ARM Properties Plc

I was able to lay my hands on the ARM Properties teaser last night and I spent a few hours digesting the information. I was able to draw some conclusions on the viability of the private placement that will be listed by way of introduction at the end of the last quarter of 2008. The private placement will be floated at N4.17 with a minimum subscription of 25000 units and 1000 units thereafter in order to raise N5.675 billion.

ARM Properties is going to work in the real estate industry in Nigeria and will largely concentrate their efforts in Lagos, Abuja and Port Harcourt where they currently have a lot of projects in the pipeline, which they will carry out within the next few years. Their investment philosophy is to acquire undervalued property and land, work on them and the lease or sell them at a much higher value.

At the end of the exercise ARM Properties will have a total of 1.684 billion shares in issue with an average of N7.022 billion shareholders’ equity. Based on their projected 2009 full year profit after tax of N1.575 billion, their return on equity is going to be 22.42%, which is not bad. They also intend to distribute 80% of their profits, which is in line with their claim to provide both dividend and capital appreciation. This means that the retention rate of their earnings will be only 20%. Based on this, prospective shareholders should be expecting an annual growth rate of 4.48% of their firm.

This company expects to pay a dividend of 75K per share at the end of 2009. At the current price of N4.17 and a calculated annual growth rate of 4.48%, the cost of equity using the dividend discount model will come to 22.47%, which is the required rate of return and is quite close to the return on equity of 22.42%. The teaser predicts a minimum internal rate of return (IRR) of 40%, which means that the management of ARM Properties is ready to provide an extra 17.58% return on top of the required rate. The dividend discount model also gives a price earning multiple of 4.44, which is in accordance with the figures in the teaser.

The firm intends to enhance capital structure through its access to sources of well priced capital. The problem I have with that is that they did not specify their target capital structure, which will give an idea of how their weighted average cost of capital will look like. It is just a teaser anyway, so maybe we will get more information when the prospectus is ready.

Another drawback in the teaser is the fact that in trying to compare themselves with the other firms in the real estate industry, they used the other companies values based on 04 July 2008 to calculate their price earning multiples, while they used their own 2009 year end data to compare. That is tacky and does not reflect the true strength of the company as compared to the others. A uniform benchmark has to be used to be able to reach a final conclusion.

The analysis done above may be a little bit technical but for the benefit of interested prospective investors, it simply means that ARM Properties is set to generate exponential wealth for shareholders and in my opinion, it is a good idea to buy as much as one can afford. If the information they have provided is anything to go by, then we are expecting a conservative share price of around N17.68, which is going to be an over 300% returns in capital appreciation alone by December 2009.

For more information about this private placement please contact me