Share Commentary: What happened with that 123% Cebu Landmasters stock dividend?
Just to catch up with everyone, CLI declared a 123% stock dividend, which gave shareholders 123 new CLI shares for every 100 shares held. But the price fell in proportion to the new shares distributed, so the shareholders didn’t seem to gain anything, and the move confused a lot of people. Before talking specifically about the stock dividend, can you shed some light on what was going on with CLI at the time the decision to pay the stock dividend was made?
Grant Cheng, CFO (GC): The stock dividend was actually a procedural measure intended to meet the regulatory requirements of an authorized share capital increase. We thought this was the most cost effective and shortest route.
As a backdrop, we decided last year that we needed to increase our authorized share capital. At the time, we only had 686 million unissued shares left. If we were to issue these shares at market price, say P5 / share, we would only increase about P3.4 billion.
Since we already generate over 8 billion pesos in revenue, 15 billion pesos in bookings, 2 billion pesos in net income each year and our investment plans now exceed 10 billion pesos per year, we have decided it was time to prepare the company for a potential fundraiser. And increasing our ACS would be necessary if we are to run it. We wanted to position the company to be able to raise growth capital and be already prepared for it, rather than just making that move when we already need it.
MB: What were the options considered by CLI to increase its ACS?
GC: Well, normally when a company increases its ACS, the SEC requires them to subscribe for at least 25% of that increase. And for public companies like ours, the PES also demands that these shares be released.
The most familiar route would therefore be to raise funds through our existing shareholders in a share purchase offer, or through new shareholders in a follow-up offer. The stock dividend route is less common but quite valid if the company has enough retained earnings to do so.
MB: I guess an SRO or FOO could be viewed as a dilutive event for shareholders. Was this something CLI wanted to avoid?
GC: You are right. And the stock dividend option was the most efficient because it was essentially an administrative process with very few moving parts. And no movement of money will take place.
MB: To me, it seems that CLI is segregating the assets before proceeding with a capital increase, to ensure that the current shareholders take full advantage of all the accumulated assets and that the significant amount of retained earnings that CLI had been one of those assets that could be “distributed” to shareholders. Is it correct?
GC: This is not really our primary intention with the stock dividend. We really wanted it to be convenient and efficient for everyone without having to ask for money.
But we were able to accomplish several things at once that we believed were beneficial to CLI and our shareholders before welcoming new investors into the mix. Existing shareholders to get the benefit of accumulated retained earnings, increasing our ACS gave us leeway for another capital increase, and we were interested in bringing more shares to the market to increase liquidity of the title. All of this was possible with the stock dividend.
MB: So when I said the move was indistinguishable from a stock split, I guess that’s only true in terms of the number of stocks held and the price of those stocks. A stock split would not have distributed retained earnings to shareholders. Would a split have allowed CLI to increase its ACS?
GC: You are absolutely right. A stock split does not transfer retained earnings to shareholders. And more importantly, a stock split does not meet regulatory requirements for subscription and payment of shares.
MB: Now that the ACS is up, how much growth capital is CLI looking to raise? What are CLI’s projects?
GC: We are working on the numbers. CLI is preparing for a strong expansion. We may not need to raise capital immediately, but this stock dividend allows CLI to raise capital when needed. It’s laying the groundwork to be prepared. At the rate we are selling our inventory, we need to initiate more new projects and strategically acquire Land Bank to continue to meet underserved demand in Vismin.
MB: When can we find out?
GC: A specific disclosure on “what then” will come this year, but we just want to be sure of our intentions when we disclose an amount. This could happen in the next few months if the conditions are right.
MB: Ok, if you can’t share the size and scope of the capital increase, can you give some color on what the future holds for CLI in terms of spending plans? GC: Of course. Our internal target is 15-20% annual growth for the next 5 years, and to achieve this we aim to spend at least 10 billion pesos in capital expenditures each year. We aim to achieve annual home sales bookings of 20 billion pesos in 3 years. Like I said, strong expansion. We are optimistic about our growth prospects!
MB: Thank you for taking the time to answer my questions and allowing me to show our conversation to MB readers!
GC: You’re welcome, and thanks for the opportunity to clarify and explain the situation in more detail.
BASIC LINE BARKADA
It’s a rare pleasure to have such a glimpse behind the curtain, and I applaud CLI for giving us the chance to learn what prompted their decision to declare the dividend. While this isn’t the first time I’ve been contacted by an executive to follow up on a story I’ve written about, thanks to Mr. Cheng, it’s the first time that an executive has offered such a constructive response. and an interesting answer to help us understand the real issues that were involved. Too interesting for me to keep.
By the way, Mr. Cheng wrote that we should think of the GBA increase as a record on the bond shelf, and I think that’s actually a great way to look at it. By paying the dividend and increasing its ACS, CLI has given itself the opportunity to deploy all or part of the increase in ACS when equity capital is really needed and when market conditions allow CLI to obtain the better performance. And all without asking for new money, or diluting its existing investors. The stock dividend was the only option that increased the ACS without diluting anyone.
Between the dividend itself, the above explanation, and the continued strong performance of the company, CLI appears ready and able to ramp up and swim with bigger fish. That’s what it’s about. Raising the ACS is the first step in some kind of capital raise, which usually means dilution (unless CLI uses an SRO for its raise), but the management team has demonstrated its ability to generate returns quarter after quarter, so it’s probably wrong. be a major concern for long-term (or new) investors. Longtime MB readers will already know that I am a huge fan of the CLI (VisMin-focused mid-market) strategy and results (rising net income, record sales bookings) and that the company is enjoying a solid reputation in local markets. investment banking circles for exactly this combination of strategy and performance. There will be challenges, of course, and investors will want to watch closely to see if the team continues to handle those challenges with the same skilled and stable hand that they have used to tackle all the challenges they have faced so far. ‘now.
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