Gulf Energy Development on Wednesday launched the fourth initial public offering of the year in Thailand's power sector, underscoring a strong appetite for energy stocks despite a lacklustre growth outlook and excess supply in the domestic market.
The Bt21.3 billion to Bt24 billion ($639 million to $719 million) IPO – Thailand’s largest this year – comes after TPI Polene Public, WHA Utilities & Power and B.Grimm Power raised a total of $990 million through their listings earlier this year.
B.Grimm Power in particular is considered one of the closest comparables for Gulf, since both operate as independent power producers, while TPI Polene and WHA Utilities & Power run waste-to-energy businesses.
Banpu Power, another IPP that listed in October last year, is also seen as a peer because its market capitalisation is very close to that of Gulf, which is estimated to be $2.55 billion to $2.8 billion according to syndicate analysts.
As it stands, Gulf will be launching its IPO on the back of B.Grimm and Banpu’s solid post-listing performances. B.Grimm was the biggest gainer, with shares soaring 62.5% since listing in mid-July, while Banpu shares rose 31% over the last 12 months and outperformed the 14.7% gain of the benchmark SET Index.
Too bullish?
While power companies are generally regarded as defensive stocks, some investors have pointed out that market valuations of Thai power companies are already quite high after the recent uptick in share prices, suggesting that it may not be the best timing to enter the market now.
For instance, B.Grimm is valued at around 28.5 times its latest reported earnings, which is far richer than the average price-to-earnings ratio of 18 times for the power sector across the region, according to DBS analysts.
But Gulf is attempting to go much further. Sources familiar with the company say its 533 million share-deal is begin pitched at Bt40 to Bt45 per share, corresponding to 36.6 times to 41.1 times estimated earnings this year and suggesting Gulf is looking at a price more than 40% over its peer.
In its corporate presentation, Gulf said its valuation was justified by a robust growth pipeline and multiple long-term power purchase agreements.
Gulf has 17 power projects in operation, including 13 gas-fired plants and 4 rooftop solar projects, and has another 11 power projects under construction and development.
The company has aggressive plans to expand its gross installed capacity to 11.1 gigawatts (GW) by 2024 from 4.7GW as of early November, and expands its domestic market share to 20.4% from 7.2% currently.
By comparison, B.Grimm has 1.6GW of installed capacity and plans to increase to 2.35GW by 2021, while Banpu has about 2GW of capacity and plans to expand to 4.3GW by 2025. That means Gulf intends to add on new capacity that is nearly double the combined existing capacity of them in seven years' time.
Gulf’s expansion plans are supported by long-term power purchase agreements with Electricity Generating Authority of Thailand (EGAT), the country's state-owned power distributor. Gulf has entered into 25-year power contracts with EGAT for over 80% of its output, while the remainder will be supplied to industrial users for a term of 15 years on average.
However, sector analysts are divided over whether aggressive expansion plans in the power sector can actually pay off.
According to Thailand's long-term power development masterplan, the government aims to achieve total installed capacity of 70GW by 2036 to support industrial growth. But some analysts are skeptical over the expansion, citing current oversupply in the market and the risk of slowing economic growth.
Thailand's total installed capacity was 45GW as of the end of April this year, but the peak electricity demand this year was recorded at only 28.5GW, while the historial peak level was only 29.6GW.
Deal structure
Gulf’s 533 million-share IPO is being split fairly equally into three tranches. About 164 million shares will be allocated to 17 cornerstone investors including Asian Development Bank and Malaysia’s Affin Hwang Asset Management.
Another 179.8 million shares are reserved for company management and directors, leaving about 189 million shares for public subscription.
The company is running a five-day international roadshow that is set to end on November 21. Listing is slated for December 6.
Gulf, which is wholly-owned by president Sarath Ratanavadi, will use the IPO proceeds mainly for project financing and debt repayment.
Joint bookrunners of the IPO are Bank of America Merrill Lynch, UBS, Bualuang Securities, Kasikorn Securities and SCB Securities.
