Financial Adviser: 5 Things to Know About the Backdoor Listing of AC Energy and How to Profit From It

The Ayala group of companies recently acquired majority control of publicly listed company Phinma Energy for its power-related projects via backdoor listing.

A backdoor listing, which is also called a reverse takeover, happens when a private company acquires majority control of a publicly listed company and merges its assets into it to become a new company.

Through its wholly owned subsidiary, AC Energy, Inc (ACEI), the Ayala group plans to transfer some of its interests in several energy-related assets in exchange for new shares in the listed company.

With the expanded asset base and increased equity ownership, the Ayala group also plans to raise funds from the public up to P5.4 billion via a stock rights offering.

Last week, the Ayala group renamed Phinma Energy (PSE:PHEN) to AC Energy Philippines (PSE: ACEPH) to officially reflect the change in strategic direction of the company.

Shares of PHEN have been trading quite actively since the start of the year due to the reported takeover of the Ayala group.

The stock of PHEN has risen by more than three times from P0.90 per share in December to a high of P3.06 in September this year.

PHEN has since corrected to a low of P2.05 this month but quickly recovered to P2.85 per share last week after the company changed its ticker symbol to ACEPH.

How will the entry of the Ayala Group change the fundamental outlook of PHEN in terms of earnings and growth? What are the terms of the backdoor listing and how will this affect the long-term valuation of the stock?

Here are the five things every speculator in the market must know about the backdoor listing of AC Energy:

1| Know the terms of the deal

The backdoor listing will involve a property for share swap transaction, wherein Ayala-owned AC Energy, Inc (ACEI) will transfer a collection of energy companies in exchange for additional shares in ACEPH.

ACEI plans to assign its equity interests in 10 energy companies where some of which are already operating while others are still in the developmental stage.

Among the companies that ACEI has identified to transfer at least 35 percent equity are Ingrid Power Holdings (100 percent); Philippine Wind Holdings (39.69 percent); ACTA Power Corp (50 percent); Manapla Sun Power (36.37 percent) and Viage Corp (100 percent).

The rest of the companies are AC Energy Development (seven percent); Monte Solar Energy (2.19 percent); South Luzon Thermal Energy (17.5 percent); Moorland Philippines Holdings (10 percent); and NorthWind Power Development Corp (19.52 percent).

ACEI also plans to transfer preferred shares as well as founder shares in these companies to ACEPH as part of the package.

2| Know the pricing of the acquisition

Under the deal, ACEI will subscribe to 6.18 billion new shares of ACEPH at P2.37 per share in exchange for the portfolio of equity investments, which has been valued at P14.66 billion.

Earlier, ACEI acquired 2.517 billion shares or 51.48 percent of ACEPH from its owner, Phinma group for P3.669 billion at P1.46 per share.

As part of the agreement, ACEI also subscribed an additional 2.632 billion new shares of ACEPH at P1.00 per share par value, giving the Ayala group 68 percent control of the company.

After the property-for-share swap is completed, it is expected that ACEI will own about 82.6 percent of the company at an average acquisition cost of about P1.84 per share.

At current market price of ACEPH of P2.85 per share, ACEI has made 55 percent returns over its acquisition costs to date.

3| Know the financial history of the company

Before the acquisition, the company was known as Phinma Energy, which was primarily into buying and selling of electricity to the Wholesale Electricity Spot Market (WESM) for trading gains.

Revenues of the company had been consistent at an average of nine percent per year from p9.7 billion in 2013 to P15.1 billion in 2018.

Net income, however, had been unstable due to the volatility of the company’s gross margins, which ranged from a high of 8.5 percent to a low of three percent.

The big source of the company’s income is its earnings from equity investments, which contributed about P700 million on the average in the past four years.

Last year, the company reported a net loss of P560 million, despite equity earnings of P532 million, due to losses in electricity trading operations.

This year, the company also reported a net loss of P556 million for the first six months despite higher revenues of P8.3 billion, which increased by 2.5 percent from last year.

Moving forward, with the Ayala group on board, ACEPH will focus on wholesale supply of electricity to distribution utilities and cooperatives that will take advantage of the opportunities provided by the new Competitive Selection Process (CSP) Rules implemented by the Energy Regulatory Commission.

Last September, ACEPH and Meralco executed a Power Supply Agreement for the supply of 200MW over a 10-year period.

The change in business model is expected to significantly change the financial outlook of the company.

4| Know the growth contribution of the new assets

From the 10 equity investments that will be transferred to ACEPH, only two companies, namely, Viage Corp and Ingrid Power that ACEI will contribute 100 percent of its equity.

However, these two companies contribute only less than P100 million in net earnings based on the financial statements provided in the disclosure.

The rest of the companies are purely investments in nature since ownership control is less than 51 percent.

Interestingly, there are two companies in the portfolio that are jointly owned by ACEI and ACEPH. The transfer of ACEI’s shares to ACEPH will result to majority control of the latter.

These two companies are ACTA and South Luzon Thermal Energy Corp (SLTEC). ACTA is a 50-50 joint venture between ACEI and ACEPH. The transfer will give ACEPH 100 percent full control of the company. ACTA, however is still in developmental stage with no significant earnings to contribute.

SLTEC, on the other hand, is 45-percent owned by ACEPH in partnership with ACEI and one of the largest equity income contributors to the company.

SLTEC has an average net income of P2 billion per year for the years 2016 and 2017, but in 2018, its net income fell to just P980 million.

The transfer of 17.5 percent equity in SLTEC by ACEI will give ACEPH 62.5 percent control of the company, which will increase ACEPH’s annual revenues of at least P5.0 billion.

SLTEC’s net income for the first six months this year, however, continued to fall to a net loss of P245 million due to the shutdown of one of its plants.

5| Know the growth opportunities

ACEPH has announced that it will conduct a Stock Rights Offer (SRO) for up to 2.27 billion shares at an offer price that has yet be determined using the range of P2.25 to P2.37 per share.

The rights offering can raise funds of up to P5.4 billion from the public to help ACEPH expand its energy business developments.

At the current share price of P2.85, ACEPH is projected to have a market capitalization of P39 billion after the property-for-share swap is completed.

Assuming ACEPH generates net income of P1.5 billion next year mainly from the recovery of SLTEC and equity earnings from the transferred assets, the prospective P/E ratio of the company is pegged at 26 times, which is almost double the average P/E ratio of renewable energy companies in the region.

Given the volatility of earnings of ACEPH and the speculative nature of the business, it will be safer to buy the stock at lower valuation.