Analysts bullish on Dolphin Cove IPO
Published:Wednesday | December 8, 2010 | 12:00 AM
Sabrina Gordon, Business Reporter
Citing its strong profits and potential for continued growth, brokers have largely marked as 'a buy' the Dolphin Cove Group, whose initial public offer (IPO) opens today.
One broker, Scotia DBG Investments even argues that at J$3, the company's offer price is under valued by between 29 per cent and nearly 41 per cent, depending on the method of calculation.
Dolphin Cove's core business is sea museums, with trained dolphins at play with their handlers, as the main attraction. The company, in an offer closing December 22, is putting 80 million shares, or approximately 21 of its stock, on the market. It hopes to raise J$240 million, which it says will be used to write-down expensive debt and for expansion.
Analysts expect that the IPO, which will lead to a listing in the Jamaica Stock Exchange's junior market, will be fully subscribed.
"Dolphin Cove has produced consistently strong results ... (and) the company operates in a niche market, with significant barriers to entry," said Kimberly Thelwell, the head of research advisory services at Stocks and Securities Limited (SSL), in explaining why she is positive about the offer.
"In addition, Dolphin Cove earns more than 90 per cent of its revenues in US dollar, which has historically protected its revenue streams from the devaluation of the Jamaican dollar," Thelwell said. She also pointed to the company's strong balance sheet.
"SSL recommends Dolphin Cove Ltd as a buy," she told Wednesday Business.
In the financial year to December 31, 2009, Dolphin Cove returned net profit of J$104.7 million, an increase of 40 per cent, on revenue of J$832.6 million. Revenue for the year was up 14 per cent. Its profit margin was 12 per cent.
Dolphin Cove shareholders' equity is J$830 million. It has liabilities of J$144 million.
The company's owners, argued in their prospectus that the continued growth of Jamaica's tourism business, on which Dolphin cove relies for the bulk of its revenue, placed it in a good position going forward.
Like SSL's Thelwell, other brokerage houses agree, even if they see the occasional hump on the path.
In its online advisory to clients Barita Investments said that Dolphin Cove's IPO was in line with other recent listings on the JSE's junior market.
"The current offer price, resulting in a price/book value of approxi-mately 1.1 times, and price to earnings ratio of 10.68 times, is in line with the market statistics of the other companies listed on the junior exchange," the Barita analysis said.
But even as Barita recommends the stock as "a buy", its analysts pointed to potential downside risks, such as the the soft global economic environment, which, despite the optimism, can negatively affect Jamaica's tourism, with negative consequences for Dolphin Cove.
"Its revenue line is susceptible to factors such as adverse weather conditions and civil disturbances," Barita said.
Nonetheless, the positive factors outweigh the potential for negative shocks, Barita told its clients.
In its analysis Scotia DBG Invest-ment pointed to Dolphin Cove's promise to pay no less than 25 per cent of its profits as dividend as well as the fact that government policy allows full exemption from corporate income tax for the first five years and up to 50 per cent in the next five.
In that contest, argued Najja Daley, Scotia DBG's senior financial analyst, Dolphin Cove's dividend is projected to grow at 24 per cent during the first five years "before transitioning to a long run rate of 12 per cent".
Run rate is basically an estimation of future financial performance based on expectations that current trends will continue.
"The output model suggests an intrinsic value of J$4.22 for Dolphin Cove," Daley said in her advisory.
Using a set of assumptions that include a relatively stagnant tourism sector and growth in cruise ship passenger arrivals lower than projected, Daley's price for the company was between J$3.13 and J$3.87 per stock.