Durrant Pate/Contributor

NCB Capital Markets has given a buy recommendation to One Great Studio Company Limited (1GS) J$338.6 million initial public offering (IPO), which opens today (August 28).

NCB Cap Market utilised two valuation method to determine whether to give the $1.00 per share IPO, which closes on September 18, a buy recommendation. This, is in addition to the positive outlook for the industry and company, as well as the fact that the stock offers a potential total return of 19.3 per cent, which is above the cost of equity of 16.67 per cent.

If successful, the shares will be listed on the junior market of the Jamaica Stock Exchange (JSE). The investment management and brokerage arm of the NCB Financial Group utilised a discounted free cash flow to equity model and a relative value approach, using the price-to-earnings ratio in determining its buy recommendation.

Valuation methods

Using the discounted free cash flow to equity model, NCB Cap Market obtained a value estimate of $1.15 for 1GS’s shares. The implied price based on the relative valuation using the junior market average price-to-earnings ratio (P/E) and forward earnings per share (EPS) is J$1.23.  

An average of both approaches was then used to determine the price target of 1GS ordinary shares at $1.19, implying an upside of 19.3 per cent.  Additionally, the valuation implies a P/E of 39.9x and 16.8x using the last twelve month and forward EPS, respectively. Both are lower than its closest peer on the junior market, The LAB with a P/E of 46.0x.

The overall junior market average P/E is, however, 17.4x as at August 25, 2023. 

According to NCB Cap Markets, “1GS’s forward P/E is lower than this, and is justified by the strong growth prospects for the company and the industry in which it operates, as well as its high return on equity, relative to peers. Furthermore, the total return to investors should be augmented if management goes through with plans to pay out up to 30 per cent of earnings as dividends.”

Half of the IPO shares valued at J$169.31 million have been reserved for key strategic partners and 1GS team members while the remaining 50 per cent is being offered to the general public. If the offer is fully subscribed, it will represent 20 per cent of the issued shares post-invitation. 

One Great Studio Company Limited has indicated its intention to use the proceeds from the invitation to:

• Reduce outstanding debt owed to Barita Investments Limited, used for the acquisition of its new subsidiary, High Voltage SEO.

• Support its strategic growth initiatives: 1GS plans to develop new products, lines of business, and fund regional and international expansion.

• Develop human capital in order to expand the company’s marketing and business development capabilities.

One Great Studio is expected to grow revenues and net profit in the near to medium term as it continues to incorporate the search engine optimisation business line within its existing business model, and benefit from increased brand visibility from listing.

The company also intends to expand its product offerings and increase its footprint across the country, the wider Caribbean and Europe, which should reduce exposure/concentration risk to a particular product or economy, and bolster shareholder value.