Rayong Refinery's IPO highlights investor interest and caution

The PTT spin-off prices offer at bottom end of the range for a 10% valuation discount to bigger rival Thai Oil.

Despite almost three weeks of virtually uninterrupted equity market declines, bankers say they still see interest in primary market issues - although investors are now typically opting for smaller sizes than they would have a month ago. They are also becoming more careful with regard to valuations, and this is especially noticeable because of a higher proportion of price limit orders.

A case in point is Thailand-based Rayong Refinery Co. (RRC) which yesterday (May 25) priced its initial public offering at the bottom end of the indicated range for a total deal size of Bt25.2 billion ($657 million). The spin-off from government-controlled energy company PTT fixed the price at Bt18 per share, after marketing the offer to investors in a range between Bt18 and Bt23.

Even at the smaller size, the deal is the largest IPO in Thailand since fellow refiner Thai Oil raised Bt32.5 billion ($788 million) in October 2004 and the third biggest overall. It is also the largest energy offering out of Southeast Asia this year and the second Thai company to complete an IPO this week after Thai Beverage (which is listing in Singapore) closed a $866 million offering on Wednesday.

RRC’s offer includes a greenshoe of 15%, which according to the practice on Thai IPOs has been overallocated exclusively to domestic institutions. If fully exercised it will boost total proceeds to Bt29 billion ($753 million)

The deal comprised 1.40 billion shares, of which 63% were secondary shares sold by PTT. The other 37% were new shares, which allowed RRC to raise net proceeds of about $232.3 million. The money is to be used towards an expansion that will boost its production capacity by 45% by the second half of 2008 and act as a growth driver going forward.

About 54% of the total offer was allocated to domestic institutions and retail investors, while the remaining 46% went to international investors. Merrill Lynch and Morgan Stanley were joint coordinators and bookrunners for the international portion, while Thai investment banks Finansa Securities and Phatra Securities led the domestic offering.

Sources noted that the price sensitivity in the book was clearly geared towards the bottom end, but say the deal was comfortably covered at that level. The domestic tranche was reckoned to have been well oversubscribed, while the international tranche, which was the price setter, saw somewhat less excess orders but still attracted about 45 global institutions.

The top five accounts were all energy sector funds and a good number of other investors who already own stock in PTT and Thai Oil also participated on the basis that the group has a history of delivering good value to their shareholders.

Asia accounted for about 73% of the demand, Europe and the Middle East for around 15% and the US for the remaining 12%.

Not surprisingly in the current market conditions, the hedge fund participation was a bit lower than normal, but the sources say many funds still submitted orders, only they were smaller than usual.

The final price values RRC at 7.1 times the consensus forecasts for 2006 earnings on a fully diluted basis, which based on Wednesday’s closing price equaled a discount of about 10% to its bigger rival Thai Oil. A day earlier, it would have been a 15-16% discount, but a tumble in Thai Oil’s share price saw the gap narrow significantly.

Fortunately for the bookrunners, up until that point Thai Oil had held up pretty well, falling only 3.7% since the launch of RRC’s institutional book building on May 15, while the benchmark SET index lost 7.1%. However, since it hit a six month high on April 20, Thai Oil has shed 14.3%.

Thai Oil is considered to be the closest comparable to RCC given that they are in the same market and they both operate high complexity refineries which enable them to maintain margins at the high end of those achieved by their peers. They also have a very similar shareholding structure since Thai Oil is also 49.99% owned by PTT.

While RRC is a pure refiner, Thai Oil also has power and petrochemical businesses, however.

According to people familiar with the IPO, the key concerns investors had didn’t actually relate to the choppy markets, but rather tended to be more sector-focused and looking at the fact that the deal is launching at a time when Singapore refining margins are at a record high. While this will no doubt be good for RRC in the short term, some investors worry about how long that situation will last.

Others see at least a few more good years as a global shortage of refining capacity is expected to uphold prices and margins. RRC typically operates at gross refining margins that are in line or slightly above the Singapore benchmark. In 2005 it achieved a gross refining margin of $7.10, compared with the Singapore average of $6.74.

PTT, which is majority-owned by the Thai government, will see its stake in the company reduced to 49.9% as a result of the IPO, or to 46.7% if the greenshoe is exercised in full.

The shares are due to start trading in Bangkok on June 5.

¬ Haymarket Media Limited. All rights reserved.
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