WHA readies water unit spin-off

Thai warehouse operator enters final preparation for a domestic IPO of its water treatment business as it seeks capital to reduce leverage after Hemaraj deal.

Thai warehouse operator WHA Corporation is pitching an initial public offering of its water treatment business  to investors as it seeks to raise fresh capital to cut a massive debt load that has weighed heavily on its share price.

Premarketing for the Reg S deal started on Wednesday and, while it expects to sell the majority of shares domestically, WHA has also arranged investor meetings outside of Thailand, bankers familiar with the situation told FinanceAsia.

The company is targeting about Bt5.5 billion ($150 million) for a 30% stake in WHA Utilities and Power as it looks to make a dent in the $1.3 billion it splashed out for Hemaraj Land and Development in 2015.

WHA’s debt level had risen by nearly five times to $1.7 billion in the year to the end of September 2016 after the company borrowed over $1 billion from Siam Commercial Bank for the acquisition. The firm had only $72 million in cash as of the end of September.

The heavily debt-financed acquisition has weighed on WHA’s share price. The stock reached an all-time high of Bt4.2 immediately after completing the deal in May 2015, but has since fallen 24% to close at Bt3.2 on Friday.

As a result of WHA’s soaring debt, Fitch Ratings downgraded its long-term credit rating from A- to BBB+ in May 2015, taking it a step closer to a high-yield rating.

In order to deleverage, WHA has been actively monetising its assets since late last year. In November it raised $160 million through spinning off Hemaraj Leasehold Reit, backed by warehouses and factories in eastern Thailand, in a separate listing.

A month later it transferred two logistics centres to Bangkok-listed WHA Premium Growth Freehold & Leasehold Reit for $120 million.

Now it is preparing to sell its stake in WHA Utilities and Power — formerly known as Hemaraj Water — which will be the first direct sale of Hemaraj Land’s assets since the acquisition.

Details

Bankers say WHA Utilities and Power is being pitched as a defensive play since it has exclusive rights to supply water and wastewater treatment to WHA’s industrial estates on Thailand's eastern seaboard, an emerging industrial and economic zone covering Chonburi and Rayong provinces.

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The eastern seaboard industrial zone is known for automotive research and houses some of the world’s leading car makers, including Ford, Mazda and General Motors.

WHA Utilities and Power generates the bulk of its revenue from water supply and wastewater treatment, but is investing heavily in power supply, which it sees as its main growth driver for the coming years.

Syndicate analysts said developing the power business would provide synergies for the water business, since additional power supply will create demand for water. It is building six new power plants with the aim of boosting power capacity to 540 megawatts by 2019, a 55% increase from 350 megawatts as of the end of last year.

WHA Utilities and Power has a fair value of Bt24 billion to Bt26.8 billion according to syndicate analyst estimates, representing about 16 times expected 2017 earnings and 11.9 times 2018 earnings.

The implied price-to-earnings ratio is richer than those of other Thai utilities companies such as Thai Tap Water Supply and Eastern Water Resources, which trade at 15.6 times and 11.7 times respectively based on 2017 earnings estimates. The valuation gap should be narrower after taking into account an IPO discount, however.

WHA Utilities and Power’s IPO will comprise 229.5 million shares, including 125 million new shares and 104.5 old shares sold by existing shareholder H-International. About a quarter of the shares for sale will be reserved for existing WHA shareholders on a 250-for-1 basis.

Siam Commercial Bank is the lead underwriter and Citic CLSA a joint bookrunner for the IPO.

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