Financial Adviser: 5 Things Every Investor Needs to Know About Vince Perez's Alternergy's IPO and How to Profit from It

Renewable energy developer Alternergy Holdings Corp (PSE: ALTER) will be the first company that will go public this year after it recently obtained approvals from regulators to raise up to P1.62 billion in an initial public offering (IPO).

ALTER will sell up to 1.26 billion primary shares to the public at a price of P1.28 per share.

The offer shares will comprise about 32 percent of ALTER’s projected shares outstanding after the IPO with a market capitalization of P5.0 billion.

The offering period of ALTER shares will run from March 13 to 17 with a target listing date on March 24, 2023.

ALTER will be the third renewable energy company that will be listed in the Philippine Stock Exchange since the pandemic. The other two were Solar Philippine Nueva Ecija Corp (PSE: SPNEC) and Raslag Corp (PSE: ASLAG).  

Remember that when you buy stocks, you're not only buying a piece of the company but also investing in its business. Therefore, it is wise to take some time to understand ALTER's business and assess its potential for growth.

Once you are aware of the fundamentals of the company, you will have a better handle on the risk and return that you can expect from investing in the IPO.

Here are the top five things every investor needs to know about Alternergy’s IPO:

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1| Know the background of the company

Alternergy Holdings Corp (PSE: ALTER) is a pioneer in the Philippine renewable energy founded by former energy secretary and investment banker Vicente “Vince” Perez, Jr. 

ALTER operates as a renewable energy holding company that manages a diverse portfolio of investee companies engaged in various renewable energy projects, including wind, solar, hydro, floating solar, and battery storage power projects.

ALTER’s management team has extensive background in power development, energy policy, emerging markets, and has pioneering experience in wind power in Southeast Asia. Since 2008, the team has been at the forefront of clean energy in the Philippines, successfully developing 67.24 MW of operating assets in wind and solar. It is developing an additional 62.00 MW of hydro and solar projects in the process after it reached financial close recently.

ALTER currently has 10 operating plants under its portfolio. These are Kirahon Solar in Misamis Oriental, Pililla wind farm in Rizal, and CitySun multi-site solar rooftop that operates in eight various Citymall locations.

ALTER is anticipating rapid growth with a pipeline of assets in hydro, wind, and solar under development, with potential installed capacity of up to 1,369 MW of renewable energy.

ALTER’s diversified “Triple Play” portfolio of renewable energy resources allows it to offer a mix of complementary power generation revenues, ensuring efficient and sustainable energy production.

As a pioneer in the energy development, particularly wind and solar energy, ALTER’s proven track record places it in a prime position to capitalize on the anticipated significant growth in the renewable energy sector.

2| Know where the company will spend the proceeds

ALTER plans to use about 36.6 percent of the total net proceeds from the IPO or P564 million to partially finance the construction and development of its pipeline projects.

Its projects include the Solana Hydro Project, which is expected to commence construction before the end of the first quarter of this year, and the Lamut Hydro Project, in which ALTER is expected to participate.

About 34 percent of the proceeds or P522 million will be used to pay for the accrued liabilities incurred in the acquisition of Kirahon Solar Energy Corp (KSEC).

ALTER’s acquired KSEC last year to get a controlling stake of 62.75 percent in direct and indirect interests. KSEC has been operating since 2015 and generated net income of over P200 million in the past three years.

ALTER is also allocating 10 percent of its net proceeds or P155 million to finance the pre-development expenses of its pipeline projects.

Pre-development works for renewable energy projects generally consists of government permitting, technical studies, interconnection studies, market studies, community engagements, land rights and leases acquisition and contractor selection process.

Among the projects that ALTER is planning to finance are the Ibulao Hydro Project in Ifugao, Tanay Wind Project in Rizal, Alabat Wind Project in Quezon and Offshore Wind Projects in Calavite and Tablas.

The balance of the net proceeds, which represents roughly 19 percent of total or P298 million will be used by ALTER for working capital requirements.

3|Know the earnings prospects of the company

Bulk of ALTER’s earnings will come from its newly acquired subsidiary, Kirahon Solar Energy Corp (KSEC), which has a 25-year power supply agreement with Cagayan Electric Power and Company.

KSEC’s total revenues have averaged about P131.6 million per year from 2018 to 2020, but in 2021, the company registered an extraordinary growth of 31 percent from its average revenues to P172 million.  

The strong revenue growth did not, however, translate to higher earnings as KSEC’s operating profit margin declined from an average of 54.9 percent to only 37 percent in 2021, causing KSEC’s operating profits to decline by 4.6 percent to P63.9 million in 2021 from P67 million in 2020.

Prior to ALTER’s acquisition of KSEC, the company had been booking 25 percent compounded annual growth rate in its net earnings from associates: from P18 million in 2018 to P35.9 million in 2021.

In 2021, ALTER also booked a one-time non-recurring income of P133.6 million, which enabled the company to register a net income of P112.7 million.

In 2022, ALTER’s acquisition of majority control in KSEC meant that the financials of the latter will be consolidated into the former.

Under pro-forma basis, ALTER’s total revenues for the first nine-months ending September amounted to P126.9 million with operating income of P22.4 million.

But because ALTER had to incur one-time restructuring costs of P173 million, the company reported a net loss of about P139 million. Without the restructuring costs, ALTER would have reported an estimated net income of P34 million.

Going forward, ALTER should be able to return to profitability this year with the sustained positive performance of KSEC and higher earnings contributions from its equity associates.

If we base ALTER’s net income this year from its pro-forma net income in 2021 with KSEC without the one-time costs, we should expect the company to achieve at least P45 million.

4| Know the risk and opportunities

The debt-to-equity ratio measures how much a company relies on debt by comparing its total liabilities with shareholder equity.

It is useful for assessing a company's financial structure and can vary by industry. Comparing Debt-to-equity ratios among direct competitors or monitoring changes over time is most effective.

A higher debt-to-equity ratio among similar companies indicates higher risk, while a lower one may suggest missed opportunities for expansion through debt financing.

ALTER’s total debt as of September 2022 is P1.9 billion, bulk of which has been acquired from KSEC after the consolidation. If we compare this against ALTER’s equity of P1.0 billion, we will derive a debt-to-equity ratio of 1.96 times.

This is relatively high compared to the energy sector’s average debt-to-equity ratio of 0.68, but once ALTER has completed its IPO this month, assuming the shares are oversubscribed, its expanded equity will lower its debt-to-equity ratio to 0.75, which should align more or less with industry average.

With ALTER’s pipeline of projects next year that are set to start construction, it is possible that the company will continue to raise funds in the future either by issuing bonds or equity that could affect its desired debt-to-equity ratio.

5| Know the target pricing of the stock

If we will value ALTER using the net earnings that it can generate from the proceeds of its IPO of P1.62 billion, we can estimate its long-term book value by assuming a certain average return on equity. 

Given the average return on equity for renewable companies in the industry, we can assume 12.5 percent return on ALTER’s investment.

By end of next year, we can expect ALTER to earn about P202 million from its investment, which should be added to its post-IPO book value of P2.54 billion.

If we assume a steady compounded return of 12.5 percent from its investment in the next 10 years, ALTER would have total book value of P7.8 billion or P1.98 per share on its 10th year.

By applying ALTER’s current Price-to-Book Value ratio of 1.97 times on its future book value of P1.98, we can project a target price of P3.91 per share on the 10th year.

But because this is estimated on the 10th year, we need to discount the share price at today’s risk.

If we discount this target price using the prevailing 10-year bond yield of 6.465 percent and risk premium of 3.05 percent, assuming ALTER will have similar beta with Raslag Corp (PSE: ASLAG) at 0.61, the present value of ALTER’s projected book value at today’s risk will be P1.57 per share.

At this value, ALTER’s IPO price of P1.28 offers 18.5 percent discount to its target price, or an upside potential of 22.6 percent.

Of course, this exercise is just an attempt to estimate the value that ALTER can create from its IPO proceeds. The earnings that the company can generate from its future fund raising have not been considered yet, which definitely will increase the stock’s prospective valuation in the future.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected]financialadviser.ph or follow him on Twitter @henryong888