THAT Harbor Star Shipping Services Inc. (HSSSI) is going public is good news. But will its initial public offering (IPO) attract investors?
Let’s see the numbers.
The company has been performing well. In the first quarter of 2013, its net income went up by 55.7 percent to P31.5 million from P20.2 million in the same period last year. This profitability resulted from service income of P207 million, up by 25.7 percent from P164.6 million.
With this financial performance, HSSSI has accumulated retained earnings of P213 million as of March 31, 2013. The amount of retained earnings, if not restricted, determines the ability of a company to declare dividends either in stock or in cash.
Even before it could start selling shares, HSSSI distributed 261.6 million shares, valued at P1 each, as stock dividend. Most of the dividends went to two stockholders.
Unfortunately for the public, the Bellas, who control HSSSI, won’t share the generosity that they had bestowed themselves, because they adopted for their company a policy that only 10 percent of prior year’s net profit would be available for distribution as dividend.
To illustrate: 10 percent of HSSSI’s net profit of P147.8 million in 2012 would be equal to P14.8 million, when divided by 605.2 million post-IPO outstanding shares would be equal to P0.02 per share. The per-share dividend would translate to 0.75 percent of P3.27 IPO price per share. That’s less than 1 percent per year return for your money.
As of latest filing in connection with HSSSI’s public sale of shares, Geronimo P. Bella Jr. and his brother, Ricardo Rodrigo P. Bella, own 249 million shares, or 58.8 percent, and 166 million shares, or 39.2 percent, respectively, of 423.6 million outstanding common shares. From July 22 to 26, HSSSI would have sold 181.6 million shares to outsiders that would be sourced from its 1.5 billion authorized capital. But in view of the market’s slight fall, the Bellas deferred the offering. “We are looking at a new offer period within September 2013,” they told the Philippine Stock Exchange in a regulatory filing.
The stock sale would be a real IPO in the sense that the Bellas are not selling.
If they would, then here is what would happen: Should each of them sell 50 million shares of the recent stock dividends they received, the Bella brothers’ unloading would fall under secondary offering that would gross each of them P163.5 million.
Instead of taking advantage of the public, the Bellas allowed their holdings to be diluted.
Here is how the dilution would occur: With the public ending up owning 30 percent of the HSSSI’s post-IPO outstanding common shares of 605.2 million, the Bellas’ combined holdings of 415 million shares would drop to 68.6 percent of expanded outstanding shares from 97.9 percent of pre-IPO paid-up capital stock.
Would it a beneficial dilution?
Definitely it would be, since at P3.27 IPO price per share, HSSSI would raise P593.8 million and at the same time increase its stockholders’ equity by P412.2 million in additional paid-in capital (APIC).
APIC represents the premium over par value of P1 of a primary offering of shares. HSSSI sold shares to the public at P3.27 each for a premium of P2.37 per share. It used to be declarable as stock dividend until then Chairperson Fe Barin of the Securities and Exchange Commission questioned the said policy. Why return to stockholders what they paid for their shares? She correctly asked and ably justified her stand that got the approval of the commission.
As the only existing significant stockholders, the Bellas would “lose” 29.4 percent of their almost 100 percent-control of HSSSI. But the proceeds would more than make up for the dilution as P593.8 million would go a long way in financing the company’s expansion plan.
Of the IPO’s net proceeds of P540.8 million, HSSSI plans to spend P120 million in buying tugboats and another P120 million in the acquisition of barges. It also plans to reduce its debts by P73.4 million. As of March 31, 2013, the company reported total borrowings of P588.9 million, of which P395.7 million is current.