IPO Note SMN Power Holding Company

Transcription

1 15 th September 2011 Al Maha Financial Services LLC

2 Offer Details Offer price RO (inclusive of 20Bzs issue expenses) Face value RO Offer size RO million Offered shares 6,987,246 Break up of Offer Retail - 60% and Institutional - 40% Authorized share capital RO 70 million Issued and Paid up Capital RO million Offer period 11 th September 2011 to 10 th October 2011 MSM listing date 25 th October 2011 Purpose of the Offer SMN Power is undertaking the IPO in order to comply with the obligations of PFA (Project Founders Agreement), which require that it make 35% of its shares available for public subscription. Use of the Proceeds of the Offer The offer represents the sale of a part of the shares currently held by the promoters. Therefore the proceeds of the offer net of the issue expenditure will accrue to the selling Shareholders. Al Maha Financial Services LLC Page 2 of 16

3 Profile - SMN Power Holding Company SMN Power Holding Company through its two subsidiary Project Companies, namely SMN Barka Company and Al Rusail Power Company, is engaged in the generation and supply of power and desalinated water in the Sultanate. The projects have been established under a BOO (Build, Own, Operate) scheme. The BOO concept enables the founders to operate the plants beyond the project horizon of 15 years. The Company has an installed capacity of 1,343 MW, comprising the two facilities of SMN Barka Company (678 MW) and Rusail Power Company (665 MW), representing approximately 35% of Oman s Main Interconnected System s (MIS) total installed electricity capacity and 120,000 m3/day water capacity which covers approximately 20% of the water demand in the Main Supply Zone. SMN Barka Company SMN Barka or Barka II is an Independent Water and Power Project (IWPP) plant situated at Barka located approximately 50km northwest of Muscat. The SMN Barka Plant utilizes reverse osmosis technology to deliver potable water to the Oman Transmission System and gas and steam turbines to deliver electrical power to the Sultanate of Oman. The facility entered into full commercial operation on 15 November 2009 and commenced the fifteen-year Power and Water Purchase Agreement (PWPA), guaranteeing the sale of its electricity and potable water capacity and production to Oman Power and Water Procurement Company SAOC (OPWP). SMN Barka is required to make available net electricity generating capacity of 678 MW and a desalinated water production capacity of 120,000 m3 per day to OPWP. In return, SMN Barka is entitled to receive a tariff covering capacity charges, electrical energy charges, water output charges and fuel charges from OPWP. Beyond the contracted capacity, SMN Barka has an additional capacity of 12 MW available which can be contracted with OPWP. The Plant operates on natural gas as primary fuel with fuel oil as back-up. The Plant is connected to the gas transmission infrastructure owned and operated by the Ministry of Oil & Gas. Al Rusail Power Company Al Rusail Power Company (RPC) is located 40 km west of Muscat in the Rusail Industrial Park. The power station is a 665 MW consisting of eight Frame 9E gas turbines that were installed in four phases between 1984 and 2000 with associated generators and transformers. The station burns natural gas obtained under contract from MOG as the primary fuel with distillate fuel oil as a backup. RPC makes available the electricity generation capacity and sells electrical energy to OPWP under the Power Purchase Agreement (PPA) and, in return, receives capacity charges and electrical energy charges contracted until 31st March RPC has an excess capacity of 10 MW which can be contracted with OPWP. Al Maha Financial Services LLC Page 3 of 16

4 Shareholding Pattern Pre IPO Post IPO MDC Industry Holding 11% Mubadala Power Holding 37% National Trading 5% Kahrabel FZE 47% MDC Industry Holding 11% Mubadala Power Holding 20% National Trading 3% Public 35% Kahrabel FZE 31% Source : Company Prospectus, Al Maha Financial Research The Company s three stakeholders Kahrabel FZE, Mubadala Power Holding Company Limited and National Trading Company LLC are offering a total of 6,987,246 shares or 35% to the investing public as offer for sale. However, MDC Industry Holding Company LLC will retain its % stake in the company, post issue. Al Maha Financial Services LLC Page 4 of 16

5 Business Strengths and Rationale for Investment Energy and water demand in Oman continues to remain strong As per the projections from the Oman Power and Water Procurement Company, average electricity demand in the MIS is expected to grow from 1924 MW in 2010 to 3464 MW in 2017, an increase of about 9% per year. The major factors driving the electricity demand are residential and services sector, including population growth, increase in number of households, new construction and increase in tourism related developments. According to OPWP, the total demand for desalinated water in the regions covered by the MIS is expected to grow from around 163 million m3 per year in 2010 to 278 million m3 per year in 2017, an average growth rate of 8% per annum. This increase is driven by population growth and the major policy to drive away from reliance on groundwater resources in most regions. Market leader in the Sultanate s power and water sector SMN Power Holding currently is the market leader in terms of installed electricity capacity and generated output. As on 1 st January 2011, the installed capacity of 1,343 MW, comprising the two facilities of SMN Barka (678 MW) and RPC (665 MW), represents approximately 35% of Oman s Main Interconnected System s total installed electricity capacity of approximately 3800 MW. The 120,000 m3/day water capacity covers approximately 20% of the water demand in the Main Supply Zone. Being the Oman s largest power company, SMN Power enjoys economies of scale. Stable business model and healthy operating cash flows The revenue of the Company is largely fixed through the PWPA with OPWP. In terms of costs, fuel charges constitute the major operating cost and are chargeable to OPWP on an actual basis to a large extent and hence, it is fixed. Other costs such as operating and maintenance expenses, general and administration expenses, depreciation, interest expense and tax rate are also broadly fixed. Thus, Company is expected to generate steady and reliable cash flows through the Project Companies until the expiry of the PWPA period which is March 2022 for RPC and November 2024 for SMN Barka. Al Maha Financial Services LLC Page 5 of 16

6 Long term power and water purchase agreements for both facilities Power Sector in Oman is characterized by transparent and stable business models regulated by their long term power purchase agreements over a definite project life. This mitigates any business uncertainty linked to economic cycles. The entire output of the installed capacities of SMN Power Company is contracted for through a single long term PWPA for both the Project Companies. The PWPA for SMN Barka extends until November 2024 and the PPA for RPC until March These arrangements reflect a low market risk as a large part of the revenue accrues based on the availability of the plant and tariffs for the tenor of the PPA remain fixed. High level of Plant efficiency The Company has a proven track record of maintaining a high standard of technical availability and reliability for its two Plants. During the year 2010, SMN Barka demonstrated a reliability of 98.77% and technical availability of 92.07% for power and a reliability of % and technical availability of 84.30% for water. RPC also showed a reliability of % and a technical availability of 90.81%. Track record of consistent improvement in top line and profitability in the last three years The Company has recorded a notable growth in its top line in the last three years with the revenues showing a growth at a CAGR of 46% over FY 2007 FY The Company has also been able to demonstrate increase in profitability since inception; SMN Power s profit from operations has grown from OMR 2.4 million in 2007 to OMR million in 2010, with the operating margin increasing from 9.7% to 25.2% over the same period. Proposed dividend of RO in November 2011 and expectation of regular cash dividends thereafter SMN Power Holding has not distributed any dividends till date. After the IPO, the company has proposed payment of the first interim dividend of OMR per share on 30 th November Thereafter, the Company has proposed cash dividends till FY2015 twice in a financial year, for the two periods ending March and September. The Company proposes to follow a reasonable dividend payout policy, subject to debt repayments, working capital and operational expenditures requirements at the level of the Project Companies. Al Maha Financial Services LLC Page 6 of 16

7 Challenges and Concerns Power business is highly susceptible to fast technological changes Energy business is extremely technology oriented and the power Companies need to keep pace with the latest technological advancements in order to maintain and improve their performance and efficiency. Also, any unexpected delays, insufficient supplies or breakdowns can impact plant performance and affect the overall output. Highly leveraged Company SMN Power is the most leveraged Company amongst its peers. Although the Company expects its Debt to Adjusted Equity 1 ratio to decline from 17.4 as of December 2010 to 7.3 as of December 2011, it remains significantly high compared to its current peer group average of 2.4. Accordingly, the Company faces huge financing costs and the 2011E interest coverage ratio remains lowest in the peer group at 1.4 against an average of 2.2. However, as per the Company s projections over the next five years, the financing costs are expected to gradually reduce and the interest coverage ratio is expected to improve from 1.4 currently to almost 2 through FY2015. Stagnant top line growth going forward The Company projects the revenues to grow by a modest CAGR of 3% during the four years from 2011 through Margins below peer average The Company s profitability is a concern as its FY2011E gross margin at 34% and operating margin at 23% remain lower than the current peer group average of 37% and 27% respectively. Although the Company expects its net margin to improve steadily from 4.8% in 2011 to 9.4% by 2015, its net margin is expected to remain under pressure due to high financing costs. SMN Power expects a net margin of 4.8% for FY2011 which is the lowest compared to its peer group with a current average of 9%. 1 Equity has been adjusted to exclude hedging deficit Al Maha Financial Services LLC Page 7 of 16

8 Pending claims and legal proceedings There are no major disputes that have given rise to formal legal proceedings other than a dispute that arose between RPC and OPWP in relation to the Annual Performance Test (APT) and the interpretation of the contractual provisions of the PPA in relation to the time-line for performing the APT. However, the parties were unable to find a mutually acceptable agreement and the matter is temporarily adjourned by the Court. SMN Barka is currently engaged in an amicable dispute resolution with Doosan, the engineering, procurement and construction contractor for the original construction of the facilities pursuant to the Engineering, Procurement and Construction Contract (the EPC Contract). The negotiations are under progress and the Company expects a final settlement to be reached in the coming months. Post PWPA risk The PWPA terms mature long before both Plants reach their expected lifetime (except for the first six gas turbine units of RPC). Consequently, a substantial part of the value is expected to be realized beyond the PWPA time line. At that moment, the two Plants will face new risks like gas supply and price risk, competition from more efficient technologies, regulatory risk, customer credit risk and operational risk in spite of the increasing demand estimates and favorable market forecasts. Valuations at a premium to the peer group The offer price of RO3.520 values SMN Power at 18.6 times its projected earnings per share (EPS) of RO0.189 for FY However, as per the information provided in the prospectus, the Company expects non-recurring EPS amounting to the RO 0.124, which values it at a PE of 10.6x,the FY2011E earnings. Hence, the Company is valued at a premium to the sector s current. PE(Ann) of 7.2. In terms of Adjusted Price to Book (PBV) 2, the Company is the most expensive compared to the listed power companies, with a PBV of 2.04 against a peer average of Equity has been adjusted to exclude hedging deficit Al Maha Financial Services LLC Page 8 of 16

9 Comparative Analysis of Financial Performance Profitability Returns Leverage Dividend Company Gross Operating Net Return on Return on Debt to Adj. Interest Margin Margin Margin Adj. Equity Assets Equity Coverage Payout Yield ACWA Power Barka 43.6% 37.7% 20.3% 28.8% 6.0% % 6.8% Al Kamil Power 25.5% 23.4% 12.1% 12.2% 4.7% % 4.7% Sohar Power 35.0% 33.3% 10.2% 14.0% 2.3% % 4.7% United Power 79.9% 21.6% 18.8% 9.2% 7.6% % 12.3% Peer Average 41.7% 31.9% 15.0% 16.4% 4.2% % 6.4% SMN Power Holding 33.8% 23.4% 4.8% 11.0% 1.1% % 5.5% Source: Company Financials, Al Maha Research Notes: Equity has been adjusted to exclude any hedging deficits Dividend payout and yield is calculated based on FY2010 dividend payments by peer companies and proposed FY2011 dividend for SMN Power An overview of the profitability returns and financial position places SMN Power below the average performance of its peers. For the six months period ended June 2011, the four peer companies operated at an average operating margin of 31.9% and an average net margin of 15%. However, SMN Power forecasts an operating margin of 23.4% and a net margin of 4.8% for FY2011 based on its projected earnings. Adjusted net margin of 7.9%, which includes RO2.5mn of additional income, also places SMN Power significantly lower than its peers in terms of profitability. SMN Power is very highly leveraged compared to its peers. Due to their capital intensive nature, the average debt to adjusted equity ratio of the peers is 2.4. However, SMN Power expects a debt to adjusted equity ratio of 7.3 at the end of 2011 and gradually reducing each year to reach 5.9 by Also, on account of higher financing costs, its interest coverage of 1.4 x remains below the peer average of 2.2x. Higher financing costs are a major factor affecting the Company s net margins. The proposed dividend policy of the Company translates into higher than average payout and dividend yield compared to its peers. The Company has proposed a dividend of RO0.193 to be payable in the end of November, which records a dividend payout of 102% of projected earnings and 62% of normalized earnings for FY2011 compared to an average 47% payout by the peers. Dividend yield for the investors at the offer price would be 5.5% during the period. Al Maha Financial Services LLC Page 9 of 16

10 Dividend Policy The Company has not distributed any dividends till date, as the completion under the financing agreements relating to dividend payment was reached only on 4 th of August After the IPO, the Company expects the shareholders to receive a stream of cash flows during the term of the Project and for the post PWPA period. The Company proposes to follow a reasonable dividend payout policy subject to debt repayments, working capital and operational expenditures requirements at the level of the Project Companies. The Company s estimates of dividend and the capital repayment for the next five years are as follows: 2011E 2012E 2013E 2014E 2015E Dividend Per Share (Bzs) Dividend Payout 102% 141% 105% 99% 89% Dividend Yield 5.5%³ 12.6% 10.9% 10.9% 10.9% ³For the period between listing and payment of dividend Source: Company Prospectus, Al Maha Research Dividend distribution might also be limited in time to respect prepayment clauses in the Facilities Agreements entered into in respect of the Project Finance Loan. As per the Facilities Agreement, cash sweep prepayment of the Loan will apply on 100% of the available cash-flow for cash sweep starting from the 30 September 2016 for RPC and from the 30 September 2018 for SMN Barka until the end of the term of the Loan. In case the Project Companies are able to refinance the Loan before the commencement of the cash sweep, dividend distribution may be available to the investors subject to free cash availability. Al Maha Financial Services LLC Page 10 of 16

11 Valuation Comparable Valuation Company Stock Price (OMR) 14-Sep-11 Share Capital (OMR '000s) Ann. PE Adj. PBV MCap to Revenue (Ann.) ACWA Power Barka , Al Kamil Power , Sohar Power , United Power , Peer Average SMN Power Holding , Source: Company Financials, Al Maha Research Valuations of SMN Power Holding Company stay at a premium against its peers based on comparable valuation matrices, Price to Earnings (PE) and Price to Book (PBV). At the issue price of RO 3.520, SMN Power is valued at a Price to Earnings multiple of 18.6 times, its projected earnings per share or at 10.6 times its adjusted earnings per share 4 for FY2011, which is at a significant premium to the average PE (annualized FY 2011) of 7.2 for its peer companies. In terms of Adjusted PBV 5, the Company is valued at twice its adjusted 2011E Book Value against a current average of 1.2 times of its peers. However, with regards to Market Capitalization to Annualized Revenues, the offer price values SMN Power at a multiple of 0.9 which places it in line with the peer companies average. 4 EPS has been adjusted to include income of RO2.5m from non-recurring items for the year 5 Equity of all companies has been adjusted to exclude any uneven impacts from their hedging deficits Al Maha Financial Services LLC Page 11 of 16

12 Growth Rate Al Maha Research Dividend Discount Model (DDM) We find dividend policy of the Company attractive as it is expected to make an average dividend payout of about 100% in the first five years post listing. An optimistic scenario, that the Company would maintain a steady stream of dividend payments, has been used as the basic premise for our valuation based on the Dividend Discount Model. Dividend Discount Model (DDM) 2011E 2012E 2013E 2014E 2015E Dividend Discount Rate 11% 11% 11% 11% 11% Discounted Cash Flows Primary Value Terminal Value Discounted Terminal Value Equity Value per Share Perpetual growth rate is assumed at 1% Sensitivity Discount Rate 10.0% 10.5% 11.0% 11.5% 12.0% 0.0% % % % % Fair Value Per Share We have arrived at a fair value range of RO3.282 to RO3.904 for SMN Power Holding Company using the Dividend Discount Model based on our assumption of steady dividend payout by the Company. We have used the discount rate between 10% and 12% based on the Company s immediate peer Sohar Power s cost of equity, derived using it s beta of (at a risk-free rate of 4.5% and risk premium of 6.5%). The perpetual growth rate of the Company is assumed to be between 0 to 2% during the stable growth peried, which would to be less than the GDP growth rate of Oman. Al Maha Financial Services LLC Page 12 of 16

13 Financials Income Statement FY ending December (all figures in OMR '000s) E 2012E 2013E 2014E 2015E Revenue 30,814 36,310 78,322 79,342 83,026 85,335 87,700 90,201 Operating Costs (26,139) (30,877) (57,409) (52,531) (54,314) (56,572) (59,041) (61,847) Gross profit 4,675 5,433 20,913 26,811 28,712 28,763 28,659 28,354 SG&A Expenses (580) (547) (1,142) (8,257) (8,278) (8,295) (8,313) (8,333) Profit from operations 4,095 4,886 19,771 18,554 20,434 20,468 20,346 20,021 Net financing costs (4,256) (8,341) (15,511) (13,594) (13,044) (12,190) (11,633) (10,303) Profit (loss) before tax and extraordinary items (161) (3,455) 4,260 4,960 7,390 8,278 8,713 9,718 Other income , Other expenses - (10,308) (279) Profit before tax ,865 4,197 4,960 7,390 8,278 8,713 9,718 Income tax (170) (2,124) (3,008) (1,185) (1,145) (1,022) (1,076) (1,200) Net profit for the year (31) 13,741 1,189 3,776 6,244 7,256 7,636 8,519 Source: Company Prospectus Al Maha Financial Services LLC Page 13 of 16

14 Balance Sheet As on 31 December (all figures in OMR '000s) E 2012E 2013E 2014E 2015E Non-Current Assets Property, plant and equipment 186, , , , , , , ,411 Investment in JV Finance lease receivables 46,290 43,134 40,305 40,357 37,334 34,088 30,636 26,957 Deferred tax asset 4, Others 1,406 1,551 1, Other intangible asset Goodwill 15,739 15,739 15,739 15,739 15,739 15,739 15,739 15, , , , , , , , ,003 Current Assets Inventory 2,660 2,794 2,689 2,689 2,689 2,689 2,689 2,689 Trade and other receivables 8,522 42,320 40,243 42,604 7,508 8,009 8,425 8,583 Finance lease receivables 4,120 6,389 5, Cash and bank 1,262 6,537 29,588 19,172 8,969 8,376 7,928 8,665 16,564 58,040 77,769 64,465 19,166 19,074 19,042 19,937 TOTAL ASSETS 271, , , , , , , ,940 Equity and reserves Share capital ,964 19,964 19,964 19,964 19,964 Statutory reserve Legal reserve ,168 1,893 2,657 3,509 Retained earnings (952) 12,622 13,811 13,668 10,504 9,448 8,735 8,816 (452) 13,289 14,478 34,175 31,636 31,305 31,356 32,289 Hedging deficit (37,742) (17,189) (23,827) (23,827) (23,827) (23,827) (23,827) (23,827) Total Equity (38,194) (3,900) (9,349) 10,348 7,809 7,478 7,529 8,462 Shareholder loans ,722 9, Term loan 246, , , , , , , ,969 Hedging instruments 42,667 19,412 27,080 27,080 27,080 27,080 27,080 27,080 Provisions 3,607 4,041 4,293 4,675 4,830 4,995 5,168 5,353 Net deferred tax liability - 4 1,848 2,828 3,842 4,725 5,668 6,734 Income tax payable Working capital facility Current portion of long term loan 5,247 40,080 11, Trade and other payables 12,207 61,574 53,788 41,468 7,661 7,622 7,549 7,630 Total liabilities 309, , , , , , , ,479 TOTAL EQUITY AND LIABILITIES 271, , , , , , , ,941 Source: Company Prospectus Al Maha Financial Services LLC Page 14 of 16

15 Award Winner 2010 Al Maha Financial Services LLC PO Box 1065 PC 117, Al Wadi Al Kabir, Sultanate of Oman Tel: , Fax: Excellence in Brokerage Business Awarded for Research Promotion and Website Content By Muscat Securities Market Contacts Telephone Research: Suresh Kumar Radhika Gadhia Khushboo Badlani Portfolio Management : S.V. Uppiliappan uppiliappan@almahafinancial.com Institutional Sales: A. S. Kedarnath kedar@almahafinancial.com Brokerage: Abdullah Al Hinai abdullah@almahafinancial.com Mahmoud Al Hamsaidi mahmoud@almahafinancial.com Nasser Al Banna nasser@almahafinancial.com Operations & Customer service : Zakia Al Ghammari zakia@almahafinancial.com Muna Al Hashmi muna@almahafinancial.com Al Maha Financial Services LLC Page 15 of 16

16 DISCLAIMER: The research report has been prepared by Al Maha Financial Services LLC for private circulation amongst selected clientele for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe any investment. This Report is not directed to, or intended to be used by, any person or entity who (or which) is a citizen of (or domiciled) in any jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the company to any registration or licensing requirements within such jurisdiction. Al Maha Financial Services LLC will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. Al Maha Financial Services LLC and its affiliates including analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to companies mentioned herein or inconsistent with any recommendation and related information and opinions. Al Maha Financial Services LLC and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. The information contained in this report has been obtained from the sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, Al Maha Financial Services LLC makes no guarantee, representation or warranty, whether expressed or implied, and accepts no responsibility or liability to its accuracy and completeness of the data, being provided. Opinion expressed is our current opinion as of the date appearing on this material only. We do not undertake to advise you as to any change of our views expressed in this document. The investments discussed in this report may not be suitable for all the investors. Investors must take their own decision based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of Al Maha Financial Services LLC. Al Maha Financial Services LLC Page 16 of 16