Durrant Pate/ Contributor          

NCB Capital Market is giving a participatory assessment to Tropical Battery’s $1.8 billion Additional Public Offer (APO), having arrived at a positive evaluation of the equity offer.

The energy company is offering subscription of 954,545,455 ordinary shares with the ability to upsize to 1,122,994,652 shares, priced at J$1.87 per share. The APO opens on Thursday, May 22 and is scheduled to close on June 6.

The positive evaluation by NCB Cap Market, which is one of the two brokers for the APO, the other being Sagicor Investments, was arrived at based on two valuations:

(1) Discounted cash flow (DCF), which is a valuation method that estimates the value of an investment based on its expected future cash flows.

(2) Price to Earnings (PE) valuation, which is the ratio of the share price of a stock to its earnings per share. PE ratio is one of the most popular valuation metrics of stocks. It provides an indication as to whether a stock at its current market price is expensive or cheap.

By averaging the DCF valuation of $2.83 and P/E valuation of $2.67, NCB Cap Market obtained a price of $2.75 with an implied forward P/E of 21.28x. This represents an upside of 47.0% on the $1.87 APO price, which is above the 12.7% cost of equity and suggests that investors would be adequately compensated for buying Tropical Battery’s shares at the APO price. 

As such, NCB Cap Market is recommending investors participate in the APO, saying, “We believe our recommendation is justified by the expected savings on finance costs, once the APO proceeds are used to pay down $1.40 billion in CIBC debt + $0.3 billion in other outstanding debt.”

Proceeds from the APO will be used to repay an existing loan of US$9.50 million (J$1.40 billion) owed to CIBC Caribbean Bank (Jamaica) was used to fund the acquisition of Rose Electronics Distributing Company in the United States and repay outstanding monies on outstanding bonds of approximately J$300 million.

The significant increase in operating profits from Tropical Battery’s recent Rose and KAYA acquisitions should also support a substantial recovery in the company’s earnings was also a positive factor cited by NCB Cap Market in its positive evaluation. 

The equities and capital market subsidiary of the NCB Financial Group also cites as a positive factor global and regional macrotrends, which support a shift toward increased demand for renewable energy and energy storage solutions in the United States, Jamaica, and the Dominican Republic, which should fuel medium-term demand growth.

This growth, it argues, should translate into higher profits, the resumption of dividends and ultimately greater value creation for Tropical Battery’s existing and new shareholders participating in the APO. 

However, on the flip side, NCB Capital Market posits that “market conditions could delay the convergence of the company’s stock price to our target price.