IPO Update: Metros Development Proposes $16 Million Mini-IPO Terms (MTRS)

A Quick Take On Metros Development

Metros Development Co., Ltd. (MTRS) has filed proposed terms to raise approximately $16 million in gross proceeds from the sale of its common stock in an IPO, according to an amended SEC registration statement.

The company operates as a real estate property acquirer and reseller in Japan.

I previously wrote about the firm’s initial IPO filing here.

Metros’ revenue growth rate has dropped sharply in the most recent reporting period, but its profit and operating cash flow are strong.

With such a slowing revenue trajectory, my opinion on the Metros Development IPO is Neutral [Hold].

Metros Development Overview

Japan-based Metros Development Co., Ltd. acquires land and properties that are underdeveloped and then combines and/or resells them to property developers.

The firm is led by Chief Executive Officer and Director Mr. Yoshihiro Koshiba, who has been with the firm since 2016 and was previously director of Surftrust Co. from 2009 to 2016 and has worked in the real estate industry for many years prior to that.

The company’s primary services include the following:

• Land acquisition and combination

• Building acquisition and demolition

As of May 31, 2023, Metros Development has booked fair market value investment of $469,439 from investors, including K-ASSET Co., Ltd.

Metros Development Client Acquisition

Metros conducts its business through relationships with real estate development companies who are seeking new development opportunities in Japan.

Management plans to use some of the IPO proceeds to develop a crowdfunding platform ‘to grow our core business’ by developing crowdfunding as an alternative source of investment and operating capital.

Selling, G&A expenses as a percentage of total revenue have remained stable as revenues have increased, as the figures below indicate:

Selling, G&A	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended May 31, 2023	13.1%
FYE November 30, 2022	13.0%
FYE November 30, 2022	13.4%

Click to enlarge

(Source – SEC)

The Selling, G&A efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A expense, has dropped to 0.4x in the most recent reporting period, as shown in the table below:

Selling, G&A	Efficiency Rate
Period	Multiple
Six Mos. Ended May 31, 2023	0.4
FYE November 30, 2022	2.6

Click to enlarge

(Source – SEC)

Metros Development’s Market & Competition

According to a 2022 market research report by Plaza Homes, the market in Japan for residential real estate has remained strong despite the recent pandemic due to a ‘flight to safety’ by investors.

The firm believes that the real estate market in Japan will remain strong in the coming years due to continued population growth and migration to the Tokyo region and greater strength in the overall economy.

Businesses are transitioning slowly to a ‘hybrid’ work environment, although existing norms of working at the office remain stronger than in other developed nations.

These trends have resulted in an increase in demand for apartments close to major business districts.

To capitalize on this expected growth, foreign investors can invest in Japanese real estate through a New-Type Entity [NTE].

An NTE is a type of Japanese corporation that is 100% foreign-owned and is exempt from certain restrictions that apply to foreign companies investing or operating in the country.

The rise in e-commerce activity is also benefiting the industrial and logistics property sectors in Japan.

The real estate crowdfunding market is also fragmented, with over 250 companies as of July 31, 2022.

Metros Development Co., Ltd. Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing but decelerating topline revenue

• Increasing gross profit and gross margin

• Higher operating profit and comprehensive income

• A swing to positive cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended May 31, 2023	$ 291,655,644	5.9%
FYE November 30, 2022	$ 472,858,985	52.8%
FYE November 30, 2022	$ 309,378,119
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended May 31, 2023	$ 81,120,434	16.3%
FYE November 30, 2022	$ 123,347,433	78.8%
FYE November 30, 2022	$ 68,990,687
Gross Margin
Period	Gross Margin	% Variance vs. Prior
Six Mos. Ended May 31, 2023	27.81%	2.5%
FYE November 30, 2022	26.09%	17.0%
FYE November 30, 2022	22.30%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended May 31, 2023	$ 43,018,514	14.7%
FYE November 30, 2022	$ 61,639,769	13.0%
FYE November 30, 2022	$ 27,511,492	8.9%
Comprehensive Income (Loss)
Period	Comprehensive Income (Loss)	Net Margin
Six Mos. Ended May 31, 2023	$ 26,113,539	9.0%
FYE November 30, 2022	$ 20,743,648	4.4%
FYE November 30, 2022	$ 9,355,695	3.0%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended May 31, 2023	$ 49,900,607
FYE November 30, 2022	$ (45,665,390)
FYE November 30, 2022	$ (29,758,668)
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

As of May 31, 2023, Metros Development had $34 million in cash and $145 million in total liabilities.

Free cash flow during the twelve months ending May 31, 2023, was $10.9 million.

Metros’ IPO Details

MTRS intends to sell approximately 1.88 million shares of common stock at a proposed midpoint price of $8.50 per share for gross proceeds of approximately $16 million, not including the sale of customary underwriter options.

No existing or potentially new shareholders have indicated an interest in purchasing shares at the IPO price, and the company will be considered a ‘controlled company’ according to Nasdaq’s rules since the CEO will own a large majority of voting shares after the IPO.

Also, the company is a ‘foreign private issuer’ and an ‘emerging growth company’, which will enable management to provide significantly less information to shareholders.

Such companies have generally performed poorly post-IPO in recent years.

The company’s enterprise value at IPO (excluding underwriter options) will approximate $469 million.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 3.69%, suggesting the stock will be a ‘low float’ stock potentially subject to higher volatility in initial trading.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

30% for development of real estate crowdfunding platform;

10% for marketing the new real estate crowdfunding platform;

10% for development and marketing of new services; and

50% for working capital and general corporate purposes.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management said the firm is not subject to any material legal proceedings.

The sole listed underwriter of the IPO is Boustead Securities.

Valuation Metrics For Metros

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO:

Measure [TTM]	Amount
Market Capitalization at IPO	$432,437,500
Enterprise Value	$469,360,777
Price / Sales	0.88
EV / Revenue	0.96
EV / EBITDA	6.94
Earnings Per Share	$0.67
Operating Margin	13.82%
Net Margin	7.06%
Float To Outstanding Shares Ratio	3.69%
Proposed IPO Midpoint Price per Share	$8.50
Net Free Cash Flow	$10,852,628
Free Cash Flow Yield Per Share	2.51%
Debt / EBITDA Multiple	1.24
CapEx Ratio	3.87
Revenue Growth Rate	5.89%
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

Commentary About Metros Development Co.

MTRS is hoping to secure U.S. public capital market investment for its various growth initiatives and for working capital requirements.

The firm’s financial results have shown growing topline revenue but at a sharply decelerating rate of growth, increasing gross profit and gross margin, higher operating profit and comprehensive income and a swing to positive cash flow from operations.

Free cash flow for the twelve months ending May 31, 2023, was $10.9 million.

Selling, G&A expenses as a percentage of total revenue have remained stable as revenue has increased; however, its Selling, G&A efficiency multiple has dropped, indicating reduced efficiency in generating incremental revenue.

The firm pays between 7% and 12% of a project’s gross profit to its purchasing & sales staff as an incentive.

Management’s plan for the crowdfunding initiative is to increase its ability to form capital for the purchase of new land or projects and to diversify its capital sources from its existing borrowing or self-funding options.

Metros plans to pay no dividends and to retain future earnings, if any, for reinvestment back into the company’s growth and reinvestment requirements. The company is subject to certain dividend restrictions per Japanese law.

The firm’s recent capital spending history indicates it has spent moderately on capital expenditures as a percentage of its operating cash flow.

The market opportunity for Japanese real estate remains strong as the Yen has weakened, drawing foreign investors into an already robust market, especially in the Tokyo region.

Business risks to the company’s outlook as a public company include the potential for higher interest rates or financial instability from financial markets.

Management is seeking an Enterprise Value / EBITDA multiple of 6.94x.

While operating profit and operating cash flow have produced strong growth, topline revenue growth has sharply decelerated, suggesting the firm’s core business model may be in trouble, at least for the near term.

With such a slowing revenue trajectory, my opinion on the Metros Development IPO is Neutral [Hold].

Expected IPO Pricing Date: To be announced