Experts are divided on the share price
As the Service Global Footwear Limited begins to raise funding through initial public offering at the Pakistan Stock Exchange, experts are divided on what will be the fair price of the stock.
The SGFL is looking to raise at least Rs1.55 billion by offering its 40.9 million shares to institutions and rich individual investors on April 7 and 8. The stock will be sold to common investors on April 12 and 13 at the PSX.
The company aims to invest into a Service Industries Limited subsidiary, Service Long March Tyres (Pvt) Limited, and become a stakeholder of approximately 19%. The percentage may increase if the shares are sold above the floor price.
The new joint venture with Chinese firms will establish a radial tyre manufacturing plant for buses and trucks with the aim of exporting around 85% tyres to the US and Europe.
“There’s anti-dumping and countervailing duties on Chinese-made tyres in the US and European Union,” said Adnan Sami Sheikh, AVP Research at Pak Kuwait Investment Company. “The Chinese company has decided to come to Pakistan, which doesn’t have those duties. Chinese tyres already have acceptance there. I think there’s potential.
“I think the stock is good even if it’s bought at Rs53.2,” Sheikh said.
The SGFL began the auction of shares at a minimum or floor price of Rs38 per share. The price may increase to a maximum of 44% or Rs53.2 per share during the auction for institutions and rich individual investors. Shares will be sold to successful bidders at a strike price, which will be set during the auction.
“Moreover, following the vaccination process across the globe, the economies will reopen and footwear sales will also pick up again,” he said. “SGFL exports nearly 95% of its footwear. I expect its exports to be high, which means more profit for the company.”
The new venture will also have the greenfield status, which means the company will get tax exemptions. It will reduce the cost of production, which would also make it price competitive.
But two other research analysts, Topline’s Sunny Kumar and BMA’s Taha Madani, say it should be bought between Rs38 and Rs44.
“I expect the share price to stand at Rs54 in December,” Madani said. “To book a profit of around 22%, the share shouldn’t be bought over Rs44.”
Kumar wrote in his report that lower than expected sales due to slowdown in the economy amid COVID-19 lockdowns, sharp increase in rubber prices, currency depreciation and higher than expected labor cost are the risks facing the company.
Madani, on the other hand, said that he took multiple ratios such as price to earnings, price to sales and price to book value of comparable companies such as Bata, Interloop and Service Industries to ascertain the industry average.
“Lower is the ratio, better will be the company stock,” he said. “According to my assessment, at Rs38, the stock seems cheap. At Rs44, the stock appears at par with the industry.”
The total cost of the new project is estimated at around Rs16.43 billion. It is expected to start production in June 2021.
The SGFL aims to sell 75% of the 40.9 million shares to institutions and rich individual investors, and the remaining 25% to common investors at the strike price.
It will be the second company to offer its shares to the public at the PSX in 2021. Later, the company will be listed at the exchange, meaning that investors will be able to trade its shares.
The SIL has entered a joint venture agreement with Chaoyang Long March Tyre Co Ltd and Myco Corporation. It established the joint-venture company, Service Long March Tyres (Pvt) Limited, in Pakistan in January 2020.
The company will have a production capacity of 600,000 tyres per annum.