Company Analysis: Company Analysis: First Rock CapiFirst ...€¦ · Company Analysis: Company Analysis: First Rock Capital Resource LimitFirst Rock Capital Resource LimitedFirst

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Company Analysis: Company Analysis: Company Analysis: Company Analysis: First Rock CapiFirst Rock CapiFirst Rock CapiFirst Rock Capital Holdingstal Holdingstal Holdingstal Holdings LimitedLimitedLimitedLimited VMWM Research and Stockbroking | December 20, 2019

876-960-5000 [email protected] vmwealth.com 53 Knutsford Boulevard, Kingston 5

Recommendation: UNDERWEIGHT

Price Target: USD$ 0.12

Offer Price: USD$ 0.12/ JMD$16.67

ABOUT THE COMPANY

First Rock Capital Holdings is an international business

company incorporated under the laws of St. Lucia in

October 2017 and began operations in March 2019. It is an

investment holding company with a core focus on real

estate and private equity investments. The company invests

primarily in real estate assets including income generating

investment properties, development projects (greenfield

and brownfield), real estate linked financial instruments and

opportunistic private equity investments. First Rock’s

investment scope include Jamaica, the wider Caribbean,

North American and Latin America. It has 3 fully owned

subsidiaries:

1. First Rock USA LLC

2. First Rock Capital Latam, Sociedad Anónima

3. First Rock Capital Cayman Limited

Which are incorporated under the laws of the state of

Florida USA, Costa Rica and the Cayman Islands respectively.

Shares on Offer: 106,083,332 units

Financial Year End: December 31

FINANCIAL PERFORMANCE

USD ‘000

23 Months

Ended

September

2019

2020(Adj.

Projection)

Total Income 226 1,590

Total Expenses (194) (1,119)

Net Profit 218 470

Total Assets 15,896 65,615

Total Liabilities 201 26,177

Total Equity 15,695 39,438

Projections

and

Valuations

Risks to

Price Target

Outlook Despite having income generating properties and quite a few

pipeline projects across a diverse geographical space; in markets

that can be viewed as stable and have to potential to produce

reasonable yields, quite a few projects are not yet completed.

Also, the green and brownfield developments are associated

with high risk, as such we hold a negative outlook for the

company.. A discounted cashflow approach was taken to value the company

and the price target was calculated to be USD $0.12. Our

valuation relied heavily on our expectations of the performance

of the income generating properties, as the development targets

were difficult to assess reasonably.

Our price target may not be realized if the company has

abnormal increases in operating expenses, delays in delivery on

development projects or if the transactions in the pipeline fail

to be completed. Our price target may also not be achieved if

the target structure of the portfolio is not achieved. On the

other hand, there may be significant room for outperformance

of our target if development projects are successfully exited at

a significant profit.

Use of

Proceeds

1. To fund of the pipeline of opportunities

2. Pay the fees and expenses associated with the

Invitation

3. Continue the mandate and objectives of the

Company in identifying opportunities in both the

local and international real estate markets for future

purchases of commercial and residential properties.

Dividend

Policy

The Board shall distribute a minimum of 50% of profits to the

Shareholders in the form of cash dividends to be paid quarterly.

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Company Analysis: Company Analysis: Company Analysis: Company Analysis: First Rock Capital Resource LimitedFirst Rock Capital Resource LimitedFirst Rock Capital Resource LimitedFirst Rock Capital Resource Limited VMWM Research and Stockbroking | December 20, 2019

SUMMARY OF KEY TERMS

ISSUER First Rock Capital Holdings Limited

SELLING SHAREHOLDER First Rock Capital Holdings Limited

ORDINARY SHARES Up to 106,083,332 Shares with the right to upsize the offer by an additional 53,041,666 shares

• 51,053,333 USD Class A Shares

o General Public - 16,250,000 shares

o Key Strategic Partners – 14,553,333 shares

o First Rock Affiliates – 20,250,000 shares

• 55,029,999 JMD Class B Shares

o General Public – 37,916,666 Shares

o Key Strategic Partners – 3,613,333 Shares

o First Rock Affiliates – 13,500,000 Shares

MINIMUM APPLICATION 1,000 Shares

AMOUNT TO BE RAISED If option to upsize is not exercised – USD 12.3 million

If option to upsize is exercised – USD 18.5 million

KEY DATES Opening Date: January 13, 2020 9:00 AM

Closing Date: January 31, 2020 4:30 PM

LEAD BROKER Sagicor Investments Jamaica Limited

PAYMENT METHOD i) Manager’s Cheque payable to “Sagicor Investments Jamaica Limited”

ii) Cleared Funds held in a Sagicor Investments Account

iii) Transfer or direct deposit to Sagicor Investments

MANAGEMENT AND CORPORATE GOVERNANCE

DIRECTORS

Dr David Lowe

Chairman (Non-

Executive, Independent)

Dr. Lowe received his Ph.D. in Corporate Finance from the University of Manchester, U.K. He was formerly the Chief

Executive Officer of Caribbean Producers Jamaica Limited. Currently he serves as a board member of the National

Health Fund and is chairman of both the Western Region Health Authority and the National Compliance Regulatory

Authority.

Norman Reid J.P.

Deputy Chairman (Non-

Executive, Independent)

Mr. Norman Reid is a career banker and is the Chairman of Port Security Corps Limited, Sam Sharp Teachers College

and also holds Directorships in the EXIM Bank, Access Financial Services Limited, Western Regional Health

Authority, Embassy Loans USA LLC and Growth Tech Limited. Mr. Reid holds a BA in Banking and Finance, a Diploma

in Banking (ACIB) and a Diploma in Retail Banking from the BAI (BANK Administration Institute) USA. He is also a

Fellow of the Institute of Banking and Financial services in the UK.

Douglas Halsall, O.D.

Director (Non-Executive,

Independent)

Mr. Douglas Halsall has spent the last forty years in the Information Technology in Jamaica and has assisted in the

implementation of the first Automated Teller Machine (ATM) in Jamaica, and in computerizing many industries

ranging from Health Insurance, Credit Unions, Retail, Government Accounting and Hospitality & Tourism. He

founded Advanced Integrated Systems (AIS) in 1987 and serves as its Chief Executive Officer. He previously served

as Chairman and CEO of National Cash Register (NCR) for ten years. He was awarded the Order of Distinction in

Information Technology.

York Page Seaton, C.D.,

J.P.


Independent)

Mr. York Page Seaton is a qualified engineer and founder and CEO of Y.P. Seaton & Associates Company Limited, a

Construction, Development, Electrical and Mechanical Engineering Contracting company in Jamaica and the wider

Caribbean. He was awarded the Order of Distinction (Commander) by the Government of Jamaica in construction

and development and also serves as a Justice of the Peace for the parish of St. Andrew

Lisandra Rickards


Independent)

Ms. Lisandra Rickards is currently the CEO of the Branson Centre of Entrepreneurship – Caribbean. The Centre seeks

to help local businesses prosper by supporting their progress and development and assisting them to access the

funding and the markets they need to scale their businesses. She brings to the Board her experience funding

programmes in multiple categories including equity investing, crowdfunding, lending, and grants. She received an

M.B.A. with Honours from Harvard Business School and a B.A. in Economics from the University of Chicago.

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Alton Morgan


Independent)

Mr. Alton E. Morgan is an Attorney-at-Law admitted to practice in Jamaica in 1977. He is the

Managing Partner the law firm Alton E. Morgan & Company which specializes in legal services

concerning Real Estate and Property Development, and Business, as well as Arbitration. He serves

on numerous private sector boards.

Kisha Anderson J.P.


Independent)

Mrs. Kisha Anderson recently served as Country Manager of JM’B’s Jamaican-based subsidiaries:

Jamaica Money Market Brokers (JMMB) Limited, JMMB Merchant Bank Limited, JMMB Insurance

Brokers Limited, JMMB Fund Managers Limited and JMMB Securities Limited (Jamaica). She has

gained an in-depth understanding of the financial sector, through her extensive experience as

part of the JMMB team and knowledge gained through her participation in a range of professional

development courses including: project management, retail banking, people management and

securities. She currently sits as a director on the Boards of JMMB Insurance Brokers Ltd., JMMB

Fund Managers Ltd., JMMB Securities Limited, JMMB Money Transfer Limited, JMMB Ltd., JMMB

Investments (T&T) and JMMB Securities (T&T). She is also a Justice of the Peace for the parish

Kingston.

SHAREHOLDER DISTRIBUTION

CLASS A SHARES

Name of Shareholder Number of Ordinary Shares after Closing

Date

% of Issued Shares after

Closing Date

Existing Shareholders 166,122,068 76.49%

General Public 16,250,000 7.48%

Reserved 34,803,333 16.03%

TOTAL 217,175,401 100%

CLASS B SHARES

Name of Shareholder Number of Ordinary Shares after Closing

Date

% of Issued Shares after

Closing Date

Existing Shareholders None 0%

General Public 37,916,666 68.90%

Reserved 17,113,333 31.10%

TOTAL 55,029,999 100%

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FINANCIAL PERFORMANCE

(USD ‘000) 2019 2020 (Adj.)*

Total Income 226 1,590

Total Expenses (194) (1,119)

Net Profit 218 470

Assets 15,896 65,615

Liabilities 201 26,177

Equity 15,695 39,438

*Our adjusted projection based on our expectation of the earning capacity of the Investment portfolio as it develops

INDUSTRY OVERVIEW

The Cayman Real Estate Market

Cayman is a small, relatively flat country located in a Hurricane prone corridor in the Caribbean. Notwithstanding, the real estate

market in Cayman has been booming for several years. Prices continue to rise in all property categories including industrial,

commercial and residential properties. The total value of property sales was just over $800 million in 2018 up 18% from the

previous year’s $679 million. Notably commercial transactions increased by 58.3% in 2018 and demand for commercial property

is expected to continue its growth trajectory as laws passed in January 2019 require foreign companies to show ‘substantial

activity’ including physical presence or they will be subject to penalties. This should increase the demand for commercial office

spaces as foreign companies increase compliance. In the residential market, activity is expected to remain strong. The current

population is approximately 68,000 persons and is expected to reach 100,000 in less than 10 years. This population growth is

attributable to several factors including Cayman’s tax neutral environment and relocation for lifestyle reasons and the new

business law which could attract more persons to the country for work. It is expected that the real estate market will not

experience a drastic crash in the short to medium term even in times of economic downturn. Any declines in the market are

expected to come from decreased transactions and not decreases in value.

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The Jamaican Real Estate Market

2019 saw growth in Jamaica slowing up to the third quarter on the back of a substantial decline in output in the mining sector

according to preliminary estimates by the PIOJ. Notwithstanding, many economic metrics point to an improving economy, with

unemployment and interest rates at all-time lows, and sovereign ratings on the rise. The real estate market has been heating

up over the last few years in Jamaica. In Kingston, prices for apartments commonly range from USD 200 to USD 250 per sq/ft

and is expected increase to up to USD 340 per square foot amidst continued excess demand. The commercial real estate market

has also been expanding due to the growth in the BPO sector as well as expansions in larger manufacturing companies who

demand warehouse space. This has led to an increase in construction as well as retrofitting of properties for these purposes.

We expect this trend to continue in the medium term. Also, the reduction in real estate transfer taxes and stamp duty is likely

to lower friction in the market and encourage greater liquidity and investment. The rental yields in the country have also been

consistently in the range of 7% and 9% on average in the past two years, which is likely to continue in the medium term with

risks skewed to the downside.

The Costa Rican Real Estate Market

The Costa Rican higher-end property market continues to grow rapidly as foreign homebuyers flock in for tourism and

retirement. Most of these foreign investors come from the United States which causes the market to be highly dependent on

the US Economy. The depreciation of the Costa Rica colon means cheaper living costs for those from the US. This has caused a

high demand for properties in the capital making sale and rental profitable for investors. As of July 2019, the average listing

price reached USD 1,110 per square metre which is almost 4% higher than the listing price in 2018. Gross rental yields on

residential properties in the country oscillate between 6% and 9% with a rate of return in the capital estimated at 8.6%.

USA/Miami Real Estate Market

Miami is a highly cyclical property market which is currently experiencing a downturn. The condominium market is experiencing

market saturation which has been driving down value in recent years. The over-supply has left many units empty and thus led

to a slowdown in development. It is believed that demand for these condos exist however, many buyers are either bargaining

for the best price or waiting for the prices to decline further before they buy into the market.

OUTLOOK

First Rock currently has 7 income producing properties with three (3) more in the pipeline. Of the income producing 3 are in

Jamaica, 2 commercial and 1 residential property, 2 are in the USA and 2 in Costa Rica. The company has mentioned that it

targets properties and ventures that offer at least an 8% return on the investment.

The stability in the Cayman Real Estate Market along with its current yields make it an attractive country for investors. By the

first quarter of 2020, First Rock is expected to own 5 one-bedroom apartments in the Grove and use these apartments for rental

income. With the current growth in population and the tourism boom currently being experienced by the country, the rental

consistency and yield is expected to be fairly stable.

The Jamaican market is expected to do well due to the current strength being exhibited in the economy. Both commercial and

residential property is in high demand with this demand expected to continue in the short to medium term allowing consistent

rental income to be earned. This will also bode well for the residential and commercial developments that the company has

planned for the country. The plan is for some of the units of these properties to be sold while some are retained to provide

rental income. As the current appreciation in property value is expected to continue, the company is expected to earn a modest

rate of return on its investments.

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CONCLUSION

While the potential for outsized profits exist through the

development projects they are engaged in and are currently

targeting, the overall risk of the portfolio remains high. The

structure of the portfolio being built out is likely to be costly

to operate, eating into returns. Based on our assessment of

the state of the company and our expectation of what is likely

achievable based on what is presented in the prospectus, we

established a price target of US$0.12, in line with the offer

price to the general public, i.e. the offer is fairly more or less

fairly valued. However, we recommend investors with an

interest in exposure to the real estate to UNDERWEIGHT the

stock as we view the risks of First Rock Capital Holdings to be

skewed to the downside.

SOURCES

The Jamaica Observer, First Rock Capital Prospectus,

Cayman Compass, The Financial Times, Reality Biz News,

Forbes

DISCLAIMER

This Research Paper is for information purposes only. The

information stated herein may reflect the opinion and views

of VM Wealth Management in relation to market conditions

and does not constitute any representation or warranties in

relation to investment returns and the credibility of the

sources of information relied upon in the preparation of this

report, without further research and verification. Before

making any investment decision, please consult a VM Wealth

Management Advisor.

First Rock currently has two one-bedroom apartments in Miami and is aiming to acquire a property in Virginia that is

currently being occupied by SunTrust Bank under a 20-year agreement with 9 years remaining. After the 20-year term is

completed, the bank will have the option to renew the agreement for two consecutive five year terms. This agreement will

likely provide consistent rental income for the company for at least another 9 years. Thereafter there is little uncertainty in

the property’s ability to provide income. On the other hand, the properties in Miami hold greater risk. The Miami

condominium market is currently experiencing a downtown which is affecting property value as well as rental yields.

Properties in this market also tend to have a higher cost structure relative to the other markets targeted by First Rock.

The company also intends to conduct a rights issue in 2020 and another 2021 for approximately USD$10,000,000 in each

year.

INVESTMENT POSITIVES

• Steady Cash flow via rental income

• The potential for large outsized returns from properties held at the development stage

• Geographic diversification provides some degree of insulation from downturns in any one market

• Potential for gains from the appreciation in property values

INVESTMENT NEGATIVES

• The business is still very early stage

• The Cash Flow generating portion of the investment portfolio is small relative to the cost structure

• The operating expenses are high relative to the target portfolio size based on the funds being raised and the existing

pipeline

• First Rock’s target investment portfolio is spread quite thinly from a geographic standpoint despite the fairly small

size. As such, the operating cost per square foot is likely to be elevated

• A large percentage of the pipeline is at the development stage, which bears higher risk

• The pipeline transactions are not certain to be completed

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Company Analysis: Company Analysis: First Rock CapiFirst ...€¦ · Company Analysis: Company Analysis: First Rock Capital Resource LimitFirst Rock Capital Resource LimitedFirst