EGAT and Thai Beverages uncork magnum of Thai equity

Pre-marketing begins for Thailand''s largest ever private and public sector IPO''s.

Thailand's equity markets stand poised to enter a new stage of development and maturity following the launch this week of IPO's for the Electricity Generating Authority of Thailand (EGAT) and Thai Beverages. The former began pre-marketing a $1 billion plus IPO on Monday, while the latter is scheduled to kick off a similarly sized IPO today (Thursday).

Together the two companies could raise up to $2.2 billion. This is a huge sum for Thailand, where there has never been more than $1.7 billion of equity issuance in any one year since the Asian financial crisis.

EGAT alone could raise more than the whole of the Thai equity market combined last year. At an upper limit of about $1.2 billion, its IPO will easily top that of Thai Oil, whose $709 million IPO of October 2004 currently ranks as the country's largest IPO on record.

Indeed, equity issuance from Thailand in the years since the financial crisis has been at best sporadic - with months and months of inactivity punctuated by a handful of government privatizations and bank re-capitalizations. EGAT and Thai Beverages will, therefore, provide key tests of the market's ability to absorb paper in size.

Added together they will equate to nearly five days trading volume. However, one point in their favour is the relative liquidity of the Thai stock exchange compared to its market capitalization.

At $117 billion, Thailand has the third smallest market capitalization in Asia ahead of just Indonesia and the Philippines. But in liquidity terms it stands fifth, ahead of Indonesia, the Philippines, Malaysia and Singapore.

On completion, EGAT and Thai Beverages will both rank in the top 10 by market capitalization. This additional $8 billion to $10 billion infusion of market cap (an increase of 7% to 8%) should help propel the country to a new MSCI weighting.

Timing the two companies to hit the market at the same time is clearly not ideal and has largely been driven by tax considerations. Companies that list on the SET ahead of December 31 this year are eligible to pay 25% corporate tax over the next five years rather than the standard 30% rate.

Specialists, nevertheless, remain confident both will be well received: EGAT because of its size and importance to the Thai economy and Thai Beverages because it represents a much sought-after Asian consumer play.


EGAT has begun pre-marketing ahead of Thai Beverages, but will price slightly later because it incorporates an employee stock offering that has been sandwiched into the middle of the marketing process. Under the current schedule, formal roadshows will begin around October 17, with pricing scheduled for around November 3.

The deal has a provisional split that will see 70% placed domestically and 30% internationally, although this may end up moving closer to a 60%/40% ratio. SCB Securities is sole bookrunner on the domestic tranche, while Citigroup, JPMorgan and Morgan Stanley will run the international books.

The transaction will comprise all new shares, with proceeds earmarked for capex and debt reduction. A 15% greenshoe will comprise secondary shares. Post greenshoe, the government will drop to a 75% stake, with employees accounting for a further 5% to 6%.

Fund managers say the syndicate has assigned fair value estimates ranging from Bt190 billion ($1.15 billion) to Bt230 billion ($1.4 billion). Based on a 15% IPO discount, this equates to an IPO proceeds range of roughly $960 million to $1.2 billion.

Using this range and syndicate consensus 2006 profit forecasts of Bt22.5 billion ($548 million), the deal is being pre-marketed on a PE range of seven to 8.5 times 2006 earnings. At this level, it will price at a discount to just about every single Asian electricity company including much smaller domestic comparables.

Asian comps ex Japan average a 2006 PER in the mid double digits. At one end of the scale, are the two Indian electricity companies NTPC and Tata Power, plus Malaysia's Tenaga - all trading in the high teens. In the middle, are the Chinese and Hong Kong power companies, trading in the low to mid teens.

At the bottom end of the scale is Korea's Kepco and EGAT's domestic comparables, IPP's EGCO and Ratchaburi. EGAT holds a 25.4% stake in the former and a 45% stake in the latter.

EGCO is currently trading on a 2006 PER of about 7.5 to eight times and Ratchaburi at about 8.5 to 9.5 times (subject to different analysts' estimates).

On this basis, EGAT looks attractively valued. The group is more than five times the size of its two subsidiaries and also controls the country's entire 28,600km transmission system. As of July 2005, Thailand had total installed capacity of MW26,431 of which EGAT accounted for 59%, Ratchaburi 15%, other IPP's (including EGCO) 16%, SPP's (including GLOW) 7% and foreign purchases 2%.

One of the main reasons why Ratchaburi and EGCO trade at a discount to both Asian comps and the Thai market is because they have been recording negative earnings growth. EGAT faces a similar problem in 2005 because it has had to write down Bt23 billion as a result of tariff restructuring. This is likely to completely wipe out 2005 earnings and some analysts are forecasting it will consequently make a loss this year.

As one specialist explains, "EGAT had been booking revenue on the basis of a tariff adjustment the government subsequently didn't allow. This forced a write-down that severely impacted its first half earnings. The government re-configured the tariff adjustment mechanism in August, but it will not take effect until October. This means EGAT's third quarter figures will also be severely affected because it will not be able to pass on high fuel costs and its revenues will take a hit. By the fourth quarter the situation will normalise."

This complicating factor will also impact the company's plans to pay out 40% of net income in the form of dividends. In future years, analysts believe EGAT will be able to maintain this ratio and hit its capex targets without having to raise new equity. Gearing is also relatively low, giving the company plenty of room to raise debt.

In 2005, however, EGAT will pay a fixed dividend per share out of its retained earnings. This means the IPO will offer a dividend yield of roughly 4% to 5%. This may prove to be a strong selling point, as the Asian sector average stands at 3.9%.

EGAT is likely to be pitched as a pivotal stock for Thai specialists. Aside from promoting it as a key play on country's economic growth story, lead managers are also likely to position it as an exceptionally attractively valued play, that has reached a beneficial inflexion point in its history.

This is because two of the key factors, which have been holding back the Thai electricity sector, look like they have been resolved. The first comprises lack of new supply and fears that the country's reserve margin may dip below 13% next year. Most analysts believe 20% is a safe minimum for a country with Thailand's economic growth profile.

Initially analysts had expected a new round of IPP bidding in 2005. This has now been pushed back until 2006 and it means new capacity will not start coming on stream until after 2011 as it takes five to six years to get a new power plant up and running.

However, the cabinet has now agreed that EGAT will not have to bid for the new capacity, but will be automatically allocated 50%. In the interim period, EGAT is also scheduled to increase its generating capacity by about 17.8%, since it has already been allocated 35% of new capacity scheduled to come on stream between 2008 and 2010.

This will bring its market share down to 50% - a level the Thai government hopes it will then be able to maintain. More importantly, capex increases should enable EGAT to resume positive earnings momentum. Analysts are forecasting a net earnings CAGR of 8% to 10% in the coming few years.

This will be re-inforced by changes to the country's tariff structure, which will also make EGAT's earnings more transparent and stable. Under the terms of the new structure, the company will be able to fully pass on fuel increases, as well as FX and inflation related costs.

But the extent to which investors believe EGAT deserves to trade at a premium to the Asian sector average will depend on their faith in the Thai government. As such, potential risk factors include the country's reputation for dragging its feet where regulatory changes are concerned.

Historically, Thailand has been slow to adopt independent regulators for key sectors such as power and telecoms. EGAT, for example, has until recently been its own regulator. Thailand now has an interim regulator, but a fully independent entity has yet to be established and when it is, it may not take such benign approach to its largest operator.

So too, timetables in Thailand tend to be more fluid than other countries. Investors may express concerns that the next round of IPP bidding could be delayed. They may also worry about negative changes to the tariff structure once it comes up for renewal in 2008.

Other risk factors stem from concentration issues. Roughly 57% of EGAT's capacity is generated by natural gas and it has only two buyers - the government-owned Metropolitan Electricity Authority and Provincial Authority.

On the cost side of the equation, there is also the issue of EGAT's operational efficiency, which could play either way with investors. EGAT's generators, for example, are relatively old, with many in use for over 20 years. The company also has a large workforce (roughly 23,000) and has historically been pressurised by a strong union, which successfully scuppered the government's last efforts to float the company in 2004.

These and other factors mean EGAT has the worst margins of any of its Asian comps. In 2006 analysts are forecasting it will record a net margin around the 8.5% level compared to an Asian average of nearly 19%.

Yet this also means EGAT's new management has plenty of room to implement operational improvements and specialists believe the government has done all it can to lay the groundwork for a successful IPO.

Most also hope that the interplay of EGAT and Thai Beverages will focus investors' attention back on Thailand, drawing liquidity to the market, rather than cannibalizing it. Year-to-date, Thailand is up about 6%, making it the seventh best performing market behind benchmark indices in Korea, China, India and Singapore.

Thai Beverages

Having begun soft pre-marketing on Monday, Thai Beverages is set to begin more formal pre-marketing today (Thursday), followed by international roadshows on October 3. Pricing is scheduled to take place after New York's close on October 24, pending formal sign off from the Thai regulators and no more protests from anti alcohol campaigners.

Thailand's largest ever private sector IPO has almost been de-railed a number of times this year thanks to the efforts of a group of Thai monks and teetotallers, who oppose the idea of a brewing company listing in a country where 90% of the population are Buddhists.

However, conscious that it would stand accused of double standards, the Thai government appears to have given the deal the green light. Phatra, SBC and Tisco will lead the domestic offering, which will account for about half the deal, while Deutsche Bank, JPMorgan and Merrill Lynch will handle the international books.

The ratio of primary and secondary shares has not yet been formalised and the company will also wait until after pre-marketing before deciding what percentage of share capital it will issue.

Based on a likely freefloat of 25% and net income forecasts of Bt11.3 billion ($275 million) for 2006, the proceeds range will span $825 million to $1.03 billion. In turn, this represents a 2006 P/E ratio of about 12 to 15 times earnings.

At this level, Thai Beverages will price at a discount to Asian comparables and at a slight premium to Thailand's 10 to 11 times market average. However, specialists emphasise that while it is typical for a brewing company to price at a premium to the market average, it is difficult to make wider valuation comparisons, because there are few direct comps in Asia.

In China, for example, brewers such as Tsingtao trade in the high 20's, but their valuations incorporate a lot of M&A froth. Likewise, San Miguel in the Philippines trades above 20 times, but derives more profits from food than beer.

Closer to home, Carlsberg is listed in Malaysia and trades at about 15 times 2006 earnings. However, the company is a lot smaller than Thai Beverages.

In some respects, specialists believe investors will pay less heed to the company's valuation and focus more on the IPO's dynamics. "Thai Beverages is one of those deals that will fly no matter what the valuation," says one. "It's already attracting a lot of interest."

The deal has two key selling points. Firstly it is an Asian consumer play that should attract droves of investors looking to play Asia's growth story and diversify away from the region's legions of export-oriented companies.

Secondly, Thai Beverages will be one of a kind on the Thai stock exchange - a market is dominated by government utilities and banks. It represents a rare example of a homegrown Asian company that has been able to foster a strong brand name.

The company is owned by Thailand's richest man, Charoen Sirivadhanabhaki, and has a dominant market share in both spirits and beer. Analysts say Thai Beverages currently controls 85% of the white spirits market, 63% of the brown spirits marks and 60% of the beer market.

Its major brands are Chang beer, Sangsom rum, Mekong whiskey and Ruang Khao (a white spirit). Combined, its brewing operations account for 90% of all revenue, almost all of which is sourced domestically.

Key issues the company faces include growing revenues and improving margins. This will be a key issue for investors as the company is unlikely to be a big dividend play. Based on a 50% pay-our ratio and valuation of about 15 times 2006 earnings, the company will yield roughly 3.5% at IPO.

In 2004, Thai Beverages reported revenues of Bt90.1 billion and net income of Bt10 billion. These levels are not expected to grow in 2005, although analysts are forecasting a jump in revenues to Bt98 billion in 2006, backed by net profits of Bt11.3 billion.

Future earnings growth will largely depend on two factors. Firstly the company is trying to improve its revenue mix by increasing capacity and targeting the high end of the market. Most of its products currently operate at the low end.

As of July, installed capacity at its two breweries amounted to 9,700 hectare litres, while 16 distilleries can produce up to 7,900.

Over the coming two years, the company is forecast to expand production at its breweries by a further 4,000 hectare litres. Most of this expansion is geared towards the company's efforts to move upmarket and it has recently launched a new light beer called Archa.

The second prong of its strategy concerns international expansion. Thai Beverages has already tried to improve its international exposure through advertising campaigns, including sponsorship of Everton football team in the UK. However, analysts conclude that most international expansion is likely to take place in neighbouring markets such as Laos, Vietnam and Cambodia.

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