Financial Adviser: 5 Things to Know About Edgar Saavedra’s Citicore Renewable Energy Corp's IPO and How to Profit from It

Renewal energy developer Citicore Renewable Energy Corporation (PSE: CREC) will be the second company that will go public this year after it recently obtained approvals from regulators to raise up to P5.3 billion in an initial public offering (IPO).

CREC will sell up to 1.9 billion primary shares at an offering price of P2.70 per share. The offering period of shares will run from May 27 to 31, with a target listing date of June 7, 2024.

CREC will have a projected total market capitalization of P24.1 billion after the offering, making it the largest solar power company in the country.

Investing in an IPO is like investing in a business. It is always good to spend some time understanding CREC's business and evaluating 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 stock.

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Here are the top five things every investor needs to know about Citicore Renewable Energy Corp’s IPO:

1| Know the background of the company

Citicore Renewable Energy Corporation (CREC) is a leading pure renewable energy developer and operator of solar, run-of-river hydro, and wind energy platforms in the country.

It is the second-largest solar platform, with a total of ten solar power plants and micro-grid solar rooftop systems, with a total installed capacity of 285 MW.

These solar facilities include Citicore Solar (CS) Bulacan, Inc., CS Bataan, Inc., CS Tarlac 1, Inc., CS Tarlac 2, Inc., Clark Solar Farm, Inc., CS South Cotabato, Inc., CS Cebu, Inc., CS Negros Occidental, Inc., Arayat-Mexico Solar Farm, a joint venture with ACEN, and solar rooftop systems in Bataan.

CREC is a wholly-owned subsidiary of Citicore Holdings (CHI) through Citicore Power (CPI). CHI, which is the holding company of business tycoon Edgar Saavedra, also owns and controls Megawide Construction Corporation (PSE: MWIDE), a leading construction and infrastructure group in the country.

CREC owns 33 percent of Citicore Energy REIT Corp. (CREIT), the country's first renewable energy REIT listed on the Philippine Stock Exchange (PSE). CREIT has approximately 7.1 million square meters of gross leasable space.

2| Know the earnings prospects of the company

CREC's total revenues over the past three years have increased more than threefold, from P1.0 billion in 2021 to P3.7 billion in 2023. This strong revenue growth more than quadrupled its net income, rising from P192 million in 2021 to P910 million in 2023.

These revenues arose from CREC’s 10 operating solar assets, which have a total installed capacity of 285 MW. CREC currently has over 6 GW of pipeline solar assets in various stages of development. Additionally, it has another pipeline of 800 MW of advanced wind development assets and a 25.7 MW run-of-river hydro energy plant under construction.

This year, CREC is expected to complete over 1,100 MW from its eight solar assets under construction. By June next month, CREC’s capacity will increase by 196 MW from its Batangas 1 project. By September, two solar projects in Zambales and Negros will be partially completed, adding a combined capacity of 132 MW. These two additions will more than double CREC's existing capacity to 898 MW by the end of September.

Before the year is over, CREC is expected to gain an additional 779 MW from the partial completion of its other solar projects in Batangas 2, Pangasinan 1, Pangasinan 2, Pampanga 3, and Quezon 1. The increase in capacity this year, especially those available in June and September, will immediately translate to additional revenues for CREC.

Based on the historical revenues generated by its existing capacity, we can estimate that the additional capacity this year should increase CREC’s total revenues to P4.4 billion. Using the same gross profit margin of 34.9 percent and keeping other factors unchanged, we can conservatively expect CREC to achieve a net income of P1.14 billion in 2024.

By 2025, with the additional capacity of 1,107 MW going full online, we can estimate CREC’s total revenues to more than double to P10.5 billion. At this level of revenue, given the same gross profit margins, we can expect CREC’s net income to more than double to P3.2 billion.

3| Know the financial strength and opportunities

CREC plans to add a solar capacity of 1 GW every year for the next five years. With the net proceeds of P4.5 billion from the IPO, CREC intends to use it to finance its capital expenditures and pipeline development this year, while 27 percent of it will be used to finance its capital expenditure budget for 2025. CREC will allocate P300 million or 6.6 percent of the total for working capital requirements.

CREC is currently in a strong financial position. Its current assets, which consist of its cash and receivables, are more than four times greater than its current liabilities.

CREC’s total debt is 1.35 times greater than its total equity because most of its pipeline developments are financed through project financing. This approach leverages debt to fund large-scale projects, allowing the company to undertake extensive development initiatives without immediately diluting equity.

Project financing typically involves borrowing significant sums of money, which are then repaid over time as the projects begin to generate revenue. This strategy can enhance a company's growth potential but also increase financial leverage and risk.

In CREC’s case, the reliance on debt for project financing explains the higher debt-to-equity ratio, as the company uses borrowed funds to fuel its expansion and development efforts.

However, if we consider the company's cash, we derive a net debt-to-equity ratio of 1.0, or 100 percent gearing. Generally, a gearing ratio over 100 percent is considered high, but a closer examination of its debt reveals that only 3.8 percent of its total debt is short-term. This makes the company less vulnerable to financial instability during economic downturns.

After the IPO, CREC’s financial position will further improve. Its net debt to equity ratio, or gearing ratio, will decline to 37 percent from 100 percent, while its current ratio will strengthen to 7.7 times.

4| Know the pricing multiples of the stock

If we assume that the optional shares will be fully exercised, we can expect CREC to have a market capitalization of P24.6 billion at an IPO price of P2.70 per share. Dividing this by our estimated net income of P1.14 billion this year, we derive a Price-to-Earnings (PE) ratio of 22 times. 

At a PE ratio of 22 times, CREC appears to be more expensive than the market average, considering the average PE ratio for renewable energy companies is only 11.8 times. However, it is important to remember that CREC is transitioning this year to achieve a capacity that is more than three times its existing capacity.

By 2025, when its additional capacity is fully online, we estimate that CREC’s net income will rise to P3.2 billion. At this projected income level, CREC’s prospective PE ratio will fall to only 7.6 times, representing a 36 percent discount compared to the current industry PE average.

The other way to price the stock is by the use of the Enterprise Value-to EBITDA ratio. The Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization.

EV is computed by adding the company's net debt to its market capitalization. Assuming all optional shares are exercised, we can use a market capitalization of P24.6 billion. We then add the net debt of P4.0 billion, which is net of cash from existing and IPO proceeds. The total amount of P28.6 billion is the EV of CREC.

To estimate the EBITDA, we can apply CREC's average EBITDA margin of 48 percent over the past three years. By applying this margin to our estimated revenues of P4.4 billion this year, we will derive an EBITDA of P2.0 billion.

Using this estimated EBITDA against CREC’s EV, we will derive an EV-to-EBITDA ratio of 14 times. At 14 times EV/EBITDA, CREC will be trading at a premium compared to the industry prospective average of 8.7 times.

Again, because this is a transition year, we should consider CREC’s full potential in 2025, when its first wave of expansion will be felt. By applying a 48 percent EBITDA margin against our estimated total revenues of P10.5 billion in 2025, we will derive an EBITDA of P5.0 billion. Using this projected EBITDA against the current EV of the company, we will derive EV-to-EBITDA of 6 times, which is a 30 percent discount to the market average of 8.7 times.

If we price CREC at today’s value using next year’s projected EBITDA at 8.7 times, we will derive a target price of P3.97 per share. This represents a potential 47 percent gain from the IPO price.

5| Know the long-term value of the stock

The legendary investor Warren Buffett once said that he prefers businesses that he can predict what they will look like in 10 to 15 years because companies that can grow consistently with a fair degree of certainty can deliver superior returns in the long term.

We must remember that CREC is committed to expanding its solar capacity by 1 GW every year for the next five years. To estimate how much the stock should be valued today, we can apply the investment approach that Buffett often uses to estimate a stock's value. This involves estimating CREC's long-term earnings prospects and then deriving the present value of CREC’s future stock price at today’s risk.

Assuming CREC will add 1 GW of additional capacity every year for the next five years, we can conservatively estimate that CREC’s total net income by the year 2030 will reach P12.9 billion. Using an average industry P/E ratio of 12 times, we can value CREC at P156 billion.

Since this is the future market value of CREC in 2030, we need to bring this amount to the present value. Given a 10-year bond yield of 6.792 percent and assuming CREC will have the same beta of 1.1 as ACEN, we can derive CREC’s discount rate to be 12.2 percent. 

Using this rate to discount CREC’s market value in 2030, we derive a present value of P69.2 billion, or P7.61 per share, which offers a 64 percent premium over the IPO price of P2.70 per share.