall, Guyana, when compared to the First Quarter of 2023.

I am extremely pleased to report that KFC recently achieved a significant milestone of serving 150,000 Harvest Meals. The Harvest Meal Programme, which has been active for two years, is designed to provide unsold KFC food to participating NGOs in Trinidad and Tobago. This unsold food is carefully packaged and transported, following accepted global food safety protocols, and is then repurposed into delicious meals and served to the less fortunate. We are very happy to have the opportunity to positively impact the communities in which we operate by partnering with NGOs to provide meals to those in need.

As mentioned in my previous report, significant investment is planned in this financial year for new store development, including Guyana, as well as the remodelling of existing assets in Trinidad and Tobago. We expect these developments, as well as our continued brand initiatives, to continue to deliver positive results.
For More Click THIS LINK

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Businessuite Markets

GraceKennedy’s Strategic Spur Tree Spices Acquisition: Positioning For Growth

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3 days ago

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April 23, 2024

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GraceKennedy Limited’s recent acquisition of an increased stake in Spur Tree Spices (Jamaica) Limited has positioned it as the second-largest shareholder in the company. With an estimated 338,410,375 shares now under its belt, based on Spur Tree’s issued share count of 1,676,959,244 ordinary shares, GraceKennedy solidifies its influence in Jamaica’s culinary landscape.

Continued Expansion through M&A

This transaction marks the latest in GraceKennedy’s series of mergers and acquisitions (M&A) activities, reflecting the company’s aggressive growth strategy. Following its acquisitions of Scotia Insurance Caribbean Limited and Unibev Limited in 2023, as well as doubling its interest in Catherine’s Peak Bottling Company Limited to 70% in February 2023, GraceKennedy demonstrates its commitment to diversification and market expansion.

Spur Tree’s Strategic Evolution

Meanwhile, Spur Tree Spices is undergoing a strategic transformation, expanding beyond spices and seasonings to become a full-fledged food brand. With plans to launch more than two dozen new products on May 1 and a brand refresh to reflect its new focus, Spur Tree is poised for a significant market repositioning.

Diversification and Innovation

In the upcoming quarter, Spur Tree Spices is set to unveil an array of innovative products, including their much-anticipated line of dried spices. This strategic move represents the company’s foray into new categories and a substantial expansion of its product offerings. By diversifying its portfolio, Spur Tree aims to capture a broader consumer base and solidify its position as a leading player in the culinary industry.

Implications of the Acquisition

GraceKennedy’s increased stake in Spur Tree Spices not only strengthens its position in the spice market but also opens doors for collaboration and synergies between the two entities. As GraceKennedy continues to expand its presence through strategic acquisitions, it can leverage Spur Tree’s innovative product line-up to bolster its offerings and tap into new market segments.

GraceKennedy Limited’s acquisition of a significant stake in Spur Tree Spices marks a strategic milestone for both companies. With GraceKennedy’s growing influence and Spur Tree’s strategic evolution, the stage is set for a dynamic partnership that promises innovation, growth, and market leadership. As they navigate the evolving landscape of Jamaica’s culinary industry, GraceKennedy and Spur Tree Spices are poised to redefine the future of food, one spice at a time.

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ANSA McAL Group Announces Formation Of Joint Venture Company, Globus ANSA Private Limited, With Globus Spirits Limited In India.

Published

2 weeks ago

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April 9, 2024

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A. Norman Sabga Executive Chairman of the ANSA McAL Group of Companies has announced the formation of the joint venture company, Globus ANSA Private Limited, with Globus Spirits Limited in India.

In a release posted on the Trinidad and Tobago Stock Exchange ANSA McAL confirmed that with effect from 4th April 2024, ANSA McAL Limited (“ANSA McAL”) entered into a joint venture agreement with Globus Spirits Limited (“GSL”) to establish Globus ANSA Private Limited (“GAPL”).

Each party will hold fifty percent (50%) of the issued and allotted ordinary share capital of GAPL.

“This collaboration signifies a new era in the Indian alcoholic beverages industry, driving innovation and growth, ‘

“Globus ANSA Private Limited will specialise in manufacturing and distributing alcoholic beverages across the Indian subcontinent, leveraging the strength of both ANSA McAL and Globus Spirits Limited,” said Mr. Shekhar Swarup, Managing Director for Globus Spirits Limited. “This collaboration signifies a new era in the Indian alcoholic beverages industry, driving innovation and growth, ‘he stated

 

 

 

Globus Spirits Ltd is one of the leading players in the Alcohol industry in North India distributing brands in the Consumer Segment including:
• GR8 Times.
• Rajputana.
• Globus Spirits Dry Gin.
• White. Lace.
• Governors’ Reserve Red.
• Governors’ Reserve Blue.
• Oakton.
• Laffaire. Napoleon.

Trinidad and Tobago conglomerate ANSA McAL Group has over 142 years of rich history representing many world-renowned brands, including some of their own home-grown successes. The partnership marks a significant milestone in ANSA McAL Group’s journey, merging cultures and expertise to revolutionise the beer industry in India, with their icon Carib brand and leading the charge.

Norman Sabga Executive Chairman of the ANSA McAL Group of Companies, highlighted the immense opportunities in India and their commitment to delivering unparalleled value through this partnership.

“We are confident that our collaboration will allow us to seize the growing demand for high quality beverages by captivating palates with our distinctive products” he said

ANSA McAL is now poised to be an equal Shareholder of GAPL, an Indian company which
would produce, market, sell, distribute and retail beer and other beverages.

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Jamaica Broilers Group Reporting Strong Top and Bottom Line Performance for January 2024 Quarter

Published

4 weeks ago

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April 1, 2024

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Christopher E. Levy Group President & CEO of Jamaica Broilers Group Limited now release the following unaudited financial results for the quarter ended January 27, 2024, which have been prepared in accordance with International Financial Reporting Standards (IFRS).

The Group produced a net profit attributable to shareholders of $1.3 billion, for the quarter ended January 27, 2024. The operations of the Group continue to be strong, and our gross margins are consistent with expectations.

Quarterly Group revenues amounted to $23.6 billion, a 4% increase above the $22.7 billion achieved in the corresponding quarter.

Our gross profit for the quarter was $5.9 billion, a 7% increase above the $5.5 billion achieved in the corresponding quarter in the prior year.

Jamaica Operations reported a segment result of $5.9 billion which was $448 million or 8% above last year’s segment result. Total revenue for our Jamaica Operations showed an increase of 2% over the prior year nine-month period. This increase was primarily driven by the growth in the sale and export of poultry and implementation of cost containment efforts.

Our US Operations reported a segment result of $3 billion which was $226 million or 8% above last year’s segment result. This increase was driven by increased volumes of poultry meat and eggs, as well as the implementation of cost management initiatives.
Total revenue for the US Operations increased by 3% over the prior year nine-month period.

We have begun to realise additional volumes through the US operations, which has resulted in increased financing requirements primarily around working capital.

For More Information CLICK HERE

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Main Event Reporting Net Profit Of JA$100M For Quarter Ended January 2024

Published

4 weeks ago

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April 1, 2024

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Solomon Sharpe Chief Executive Officer of Main Event Entertainment Group Limited has released the following unaudited financial statements for the quarter ended January 31, 2024 (Q1).

The company continues to have solid results in an increasingly competitive and largely difficult environment. The company’s performance was anchored by diversifying our client base through strategic targeting and efficient management of our operations.

The company reported net profit of $100.254M for the quarter ended January 31, 2024, representing a decline of 15% or $17.695M relative to the corresponding period of 2023. Consequently, earnings per share decreased by 15% to $0.33 per share.

Total revenues for the quarter ended January 31, 2024 declined by $59.235M to $567.752M, reflecting a decrease of 9% over the corresponding period. This was mainly due to a one-off event for one of our major clients which is not likely to reoccur in subsequent periods.

The company was strategic in its efforts to protect the margins and the gross profit for the quarter was $315.822M compared to the $312.611M earned in 2023. This demonstrates the company’s ability to be alert and responsive to market conditions. Gross margins improved to 56%, up from 50% in the corresponding period.

The company continues to generate revenues from activities requiring reduced external support.

For more information CLICK HERE

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