Banpu Power brings largest Thai IPO of 2016

If it delivers the same upside as the sector's last IPO, investors will be very happy.
Hongsa Laotian plant: becoming a reality
Hongsa Laotian plant: becoming a reality

Banpu Power has launched Thailand’s largest initial public offering of the year, hoping its deal will be as successful as Global Power Synergy’s (GPSC) IPO from the same sector in May 2015.

The power generation arm of the SET-listed Banpu Group is currently wrapping up Thai roadshows for a transaction slated to raise Bt11.7 billion to Bt13.6 billion ($337 million to $394 million) based on an indicative price range of Bt18 to Bt21 per share.

This would make it the country's largest flotation of 2016 and only the third benchmark-sized offering of the year following earlier issues by Golden Venture Reit, which raised $233.43 million in April and BCPG, which raised $169.28 million in September according to Dealogic figures. 

Sizeable IPOs from Southeast Asia have been few and far between in 2016 and Banpu Power’s deal certainly appears well timed from the issuer's perspective.

The country’s SET 100 Index has been one of Asia’s star performers so far this year, rising 15.75% to Monday’s close.

Parent company Banpu, the Vongkusolkit family’s coal mining arm, has also performed well, up 31.95% since the beginning of the year.

The parent's outperformance has been driven by rising coal prices and investors' perception of the value to be unlocked by spinning off Banpu Power. The latter will have a market capitalisation of $1.6 billion to $1.8 billion when it lists on October 28, not that much smaller than Banpu's $2.3 billion.  

Valuation

The offering is being pitched on a consensus forecast 2017 P/E range of 10 to 11.6 times. This is significantly lower than the multiple GPSC achieved in May 2015 when it raised $301.4 million from an IPO, which came at 20.6 times forecast 2016 earnings.

Having been priced at Bt27, GPSC’s share price closed Monday at Bt36, an increase of 33.3%.

Year-to-date it is up 62.16% and is currently trading at 17.2 times forecast 2017 earnings, the highest valuation of Thailand’s four listed independent power producers.

In a recent research report, non-syndicate broker Maybank Kim Eng calculated that Banpu Power's prospective IPO is being pitched at an 11% to 24% discount to its four nearest peers and at a 5% to 19% discount to its own fair value estimates. 

According to Maybank Kim Eng figures, GLOW Energy commands the second highest valuation of the listed quartet on 13.9 times 2017 earnings. Behind it are two EGAT spin-offs: EGCO on 10.7 times forecast 2017 earnings and Ratchaburi on 10.6 times. 

Current valuations have a direct correlation with the size of the companies' installed capacity bases; with the smallest by installed capacity commanding the highest valuation as investors bet on higher growth from a smaller base.

Once it begins trading, Banpu Power will rank fourth in the pack in terms of installed capacity. It currently has installed capacity of 1.86GW compared to GPSC’s 1.34GW.

High earnings growth

Analysts forecast a 29% earnings compound annual growth rate (CAGR) for GPSC between 2016-18 and are particularly excited about the prospects for revenue from its main shareholder and cornerstone customer PTT.

Banpu Power is also projected to enjoy strong earnings growth, with Maybank Kim Eng forecasting net profit to rise 70% from $91 million in 2015 to $154 million in 2016 and then by 8% to $176 million in 2017 and to $178 million in 2018.

Banpu Power says installed capacity will expand to 2.3GW by 2018 and hopes to double this figure again to 4.3GW by 2020 when it hopes 20% of the total will be derived from renewables.

GPSC is forecasting installed capacity of 1.85GW by 2019.

Both companies will, nevertheless, rank some way behind their larger peers. Ratchaburi, for example, currently has 6.98GW (of which 70% comes from Thai projects), while EGCO has 4.049GW (also 70% from Thailand) and GLOW 3.2GW.

Ratchaburi is planning 10GW of installed capacity by 2023 and has a similar 20% renewables target to Banpu Power.

One key issue for investors will be whether Banpu Power’s earnings growth will outperform larger comps EGCO and Ratchaburi, with whom it co-owns a number of projects.

It currently has two main projects and shares one with Ratchaburi and one with EGCO.

The former comprises a 1.878GW lignite-fired plant in Laos, in which Banpu Power and Ratchaburi each hold a 40% stake. This Hongsa plant has a power purchase agreement (PPA) with EGAT and is currently ramping up after encountering problems with one of its generators earlier this year.

The latter is a 1.434GW coal-fired plant in Rayong, Thailand in which Banpu and EGCO hold half the equity each. This also has a PPA with EGAT out to 2032.

Going global

Recent efforts have been focused on expanding overseas and in August, the company’s CEO said Banpu Power intended to spend about $1 billion on acquisitions over the next decade.

So far, the group has purchased a 30% stake in a 1.32GW coal-fired plant in Shanxi, China, which will begin operations in late 2017, plus three other small coal fired plants in China with installed capacity of 373MW.

Earlier this year, Banpu Power significantly increased its renewables footprint and now has 90MW of solar capacity in China and 51.1MW in Japan. It also recently purchased a 29.4% stake in a US shale gas operator.

UBS recently argued that the Thai power producers are expanding overseas because domestic demand is slowing and overcapacity may be looming. At home, Thailand has set itself a 70GW target for installed capacity by 2036, with a focus on coal and renewables to reduce the country’s dependence on natural gas.

Banpu’s overseas push is partly the result of a managerial change after founder Chanin Vongkusolkit stood down as CEO last April in favour of the company’s long-standing CFO Somruedee Chaimongkol.

Her appointment marked something of a departure for the group since she is not a family member, although she has served the company for three decades. Her replacement also marked a change of course after an Australian, Peter Parry, was bought in: another reflection of the group’s overseas ambitions.

Parry was formerly at Centennial Coal, the group Banpu purchased in 2010 at the height of the previous industry cycle.  

IPO deal structure

According to a termsheet seen by FinanceAsia, the IPO has three tranches, although two are interlinked.

A cornerstone tranche has already been allocated, with 20 million shares for Credit Suisse private banking clients and 90 million shares going to Capital Research and Management, which is taking a 3.6% stake in the group.

The US investment manager is a big investor in the Thai power sector, as it already owns stakes in Ratchaburi and GLOW according to S&P Capital data.

The cornerstone tranche forms part of a 438.49 million share placement tranche, which accounts for 67.6% of the offering.

There is also an entitlement tranche for existing Banpu shareholders equalling 210 million shares, or 32.4% of the offering.

Overall, the deal amounts to 21% of the company’s enlarged share capital, leaving Banpu with a 79% stake.

Roadshows will arrive in Hong Kong on October 6, moving to Singapore on October 10, then Kuala Lumpur on October 12 and finally London on October 13. Pricing is scheduled for the day after on October 14.

Joint co-ordinators for the international tranche are Credit Suisse and the Quant Group. 

Joint underwriters for the domestic tranchea are Bualang Securities, Kasikorn Securities and Thanachart Securities. 

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