G Steel, Thailand's second largest producer of hot rolled steel coils, has priced the country's first IPO of the year towards the top end of its indicative price range at Bt1.60 per share, netting the company proceeds of Bt2.4 billion ($60.9 million).
The international portion of the offering was arranged by Macquarie in its first Thai transaction as sole lead manager. The Australian-based bank took over the mandate from UBS in the fourth quarter 2005 after the latter had expressed concerns about the strength of the market.
Since then the deal size got cut from $200 million in order to allow for a decent valuation. Yet at the same time the company needed to make sure its aggressive capex plans were met and this largely dictated the timing of the deal.
It was helped slightly by the fact that foreign investors appear have become more positive about the Thai stock market since the beginning of the year with the benchmark index up 4.38% year to date. The SET (Stock Exchange of Thailand) was one of the poorest performers in the region last year, rising a meagre 6.8%.
G Steel offered 1.5 billion shares, or 15.5% of its enlarged share capital, at Bt1.55 to Bt1.70 baht each with a 50-50 split between international and domestic investors. The final price of Bt1.6 values the company at 6.4 times 2006 earnings.
Its main competitor, Sahaviriya Steel Industries (SSI), is currently trading around six times based on consensus estimates. The Thai steel sector as a whole is valued at a 2006 multiple of 7.9 times.
One observer commented that the slight premium to SSI was warranted even after taking into consideration the need for an IPO discount. This argument is based on the fact that G Steel is a fully integrated steel maker with products that other Thai hot rolled coil producers do not have. Notably, it is able to make thinner steel for use in the more value added segments of the market, such as the auto manufacturing industry.
The company met with 33 investors of which 20 eventually submitted orders. The order book was about 2.5 times oversubscribed when it closed on Wednesday after a five-day roadshow that stopped in Singapore, Hong Kong and the UK.
Most of the buyers were from Europe and Asia and included both investors focusing on small- and mid-cap companies and those looking specifically at commodities. The retail offer, which was led by Asia Plus Securities and accounted for most of the domestic portion of the deal, was about four times covered.
During roadshows, the management needed to convince potential investors that G Steel's product mix makes it sufficiently different from the Chinese steel exporters, which mainly produce low value commodity steel. Thailand also has anti-dumping measures in place to protect its steel sector and together, this gave investors sufficient confidence to commit, said Stephen CuUnjieng, a corporate finance banker at Macquarie.
"One of the key objectives of this road show was to differentiate G Steel from other Asian steel companies in terms of its higher quality product mix and management," CuUnjieng stated. "Secondly, to show the upside potential from the de-bottlenecking and the fact that proceeds are going to be used to vastly increase production capability and quality."
Adds Marshall Nicholson, co-head of Asian ECM, "G Steel may potentially have been selling its shares at one of the worst valuation points, but by raising money now to erase the bottlenecks, it is sitting on the best combination of capacity and pricing power when the cycle turns and the new capacity comes on board towards the end of 2007."
Proceeds will be used for a $320 million expansion that will double the company's effective annual production capacity to three million tons from 1.5 million tons from the end of 2007 and help alleviate bottleneck problems in parts of its production process that are impacting negatively on its overall capacity utililization.
The company also raised $100 million from the sale of high-yield bonds in October last year that will go towards the same project.
Getting rid of the bottleneck problem should allow the company to fully benefit from strong domestic demand for steel, which has been growing at 20% per annum for the three years to 2004, according to the International Steel Institute.
Syndicate research estimates that G Steel will be able to achieve sales volumes of 1.7 million tonnes in 2007, up 53% from a forecast 1.1 million tonnes in 2005. In the first nine months last year, G Steel had total sales of 17.71 billion baht, of which 88% were generated in the domestic market.
The company ran into financial difficulties during the Asian financial crisis after the devaluation of the baht in 1997 prompted a default on $600 million of debt, which quickly ballooned to $1.5 billion in unpaid obligations.
However, since the completion of a debt restructuring programme in September 2003, the company's earnings have been growing solidly, driven by higher selling prices and volumes. In 2004, net income before extraordinary items rose 120% to Bt2.59 billion on sales of Bt21.27 billion.
Syndicate research projects a 10% drop in the bottom line in 2005 to Bt2.33 billion, mainly as a result of steel prices having peaked in the first quarter last year. The bank expects earnings to grow by 4% in 2006 and, with the de-bottlenecking measures starting to kick in the second half of the year, to improve by a further 18% in 2007.
The debt restructuring gave the company an infusion of new equity from two shareholders, Superior Overseas (Thailand) and Ample Vision Group, which held stakes of 30.76% and 19.78%, respectively, before the share sale. Each of the vehicles are comprised of a small number of individual shareholders.
The group's founder Dr Somsak Leeswadtrakul and his associates held about 15%.