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Financial Adviser: 5 Things to Know About Leandro Leviste's Solar Philippines Nueva Ecija's IPO and How to Profit from It

Here’s what you need to know about the 10th IPO in the country this year.
ILLUSTRATOR WARREN ESPEJO
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Renewable energy company Solar Philippines Nueva Ecija Corp (PSE: SPNEC) will be the tenth company that will go public this year after it recently obtained approvals from regulators to raise up to P2.7 billion in an initial public offering (IPO).

SPNEC will sell up to 2.7 billion primary shares to the public at a price of P1.00 per share.

The offer shares will comprise about 33.2 percent of SPNEC’s projected market capitalization of P8.1 billion after the IPO.

The offering period of SPNEC shares will run from December 1 to 7, with a target listing date on December 17, 2021.

The listing of SPNEC will make Leandro Leviste the youngest self-made billionaire at only 28 years old.

Bear in mind that when you buy the stock, you are also investing in the business. It will be good to spend some time understanding the business of SPNEC and evaluate its growth opportunities.

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 SPNEC’s initial public offering:

1| Know the background of the company

SPNEC is majority-owned and controlled by Leandro Leviste, who founded the Solar Philippines Legarda Group at the young age of 20 years old. He has been recognized as a top “30 under 30” entrepreneur by Forbes Magazine.

Leviste, who is the son of former Senator and Deputy Speaker of the House Loren Legarda, has transformed the Solar Group to be the largest solar energy company in the Philippines.

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The Solar Group has been operating solar rooftop power plants since 2014 and owns a portfolio of several solar energy projects that are strategically located in different parts of the country, under its company, Solar Philippines Power Project Holdings.

The group has been operating the 63 MWdc Calatagan solar farm and 100 MWdc Tarlac Solar Farm.

The Tarlac Solar Farm, which began operations in 2019, has already generated total revenues of P1.27 billion and net income of P733 million as of December 2020.

Its solar project in Central Luzon, on the other hand, has been sold to AC Energy (PSE: ACEN) of Ayala Group early this year.

The Solar Group is raising to finance its solar project in Nueva Ecija through the IPO of Solar Philippine Nueva Ecija.

2| Know the earnings prospects of the company

SPNEC is currently at pre-operating stage and has not generated any income for the past three years.

SPNEC is aiming to develop up to 500 MWdc solar power plant in barangays Las Piñas and Sinasajan, Peñaranda, Nueva Ecija. It plans to implement its project with Phase 1 to be divided into Phase 1A and Phase 1B. Phase 1A, which will operate with a capacity of 50 MWdc is planned to be commissioned by the middle of 2022 and Phase 1B with 175 MWdc is planned to be commissioned in late 2022.

After the completion of Phase 1, SPNEC will construct Phase 2 of the project for up to an additional capacity of 275 MWdc. Once this is completed the total project capacity of SPNEC will be 500 MWdc.

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SPNEC acquired the exclusive right to explore and develop the Sta. Rosa Nueva Ecija solar power projects from its affiliate, Solar Philippine Commercial Rooftop Projects, which was awarded by the Department of Energy in 2017.

SPNEC plans to pursue off-take through contracting on an opportunistic basis with Retail Electricity Suppliers by participating in a competitive selection process.

An alternative to an off-take agreement, the Company also plans to supply power through the Wholesale Electricity Supply Market.

3| Know the risk and opportunities

SPNEC plans to undertake its solar power projects using a mix of debt and equity financing.

It is allocating P1 billion from the IPO proceeds to fully fund the construction and development of Phase 1A, which will have a capacity size of 50 MWdc, and P200 million to finance the construction of the transmission line for the project.

SPNEC plans to commence operations of Phase 1A sooner so that it can generate enough cash flows to help finance the construction and development of Phase 1B as well as Phase 2.

SPNEC intends to borrow money to finance the remaining funding requirements for the construction and development of Phase 1B, which has an estimated budget amounting to P3.6 billion.

SPNEC plans to use P23 million from the IPO proceeds to pay for leases over project lands and Right of Way during the construction of Phase 1 and P40 million for working capital requirements.

The excess of the proceeds amounting to about P1.4 billion shall be used for future land acquisitions.

In June 2021, the Solar Group through Provincia Investment Corp signed an omnibus loan agreement with AC Energy. Under the agreement, AC Energy will provide a P1.0 billion loan to the Solar Group and its affiliates to acquire land for its solar farm projects.

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As part of the loan agreement, the Solar Group was required to pledge all its SPNEC shares, which will have a market value of P5.4 billion upon listing, as security to AC Energy. The stock certificates of the Pledged Shares were delivered to and are currently in the custody of AC Energy.

4| Know the prospective earnings outlook

If we will assume that SPNEC will be able to start operating Phase 1A by middle of 2022, which has a capacity of 50 MWdc, we can estimate its net earnings by assuming its return on equity.

Given its investment of P1.3 billion from its proceeds, assuming a 25 percent return on equity, we can estimate a full year income of the project to be at P325 million.

But since it is expected to be operational by middle of 2022, we can estimate that SPNEC will earn half of this at P162.5 million. At this earnings estimate, the stock will have a prospective Price-to-Earnings (PE) ratio of 50 times.

If we want to be more conservative, we can assume a lower return on equity for SPNEC at 12.3 percent, which is the current average return among global renewable energy companies in the world.

At this assumed return on equity, we can estimate SPNEC’s full year net income at P160 million, but since it will be operational by the middle of the year, we can estimate its net income to end the year at P80 million.

At this net income projection, the stock will have a prospective PE ratio of 101 times.

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5| Know the intrinsic value of the project

If we will value SPNEC using the net earnings that it can generate from its 50 MWdc Phase 1A project, which is most likely to be completed using the proceeds of the IPO, we can estimate 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 SPNEC’s investment. This is relatively generous compared to AC Energy’s current return on equity of 7.2 percent.

If the Phase 1A project becomes operational by next year, we can expect SPNEC to earn P0.01 per share, which will be added to its book value per share to get P0.41 by end of 2022.

By 2023, the full year earnings that can be added to SPNEC’s projected book value will be P0.02 per share so that by end of the year, book value per share will be P0.43.

Assuming SPNEC’s earnings from Phase1A will continue to grow by the same 12.5 percent per year up to the 10th year and all the earnings are accumulated int the equity, SPNEC’s book value per share on the 10th year would be P0.73 per share.

If we apply SPNEC’s current Price-to-Book Value of 2.5 times on its future book value of P0.73, we can project a target price of P1.82 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.

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If we discount this target price using the prevailing 10-year bond yield of 5.07 percent and risk premium of 2.85 percent, assuming SPNEC will have similar beta with AC Energy at 0.57, the present value of SPNEC’s projected book value at today’s risk is P0.85 per share.

At this value, the IPO price of P1.00 is being offered at 17 percent premium.

Of course, this is just an estimate of value from its Phase 1A project, the earnings from Phase 1B have not been considered yet, which definitely will increase the stock’s prospective valuation in the future.

However, this can only be anticipated once the SPNEC has completed and delivered its Phase 1A project in due time.

Given the size of the IPO, there is always the possibility that the stock will become highly volatile, but sustainable upside may be limited due to its lower intrinsic value. 

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