The Profits that Does Not Belong to You

A lot of investors often get the wrong profit figures from a company’s income statement. This may result in a wrong valuation for the company. In this article, I hope to achieve the objective of guiding you through what are the numbers to pluck from a company’s financial statement.

Some figures are used as illustrations and it may not show the accurate representation of the PropNex’s financials. 

Since everyone is interested in PropNex’s IPO, I will use its financial statement:

(source: PropNex prospectus)

Any new investors would assume that we will take SGD $18,855,411 as the profits. Look at the “profit attributable to”, there are two items being “owners of the company” and “non-controlling interests”.

We are the owners of the company hence SGD $16,273,279 is attributable to us. We should not take the profits of SGD $18,855,411 as our profits

How do non-controlling interests arise?

It happened because there are certain subsidiaries where the parent group do not own 100%. In this case, it owns 71.83% of PropNex International and 75% of PropNex Property Management.

To give an illustration to explain simply, assume that PropNex Property Management brings in SGD $10m for FY2017. Since it is a subsidiary of PropNex Singapore (parent company), under accounting rules, it will recognise the entire SGD $10m as revenue with its relevant expenses to derive the net profit. For example, maybe the net profit is SGD $3m. But we should not assume the entire SGD $3m belongs to us – the common shareholders. Likewise for PropNex International.

Since it is 75% owned, we must take SGD $3m multiply by 75% to derive our rightful share which is SGD $2.25m.

Using 370m shares outstanding post-IPO, using SGD $18,855,411 and SGD $16,273,279 figures will lead to Earnings Per Share (EPS) of $0.051 and $0.044 respectively.

Using its IPO price of SGD $0.65 divided by the respective EPS, you will get Price-Earnings-Ratio (PER) of 12.73x and 14.78x.

Now you see, using different figures leads to different PER. Take the right figures and you will know the differences. Investors who are taking the full amt of SGD $18.9m may feel that they are having a good deal at PER 12.73x, however, the actual PER is 14.78x.

Currently, APAC Realty, (their peer) is trading around 10-11x PER. APAC Realty has higher margins.

Email me if you have any other questions. Hope this article helps and do share it with your friends!

Extra Information

Some concerns on PropNex flagged out by Business Times:

A S$5 MILLION value pegged to PropNex Realty’s business takeover agreement with Dennis Wee Realty (DWR) last year in the initial public offer (IPO) prospectus lodged by PropNex has raised the eyebrows of many observers, who keenly recall the transaction was previously said to have no dollar value.

PropNex’s revenue and net profit for fiscal 2016 was S$245 million and S$7.6 million according to its IPO prospectus, lower than the respective S$278.9 million and S$9.23 million previously quoted in the press on June 13, 2017.

These perceived discrepancies in disclosures were raised by some industry rivals and members of the public following PropNex’s lodgment of its IPO prospectus last Thursday.

To understand how companies classify subsidiaries, joint ventures, associates or financial assets, head over to this article.

The author has no links or investment interests in any of the companies mentioned.

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