Sell-down of PNOC-EDC prices at zero discount

The focus now turns to what will happen to the Philippine government's remaining 40% stake in the geothermal power producer.
The Philippine governmentÆs sell-down of a 20% stake in PNOC Energy Development Company has added Ps17.1 billion ($371 million) to its coffers after strong demand allowed the deal to be priced at a zero discount to the latest market price.

The offering, which reduced the governmentÆs stake in the countryÆs largest producer of geothermal energy to 40%, also closed a full day earlier than planned as the book was already six times covered.

The enthusiasm continued when the shares started trading yesterday after being suspended on the final day of bookbuilding, with the share price rallying 12.3% to Ps6.40. The gain suggests that sole bookrunner CLSA had got the balance right in terms of allocating enough shares to the serious buyers to ensure they would want to top up their holdings in the secondary market. When order books are significantly oversubscribed there is always a danger that investors who feel they got too few shares could put them right back into the market again.

The fact that the three billion-share offering was supported by six cornerstone investors who agreed to buy about half the deal would have helped spark buying in the market yesterday as it effectively reduced the amount of shares available to everyone else. After taking out the cornerstone tranche, the offering was 11 times covered, sources say.

The cornerstones, who were not disclosed but were said to be mostly existing institutional shareholders, are of the ôsoftö kind, meaning they are not bound by a formal lockup. But their involvement gave the bookrunner the comfort of knowing that half the deal was covered at launch. They also had to commit to buy the shares at the strike price, which according to the term sheet, was due to be ôat or close to marketö.

The price was eventually fixed at Ps5.70 per share, which was equal to the latest close û a definite rarity among Asian follow-on issues. It was also Ps0.10 higher than the price at launch after the share price remained well supported during the four-day roadshow.

According to sources, about 90 investors came into the deal. Approximately 80% of the demand was from long-only accounts, with the remaining 20% coming from hedge funds. A rough geographical breakdown suggested 60% of the interest came from Asia, followed by 25% from the US and 15% from the UK. As always these days, many US funds submitted their orders from their Asian offices, making the split between Asia and the US less clear cut.

Investors bought into the deal on the back a positive fundamental outlook both for the Philippine power sector in general û the countryÆs power producers are still cheaper than most of their peers in the region on a price-to-earnings basis - and for the company specifically as demand for environmentally friendly energy continues to grow. The fact that the governmentÆs stake has now fallen below 50% should also allow PNOC-EDC to become more efficient, observers say. For one, it will be subject to less bureaucracy and will no longer be required to operate marginal businesses that donÆt meet its targets for cost of capital and internal rate of returns.

It would also have helped that PNOC-EDC was trading at a significant discount to Aboitiz Power, a power generator and distributor that raised $218 million from a highly successful IPO of its own, less than two weeks ago. Even after yesterdayÆs 12% gain, PNOC-EDC was quoted only at 11.9 times projected 2008 earnings, compared to the 14.8 times that Aboitiz was sold at. The latter has yet to start trading.

YesterdayÆs gain did widen PNOC-EDCÆs valuation premium over First Gen somewhat, however.

The sell-down also drew a lot of attention after financial secretary Margarito Teves said just before the offering that the government intends to sell its remaining 40% stake in PNOC-EDC before the end of this year as well - resulting in a complete sell-down from 100% to zero in 12 months.

Whether or not it will actually happen that quickly remains to be seen, but the fact that a full privatisation is clearly on the governmentÆs agenda is likely to keep the share price well supported. The government needs to raise money from asset sales to cover shortfalls in its tax collection. The final 40% is likely to be sold either to a trade player or strategic investor and is expected to draw a lot of interest both from domestic and international players.

PNOC-EDCÆs share price has already doubled since its IPO in December last year, when the government sold an initial 20% of the company through the countryÆs first privatisation in 12 years. YesterdayÆs gain took it within a quarter of a peso of FebruaryÆs closing high of Ps6.60 and left it exactly 100% above the IPO price of Ps3.20.

Some analysts are suggesting that the strong fundamentals, including a supportive macro economic environment, the added M&A angle and the fact that PNOC-EDC is a more unique asset than other power producers in the Philippines could take the share price above Ps10 in the next six to 12 months.

PNOC-EDC produces geothermal steam which it sells to National Power Corporation (Napocor) and to independent power producers who use it to produce electricity under the BOT scheme. As of the end of last year, the amount of energy it produces is enough for the production of 1,149 MW of electricity. The company currently contributes about 64% of the countryÆs total capacity of geothermal power and 18% of its total power production.

In the first quarter this year, the company generated Ps5.09 billion ($111 million) in net sales and a net profit of Ps1.50 billion. This compares with net sales of Ps21.01 billion and a net profit of Ps6.78 billion for the full year 2006.
¬ Haymarket Media Limited. All rights reserved.
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