Financial Adviser: 5 Things to Know About Peter Nepomuceno's Raslag Corp's IPO and How to Profit from It
Renewable energy company Raslag Corporation (PSE: ASLAG) will be the fifth company that will go public this year after it recently obtained approvals from regulators to raise up to P805 million in an initial public offering (IPO).
ASLAG will sell up to 350 million primary shares to the public at a price of P2.00 per share. It will also sell an additional of 52.5 million secondary shares from the controlling shareholder, J Ten Equities, to cover additional demand for the IPO.
The offer shares will comprise about 23.3 percent of ASLAG’s projected market capitalization of P3.0 billion after the IPO.
ASLAG will be the fifth renewable energy company in the Philippine Stock Exchange and the smallest in the sector. The biggest in the sector is AC Energy (PSE: ACEN), which has a market cap of P279 billion followed by Aboitiz Power (PSE: AP) with P231 billion; First Gen Corp (PSE: FGEN), P73.5 billion and Solar Philippines (PSE: SPNEC), P14.4 billion.
The offering period of ASLAG shares will run from May 23 to 27 with a target listing date on June 6, 2022.
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 ASLAG 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 ASLAG’s IPO:
1| Know the background of the company
Raslag Corporation (PSE: ASLAG) is one of the pioneers of solar energy development in the country. It was founded by business magnate Engineer Peter G. Nepomuceno from Angeles City, Pampanga.
Nepomuceno, who is now 85 years old, is the patriarch of the Nepomuceno family that had established a long track record of multiple lines of businesses in Angeles City.
Among these are the Angeles Ice Plant, which was founded 100 years ago in 1922; electric distribution utility, Angeles Electric Corporation; Holy Angel University, the largest in Central Luzon; Nepo Mart Commercial Complex; and other real estate ventures.
ASLAG, which is a Pampango word that means “light,” has two operating solar power plants in Pampanga: the 10.046 Megwatt-peak (MWp) project known as Raslag 1 and the 13.141 (MWp) project Raslag 2.
ASLAG is expecting its third solar power plant in Mabalacat, Pampanga, the 18.011 MWp project Raslag 3 to be operational this year, which will increase the company’s total installed capacity to 41.198 MWp.
ASLAG is planning to construct its fourth solar power plant, Raslag-4 in Magalang, Pampanga by the second quarter of next year and is expected to complete it in eight months before its operational target in 2024.
Under the EPIRA Law, ASLAG is mandated to offer and sell to the public a portion of not less than 15 percent of their common shares of stock within a period of 5 years from the issuance of its permit by the Energy Regulatory Commission.
2| Know where the company will spend the proceeds
ASLAG plans to use about half of its total net proceeds from the IPO or P330 million to partially finance the construction and development of its fourth solar power plant, the Raslag-4 through equity investment.
The total investment cost for Raslag-4 is estimated to cost at P1.4 billion, wherein about P1.1 billion will be allocated for project implementation and the balance for land acquisition.
Assuming a project financing of 70-30 debt and equity ratio, ASLAG will likely borrow this year to fund the balance of this project amounting to over P1.0 billion.
ASLAG will also allocate about 38 percent of the proceeds or P250 million to fund the pre-development work of its future pipeline solar projects.
The Company has already secured a 44-hectare piece of land for its fifth solar power plant, the Raslag-5 project, in Panipuan, Mexico, Pampanga.
The Raslag-5 project will be its largest solar power plant with 60 MWp capacity with total construction cost of P2.1 billion. ASLAG intends to start construction of this project by the second quarter of 2024.
While this project is still far in the timeline, ASLAG is expected to raise another round of funding to finance this project next year through a combination of debt and equity offering.
The balance of the net proceeds, which represents roughly 12 percent of total or P72.7 million will be used by ASLAG to pay for the balance of its land acquisition for Raslag-4 project and working capital requirements.
3|Know the earnings prospects of the company
ASLAG’s total revenues from its two solar power plants have been growing by an average growth of 15 percent from P300 million in 2018 to P395 million in 2020.
The growth in revenues, coupled by improving gross margins from 68 percent in 2018 to 74 percent in 2020, has increased ASLAG’s net income to P178.8 million in 2020 from P124.8 million in 2018.
But last year, ASLAG reported that its total revenues for the first nine months of 2021 was almost flat at P224.8 million from P220 million the previous year.
Higher gross margins and lower finance costs, however, helped ASLAG increase its total net income by 15 percent from P95 million in 2020 to P110 million in 2021.
If we follow the same historical distribution of net income from 2020, ASLAG should be able to register P207 million for 2021 or earnings growth of 16 percent on total revenues of P402 million.
This year, ASLAG expects its third solar power plant, the Raslag-3 project to be operational, which should increase its total revenues further.
The Raslag-3, which will add 18 MWp capacity, is equivalent to 78 percent of ASLAG’s existing capacity, which should increase ASLAG’s total revenues by not less than P300 million or P150 in net income in 2023.
4| Know the risk and opportunities
ASLAG’s solar power plants have been largely financed by borrowings with 70 percent debt and 30 percent equity.
In 2018, about 52 percent or P1.07 billion of ASLAG’s total assets were financed by debt, but this has gone down to only 31.6 percent of total assets or P808 million by September last year due to prepayments in the last two years by its controlling stockholder.
It is interesting to note that about P550 million worth of ASLAG’s shares, representing 73 percent of the company, have been pledged as security to its financial creditors.
Although ASLAG has relatively low debt-to-equity ratio of only 0.58 based on its financials last year, debt level is expected to increase as the company ramps up its borrowings to finance its expansion.
ASLAG’s third solar power plant, the Raslag-3 project, has total investment cost of P832 million, whose debt financing of P600 million has yet to be disclosed in its balance sheet this year.
The company is also expected to borrow an additional of P1.0 billion to finance its Raslag-4 project.
ASLAG will have a total debt of P2.4 billion by next year, which would roughly translate to a debt-to-equity of one is to one.
Higher borrowings in light of rising interest rates could mean higher risks of increased financing costs and lower internal rate of return.
5| Know the pricing multiple comparables
Based on a 12-month trailing net income of P193 million against its projected market capitalization after IPO at P3.0 billion, ASLAG has Price-to-Earnings (P/E) ratio of 15.5 times.
This is relatively reasonable compared to the average P/E ratio of renewable energy companies in the region at 35 times.
Assuming ASLAG trades at 70 percent of the regional average of 35 times, the stock should be priced at 24.5 times P/E or P3.16 per share.
Higher pricing of ASLAG should be justified by its higher earnings prospects in the next three years.
ASLAG is expected to have a book value of P1.36 per share after the IPO. This is equivalent to a Price-to-Book Value (PBV) of 1.47 times at IPO price, which is relatively lower than regional sector’s average of 3.3 times.
Again, if we assume the stock to trade at 70 percent of the sector’s average of 3.3 times, ASLAG’s should be priced at PBV ratio of 2.31 times, which is roughly equal to P3.14 per share.
The higher PBV ratio of ASLAG should be supported by the higher return on equity of the company, which will be backed by its high debt financing leverage.