Real estate leader braces for attractively priced IPO

Acuity Partners Vice President Corporate Finance Amani Ranaweera

Prime Group Chairman Premalal Brahamanage

Prime Group Co-Chairperson Sandamini Rukmal Perera

• Prime Lands Residencies signifies strong growth potential with 40% dividend payout envisaged

Prime Lands Residencies Ltd., the leader in the real estate industry, is heading for a new chapter as it seeks a listing on the Colombo Stock Exchange with its initial public offering (IPO). In this interview Amani Ranaweera, who is Vice President Corporate Finance at Acuity Partners – the firm that will be the managers and financial advisors to the Issue – shares key insights into Prime Lands Residencies as well as the IPO. She said that Prime Lands Residencies signifies strong growth potential with a 40% dividend payout envisaged. The IPO is also attractively priced, she added. Following are excerpts: 

Q: Can you please give us a summary of this IPO?

The IPO of Prime Lands Residencies is an ‘offer for subscription,’ meaning that it is a new issue of shares with the IPO proceeds coming into the company. 100 million new shares will be issued as a price of Rs. 10.40 per share with an option to issue a further 87.5 million shares in the event the first 100 million are oversubscribed.

This results in an IPO which will be a minimum of Rs. 1.04 billion going up to a maximum of Rs. 1.95 billion. If only the first tranche of shares is issued, the post-IPO public holding will amount to 11.74%, and if the option is exercised and 187.5 million shares are issued, the public holding will be 20%.

The IPO will open on 11 May 2021 and we expect to close on the same day. The Board of Directors of Prime Lands Residencies with the assistance of Acuity will decide on whether the option will be exercised.

Q: What will the IPO funds be used for?

The company has identified several purposes for which the IPO funds will be used. Firstly, Rs. 333 million will be used to settle the balance amount payable for the land the company acquired in Meegoda. Next, Rs. 150 million will be used to pay 50% of the mobilisation advance for the Gampaha project. Rs. 50 million will go towards the construction cost of the The Beach Front 2 Uswetakeiyawa, which is currently under construction, and Rs. 188 million will be used to settle some import loans that were taken for The Grand project which is falling due shortly. Any remaining amount will be used for the purposes of covering the construction cost of The Grand project. 

Q: What is the current status of The Grand Project?

 At present the company has sold 177 units of a total of 331 units, resulting in a sale value of nearly Rs. 14 billion. Despite the current economic conditions, as well as the social issues as a result of the COVID-19 pandemic, the company has managed to sell nearly Rs. 900 million worth of units during the month of April. Apart from this it also needs to be pointed out that all six penthouses, each worth over Rs. 300 million have been sold, and of this, quite impressively, four were sold after the COVID-19 pandemic started. 

The project is due for completion by June 2022 and at present the super structure is completed with the finishing stage having commenced.

Q: What is the company’s future business strategy?

The company’s main focus within the residential real estate sector has always been the ‘Affordable Luxury’ and ‘Luxury’ categories, which are less vulnerable to market shocks. This will remain the main focus in the future as well. In terms of identifying the locations of projects to be launched in future, the company will decide based on the insights they get into the demand in each locality from parent company Prime Lands’ land-sale operations. 

In terms of the five projects that are earmarked for launch in 2021, the company has looked beyond the Colombo district. Of the five projects, the project in Gampaha was officially launched in mid-March and has secured presales for over 53% of the total 480 units by end March. This project is the largest project to be carried out by the company in terms of the number of units to date. 

Apart from that, the company will be launching a project in Kurunegala, just adjacent to the Central Expressway entrance, a project in Negombo and another in Meegoda, Homagama. In addition to this, a 43-luxury villa project will be launched in Ambewela, Nuwara Eliya this year. 

Q: How is the company’s financial performance? And what does the future look like?

From the 2016/17 financial year to the 2019/20 financial year, profit after tax was recorded as Rs. 1 billion, Rs. 715 million, Rs. 258 million and Rs. 138 million. The profitability has been at a low level for the last two financial years mainly down to the fact that the company did not launch any new projects as a result of the unfavourable market dynamics – and due to it also focusing on The Grand project. 

The company is expected to report a profit after tax of Rs. 975 million for the financial year 2020/21 on a revenue of Rs. 7.9 billion. Of this, for the 10 months ended 31 January 2021, the company recorded a profit of Rs. 736 million, which is based on the audited financial statements for the 10 months ended 31 January 2021. The main reason for this growth in revenue as well as profitability in the 2020/21 financial year is the commencement of the recognition of revenue from The Grand project.

Going forward profit is expected to increase to Rs. 1.4 billion, 1.8 billion, 2.4 billion and 2.6 billion over the next four financial years. 

Q: What is the revenue recognition policy of the company?

The company adopts a very prudent revenue recognition policy where there are two primary conditions that need to be met prior to the commencement of revenue recognition, that is, 25% of the construction should be completed and 20% of customer advances should be received. Once both these conditions are met revenue recognition will commence, but that too will be on the basis of percentage completion of construction and customer advances received. 

This policy means that the revenue that is recognised is based on actual cash receipts on units sold and relating to the particular level of construction completed.

Q: What is the basis of the IPO valuation?

In order to arrive at the IPO valuation, Acuity used three valuation methodologies, namely, discounted cash flow method, trailing Price-Earnings Method and forward Price-Earnings Method. Using the three methods we arrived at a value per share ranging from Rs. 15.82 to Rs. 20.02, with a simple average of Rs. 17.39 per share. The IPO price of Rs. 10.40 per share is at a discount of over 40% on this average value per share. 

The IPO price of Rs. 10.40 per share, translates into a Price-Earnings ratio of eight times, based on the expected earnings for the 2020/21 financial year on the pre-IPO number of shares. This further results in a very attractive Price-Earnings ratio of 6.53 times based on the forecasted earnings for the 2021/22 financial year, based on the post-IPO number of shares, using 187.5 million shares as being the number of shares issued at the IPO.

Q: What will be the dividend policy of the company?

 The company has decided on a dividend policy where a minimum of 40% of the profit after tax will be declared as dividends. Apart from this, IPO investors will also be eligible to the dividends that will be declared on the earnings for the 2020/21 financial year.

Q: What is the outlook for the residential real estate sector in Sri Lanka?

We have observed several factors that are currently contributing positively towards the growth of the sector. The historically low interest rates together with the regulatory policy changes with regard to the removal of VAT and NBT from condominium sales, as well as the relaxations with regard to foreign nations being allowed to acquire condominium property, has given a significant boost to the market. Apart from this, the depreciation of the rupee has also made local projects more attractive to foreign exchange earners, while the increasing percentage of household income being deployed for housing needs, together with the reducing household size and the resultant increase in the number of households, shows a steady demand for the industry. 

Q: How can investors apply for the IPO?

Investors have two options for applying. They can either apply using the manual form, sending the filled application form along with a cheque, bank draft or bank guarantee, or do a RTGS transfer for applications above Rs. 100 million, to either Acuity Partners Ltd., the managers to the Issue, SSP Corporates Services Ltd., Seylan Bank branches or to any stockbroker. 

Resident individual applicants also have the option to apply online either through the company website (https://ipo.primeresidencies.lk/) or through the CSE mobile app. If applying online the payment has to be done through an online transfer.