General assumptions that were used in both models include an approximate cost of equity of 14.75%. We also start our valuation by projecting the adjusted book value per share (that is after taking into account the new shares from the IPO) as well as utilizing information provided in the prospectus about deals that were finalized after the date of the latest 6-month financials (Feb 2021). Thereafter, we estimate an adjusted book value for the 2021 year-end of J$21.86 per share. In the long term, we expect the ability of the Company to pay dividends will fluctuate throughout any particular year as the cashflows will be linked to unique events such as exits from real estate positions while being supplemented in some periods by more stable cash flow from the real estate investment notes.
In the base case scenario, we estimated a projected return on equity of 17.65% which we use as the long-run return on equity in our model. This estimate was arrived at by utilizing several assumptions, including a projected gain on new investment property of 33%, this is inclusive of projected gains on new development projects listed in the timeline that are currently in the works. We further assume that going forward, new investment properties being added to the timeline will have a greater potential for value creation than older projects and as such assume that “older developments” appreciate by 20% annually based on the continued strategic work that SRF will be putting into these projects before their intended exits within the 3–5-year period.
In the downside scenario, we reduced the expected rate of appreciation on projects on both new and old investment properties. That is, we used a projected return on developments in “older” developments of 15% while the rate on new investment property was lowered to 25%. In this scenario, the long-run return on equity was estimated to be 13.70%. This compares to the 13 months to August 2020 ROE of 15.7% which indicates that this scenario is fairly conservative.
From these assumptions, we arrived at a fair value estimate using the justified PB model of J$27.98 in the base case scenario and J$20.05 in the downside scenario. Based on the average of this range we get a fair price of J$24.02. This is relative to the IPO price of J$19.30 for an implied upside of 24.46% for the general pool applicants (31.25% for key stakeholders at a price of J$18.30 and 34.19% for current shareholders at a price of J$17.9). Given the implied upsides, we recommend investors participate in the IPO.
A summary of the valuation can be found in the table below:
|Justified P/B (Downside Case)||J$20.05|
|Justified P/B (Base Case)||J$27.98|
|Average Fair Value Estimate||J$24.02|
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