ASIAN IPO FOCUS: First Gen IPO May Face Rough Ride
Wednesday, January 25, 2006
By Ditas Lopez Of DOW JONES NEWSWIRES
MANILA (Dow Jones)--While there's little doubt that the initial public offering of First Gen Corp. will draw enough demand to be fully taken up, analysts say the Philippines' largest independent power producer will need to price its PHP10 billion-plus offering at the low end of an already narrowed price range.
Part of the problem is timing. First Gen's IPO will hit the market just as two other big Philippine share offerings are competing for investors' cash.
"There's a lot of alternatives to look at...That's why the pricing power of this deal has been reduced to the low end of the range," said Alan Richardson, who helps manage $3.2 billion in assets at Baring Asset Management.
Last week, First Gen narrowed its IPO's price range to PHP51-PHP62 from the PHP51-PHP74 range it flagged late last year. The offer will be priced on Jan. 27, and the shares will debut on the Philippine Stock Exchange Feb. 10. The offer period is set for Jan. 31-Feb. 6.
Unfortunately, Philippine food manufacturing company Universal Robina Corp. (URC.PH) is set to price a secondary offering of up to 730 million shares on Feb. 6. At current market prices, that offer would be valued at around PHP14.6 billion. GMA Network Inc., the country's second-largest broadcasting firm in terms of assets, also plans to issue at least 20% of its shares to the public in the first three months of 2006.
Formerly First Generation Holdings Corp., First Gen is the primary holding company for the power generation and energy-related businesses of the Lopez group. First Gen is the largest Filipino-owned and -controlled independent power producer in the Philippines. It owns four power plants with a total generation capacity of 1,726.6 megawatts, equivalent to around 11% of the country's total installed capacity.
The company plans to use part of the IPO proceeds to fund future expansion projects, including a plan to bid for power plants that state utility National Power Corp. is privatizing.
Depending on the final price, First Gen will offer between 180.9 million and 219.9 million new common shares. In addition, current shareholders including investment holding company First Philippine Holdings Corp. (FPH.PH) will sell as many as 125 million existing shares. First Philippine Holdings, commonly known as First Holdings, owns 88.4% of First Gen.
If all the shares set aside for the offer are taken up, including those allocated for oversubscription, 39.69% of First Gen will be held by new investors after the IPO.
First Gen didn't say why it lowered the price range of its offer, but analysts say competition from other offers isn't the only problem.
"The IPO may face weak demand from domestic retail investors," said Fitzgerald Aclan, an analyst at Wealth Securities. "And most people would probably rather buy First Holdings given that First Holdings is trading at a discount to First Gen's IPO price range."
One more cause for concern is that First Gen has just one buyer for its electricity: its sister company and the country's largest power distributor Manila Electric Co. (MERB.PH), or Meralco.
"If Meralco experiences financial difficulties and is unable to meet its payment obligations, the company may be materially and adversely affected," RCBC Securities said in an IPO information brief distributed to clients.
Meralco has had a few difficult financial years owing to a court-ordered refund of over PHP29 in overbillings. Its finances remain under pressure from consumer groups complaining of high electricity prices and a government susceptible to yielding to populist demand.
First Gen parent First Holdings effectively owns 17.7% of Meralco and there may also be a conflict of interest in dealings between First Gen and Meralco.
Still, analysts say a price at the lower end of the new range should spur enough demand to ensure all the shares on offer are sold.
"Foreigners who want a bite of the power sector in the Philippines will probably buy some of the IPO," said Joey Roxas, president of Eagle Equities. "They can get $1 million or $2 million in one shot, rather than line up everyday to buy a few thousand dollars of First Holdings at a time. That's why the IPO will probably be sold," he said, adding he may be willing to buy at the low end of the price range.
Analysts say the bottom end of the range is unlikely to be lowered, with some estimating that the IPO's fair value is in the area of PHP51-PHP53, based on the current stock price of First Holdings.
"It's already a good investment based on that price," said an analyst with a foreign brokerage.
The analyst added that First Gen's generation subsidiaries have contracts that help provide the company with predictable long-term cash flows. Aside from its 25-year power purchase agreement with Meralco, First Gen also has a 22-year gas supply agreement with gas sellers.
The company also is in a position to benefit from improved economic growth in Luzon, where around 78% of the Philippines' total installed generating capacity is located. All of First Gen's power generation facilities are located in the Southwestern Luzon region and linked to the Luzon grid.
Other analysts said First Gen's investments in capacity expansion, which may include both acquisitions of power generation facilities and the development of greenfield projects, should boost the company's profitability going forward.
In addition, most of its plants are in the early stages of their useful lifespan. That makes First Gen's asset portfolio one of the best in the region, they said.
That doesn't impress everyone, however. "First Gen's core fundamentals are okay. But based on revenue growth for the last three years, they're a bit volatile," said Elena Ponceca, research head at Unicapital Securities. She added that some of First Gen's power plants aren't fully operational, which tends to limit growth.
First Gen President and Chief Operating Officer Federico Lopez has said the company's earnings were likely flat last year as they likely will be this year.
In the nine months ended Sept. 30, First Gen reported net profit of PHP3.65 billion on revenue of PHP33.73 billion. Net profit in the year-earlier period was slightly higher at PHP3.70 billion even though revenue was lower at PHP28.32 billion. For the whole of 2004, net profit was PHP4.96 billion, down from PHP5.33 billion in 2003.
The revenue increase was the result of higher fuel prices that translated into higher prices for the electricity the company sold. Net profit, however, was squeezed by increased maintenance and operating costs, the company said without providing details.
Some analysts said those costs may remain high in the coming years as the company spends more for the maintenance of its plants. The international underwriters of First Gen's IPO are CLSA Ltd. and UBS AG, while the domestic portion of the offering will be handled by ATR-Kim Eng Capital Partners Inc. and BDO Capital & Investments Corp.
posted by philpower @ 6:22 AM,