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News : Local Last Updated: Sep 11th, 2023 - 00:59:19

138SL's APO
By Marston Gordon
Sep 10, 2023, 23:55

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The stack of Chartered Accountants (CA) on the board of 138SL is currently five, up from four in 2020 and represents 55.5% of board members. Of the five senior executives, the two most senior ones are also CA’s, yet the quarterly financials are uninformative and lack depth.

Connected parties

Sagicor related entities is the single largest shareholder of 138SL with 37.29% and has three current employees and one former on its board. Since 2023 they have sold shares from all four related share account without any public disclosure of those sales on the Jamaica Stock Exchange’s (JSEs) website.

Directors that represent companies on public boards must be required to disclose “trade in shares” by the entities they represent, they are connected parties. It should go further and institute a “block out period” for insiders ahead of an APO.

Further, it appears on the face of it that those undisclosed offers at $4.65 ahead of the Additional Public Offer (APO) were placed by Sagicor, with the intent to suppress the price and keep it in check fully knowing price of the APO.


As stated in the APO prospectus, “For the upcoming school year, management has noticed demand that has exceeded the current accommodation capacity. Given the overwhelming out-turn, management believes that the Group is appropriately positioned to begin the construction of already approved new student housing towers. This development has the potential to further the Group’s mission of providing adequate and safe housing for students while markedly growing the bottom line. This is consistent with the existing Concession Agreements which allow the provision of 842 additional student accommodation rooms for the Group”.

While there is no cost stated for the new student towers, it is worth noting that approximately 70% (60% if upsized) of the raise will go towards debt reduction. And it is understandable that the COVID-19 pandemic brought unforeseen risk to the fore but there are better options to mitigate the risk and the directors know it.
According to the Jamaica Observer of September 8, 2023 report of the Investors Briefing the day before, Director John Lee was quoted as saying "We are well-placed to venture into other areas using the concession agreement as our base. These areas can be what we refer to as user-pay, such as student housing where, literally, the user pays or we could go into availability pay, where the Government will pay us directly to provide services for hospitals, prisons and schools. The possibility for 138 is extremely endless because these areas such as hospitals, prisons and schools are literally untapped in the Jamaican market, in terms of the private sector stepping in, adding that growth from PPPs alone could double 138SL's revenues in the next five years”.

The use of any portion of the proceeds from the APO for reduction of indebtedness is bad for investors but more so existing investors. The net book value per share at June 30, 2023 of $11.51 will dissipate to $7.45 ($6.79 if upsized) after the APO compared to interest savings per share of $0.12 and $0.13 post APO and upsized offer respectively.
Considering that earnings per share (EPS) to the third quarter of 2023 stood at $0.65 growing the top and bottom line is more beneficial to shareholders than interest savings.

The transaction cost of the APO of $102.5M- $140M is excessive given that the arranger and lead broker (GK Capital Management) is not underwriting the offer.


Source: Jamaica Stock Exchange, Jamaica Observer

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