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Sarvodaya prices Rs. 22 per share ahead of IPO

19 Nov 2021

  • Says price is a ‘significant’ discount in comparison to valuation of peer group
  • IPO scheduled to open on 23 November
By Shenal Fernando According to Sarvodaya Development Finance (SDF), its Initial Public Offering (IPO) price of Rs. 22 per share represents a “significant” discount of around 30% in terms of price to earnings ratio (PER) and 47% in terms of price to book value (PBV), in comparison to the valuations of its broader peer group within the diversified financial sector. These assertions were made at its virtual investor forum held on 17 November. SDF will be categorised under the diversified financials sector under the Global Industry Classification Standards utilised by the Colombo Stock Exchange (CSE). All listed non-banking financial institutions (NBFIs) are categorised under the diversified financials sector. Accordingly, the SDF IPO price of Rs. 22 at a 11.02 PER represents a 30% discount in comparison to the diversified financials sector average of a 15.69 PER and at a 1.03 PBV multiple the SDF IPO price represents a 47% discount against the diversified financials sector average of a 1.93 PBV. This PBV sector average was calculated in end-October, and since then, the sector PBV average has surged beyond 3.0 multiple. Valuation presented by SDF during the forum appears to further indicate that the SDF IPO is priced at a significant discount. In applying a peer PBV-based valuation, SDF relied on a more conservative PBV of 1.22 by narrowing down its peer group to NBFIs with a comparable asset base. Accordingly, based on its net asset value per share (NAVPS) on 31 August of Rs. 21.28, SDF arrived at a peer PBV-based per share valuation of Rs. 25.96, which represents an 18% discount. The SDF IPO is scheduled to open on 23 November and is managed by NDB Investment Bank. The IPO will offer 45 million ordinary voting shares at a price of Rs. 22 per share in two tranches – an initial tranche of Rs. 500 million and a green shoe option of Rs. 500 million to be exercised upon oversubscription. The total capital raised of Rs. 1 billion amounts to a 30.4% stake in the company and shall result in a projected market capitalisation of Rs. 3.3 billion, assuming full subscription at the issue price. Moreover, 50% of the initial tranche (Rs. 250 million) is underwritten by NDB and Sampath Bank. The post-IPO public float will be 45%. The primary objectives of the SDF IPO is to satisfy the regulatory core capital requirements of the Central Bank of Sri Lanka (CBSL) and to part-finance the growth in its loan portfolio, which is forecasted to grow at a six-year compound annual growth rate (CAGR) of 24%. SDF successfully carried out a private placement across eight tranches in early 2021, also at Rs. 22, which raised Rs. 806 million; 76% of the share issue was obtained by Sarvodya Linked Entities and of the remaining 24%, a majority was acquired by external individuals. This private share issue represents a PBV multiple of 1.24. In contrast, the IPO PBV is at 1.03, which represents a 17% discount in comparison to the private placement. Post-IPO SDF intends to maintain a dividend payout ratio between 25% and 40% as it expands its portfolio, which will result in dividend yields starting at around 2-3% initially and which is expected to expand to over 10% by five to six years. According to SDF financial forecasts, its profit after tax (PAT) is expected to expand at a seven-year CAGR of 30.4%, reaching Rs. 1,172 million in FY2028 from Rs. 183 million in FY2021. This expansion will be supported by the organic growth of its loan book which is expected to surge beyond Rs. 32.5 billion by FY2028 and the tax breaks the company will enjoy as a result of listing within this calendar year. This equates to 50% reduction in income tax during FY2022 and income tax of 14% over the next three years.


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