Jasmine yields up Thai IPO

Infrastructure fund chooses advantageous moment to formally launch one of Thailand's largest IPOs, with investors looking for yield plays as deflationary expectations gain ground.

Jasmine Broadband Internet Infrastructure Fund (Jasif) formally launched its Thai initial public offering on Wednesday, nearly one month after it decided to withhold the deal over the Christmas period when market conditions were too soft.

The delay should now play to the telco's advantage with deflationary expectations firmly gaining ground and investors continuing to show interest in yield plays.

As roadshows were completed at the end of last year, the deal has gone straight into bookbuilding mode, with pricing on February 3 and allocations on February 6. Listing is scheduled for February 16.

The Bt36.67 billion to Bt38.5 billion ($1.1 billion to $1.2 billion) transaction has a concurrent offering structure and there are no fixed allocations to domestic or international investors. Joint global co-ordinators are Bualuang Securities and Morgan Stanley, with Macquarie as joint lead.

The 3.66 billion share deal is being marketed on a price range of Bt10 to Bt10.5 per share, which equates to a 2015 dividend yield of 8.5% to 9%. This offers a chunky 558bp to 607bp pick up over Thai government bonds, which were yielding 2.921% on Wednesday.

As such, the deal is likely to strongly appeal to both domestic retail and institutional investors. Notwithstanding the fact that Thai equities are trading at a decade high on a p/e basis, local investors have continued to put money to work for the lack of many alternatives.

Domestic retail investors do not have a history of diversifying offshore and yield plays remain attractive since many economists believe the Thai government will cut rates further during 2015.

TRUE benchmark

Over the past year, 10-year sovereign yields have come down just over 100bp from the level they were trading at when Jasif's nearest comparable, TRUE GIF, completed its Bt58.1 billion ($1.8 billion) IPO in December 2013.

This saw integrated telco, True Corp, spin off some of its towers and fibre optic network at Bt10 per share and on a forward yield of 8.8%. At the time, the need for such an attractive yield was ascribed to the parent's high debt levels and implied credit risk. 

For much of 2014 the stock failed to do very much. But so far in January it has been one of the country's best performers, rising 10.3% to Bt11.7 compared to a 6% rise in the benchmark SET Index.

This has been driven by an announcement that it is purchasing a further 303,000 km of fibre optic network from its parent - a 13.7% to 19.1% addition to its Net Asset Value. 

At current levels, TRUE GIF is trading on a 2015 dividend yield of 7.9%, which means Jasif is offering a 7.5% to 13.9% pick up. This differential is partially a reflection of the need for an IPO discount and also of the flotation's large size relative to the Thai market.

The deal's other main comparable, BTS Mass Transit, currently yields about 6.5%, while regional telcos average about 4% to 5%. Singapore Reits are also yielding around 5%.

Jasif should therefore offer value for international funds, which do not have issues with Thailand's perennial geopolitical risk and the overhang of the parent's battle with a group of creditors dating back to the Asian financial crisis.

Son cleans up father's mess

In its current form, Jasmine is run by the founder's son, Pete Bodharamik. He is also its largest shareholder.

His success in turning around the group over the past seven years has surprised many of his peers. What was a defunct provincial fixed-line operator has now been transformed into a national broadband provider with a 29.6% market share and strong presence outside of Bangkok where 75% of its subscribers are based.

But its assets have been the subject of litigation from TT&T, which claimed Jasmine had contravened an agreement to sell it a stake. This was finally resolved in November paving the way for the IPO.

The listing company's main assets comprise a fibre-optic network and the rights to revenue from the last mile copper network. There is a slightly unusual structure, which sees the network divided in two. Some 800,000 km of cable is being injected upfront on a purchase price of Bt45.5 billion to Bt47.08 billion and book value of Bt2.5 billion.

A further 180,000 km of cable is being injected over the next two years at a purchase price of Bt9.47 billion to Bt9.94 billion and a rate of 7,500 km per month.

There is also a second split, which will result in 80% of the network being utilised via an 11-year lease back to Jasmine at a cost of Bt425 per core kilometre per month. The remaining 20% will be subject to a three-year lease, which will either be utilised by Jasmine at a cost of Bt750 per core kilometre per month, or third parties.

Low leverage to foster future acquisitions?

Analysts forecast that Jasif will provide distribution growth of about 8% per annum over the next couple of years. Under Thai law, infrastructure funds are required to pay out at least 90% of adjusted net profit and dividends are free of withholding taxes for the first 10 years.

In its prospectus, Jasif says it will pay out 100% of its projected Bt4.5 billion in adjusted net profit in 2015. 

It has no debt and its parent, Jasmine International, also runs a net cash position. This means that, subject to its future cost of debt, the fund should be able to make earnings accretive acquisitions simply by increasing its leverage.

Post IPO, the parent will own 33.3% of the fund and is subject to a three-year lock up, which prevents it from lowering its stake below this level. After that, it cannot reduce its stake below 19% for a further three years.

Post IPO, the fund should have a market capitalisation of Bt55 billion to Bt57.75 billion.

Analysts forecast re-rating for parent

Some analysts believe the spin-off will have a positive impact on the parent. In a recent research report, CIMB said the parent's stock performance had been very disappointing considering Jasmine has grown its earnings base fifteen-fold over the past five years.

It believes investors have not priced in potential upside from the IPO and have previously held back because of the uncertainty surrounding the litigation.

Proceeds from the IPO will now be used to fund the group's Bt6 billion 2015 capex plan. Jasmine hopes to secure two million customers by the end of 2015, up from 1.547 million in June 2014.

Its network currently passes by the homes of 5.957 million potential customers.

Since 2010, Jasmine has been able to increase its market share mainly at the expense of lumbering state-owned Telecom Organisation of Thailand (TOT), which has seen its broadband market share decline from 34.3% to 29.9%.

Other market share has been taken from True Corp, which has seen its market share marginally decline from 37.2% to 36.7%.

Key for investors will be how the country's three main operators are able to position themselves against each other over the next few years and what impact the entrance of a new broadband player, AIS, will have on the market.

But overall the market is forecast to expand relatively quickly given the country's low broadband penetration rates. At the end of 2014, this stood at 28.7%, with Media Partners Asia projecting growth to 44% by 2019.

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