The Philippines has become one of the best-regarded economies in Asia. But what it has not become, despite the best attempts of bankers inside and outside of the country, is a major source of capital market revenues.
The easy availability of bank loans, bolstered by steady flows of remittances from overseas workers, puts many local companies off the rigours of bond registration. The most recent initial public offering was paltry: a $4 million listing by Italpinas Development Corp. Block trades are patchy too, as they are elsewhere in the region.
But opportunity lurks on the horizon, with the Philippines Stock Exchange expected to facilitate deals worth Ps200 billion ($4.26 billion) this year, its president and chief executive Hans Sicat told FinanceAsia. That’s a big leap from the $316 million that Dealogic reckons was raised in the first five months of 2016.
However some of the biggest deals on the horizon are coming from the subsidiaries of foreign companies — and these are difficult for bankers to replicate. The IPOs of Cemex Holdings Philippines, and possibly Shell Philippines are more likely to be exceptions than the start of a trend.
“It is not normal to see a lot of spin-offs of international companies in the Philippines,” said a Southeast Asian ECM head. “I'm not aware of any outside of these two.”
RELUCTANT SELLERS
Philippine companies tend to get by with reasonably small IPOs. According to Dealogic data, the average listing size since the start of 2010 has been around $119.2 million. The country’s largest IPO last year was Metro Retail’s $77 million deal, according to Dealogic. That which was just a fraction of the size of Jasmine Broadband’s IPO, which raised $1.1 billion in Thailand’s largest deal last year.
So, aside from the rare eye-catching IPO by a local company, the best hope for bankers is to help foreign companies raise money from their local units.
But that is not as easy as it sounds. These deals are few and far between because foreign companies often see little upside to selling stock in their Philippine businesses.
The potential jumbo listing from Shell Philippines should also be regarded as an anomaly, and a long overdue one at that. The company has been flirting with a listing for more than 15 years, after the signing of the 1998 Oil Deregulation Law instructed oil companies to float at least 10% of their stock.
The local unit of Royal Dutch Shell had previously attributed the repeated delays in the listing process to unfavourable market conditions and the need to upgrade its local refinery. Yet, it has recently mandated JP Morgan and BPI Capital as lead underwriters of the IPO, suggesting this year could finally be the one.
Cemex's decision to list its Philippine subsidiary, meanwhile, has less to do with that business and more to do with the parent company, bankers say. Cemex, a Mexican cement producer with operations in more than 50 countries, was an investment grade company in 2007. But in the wake of the global financial crisis, amid fears about the company's high debt levels, Standard & Poor's and Fitch cut its rating to junk.
The company has since been carefully trying to clear a path back up the credit quality rankings, offloading some US properties, selling some businesses in Thailand, Bangladesh, and Latin America — and now looking to list its Philippine subsidiary. Cemex is still rated just B+ by S&P and BB- by Fitch, deep in non-investment grade territory.
Neither Cemex nor Shell, potentially, are typical sellers. Cemex, which will use the proceeds to pay off inter-company loans, is being motivated by the need to improve its credit rating; Shell by regulations.
The steady growth of the Philippines, its low-cost base, and the prospect of rising infrastructure investment are all factors that could stop other foreign companies following suit, making them reluctant to share the spoils when there is so much potential growth.
Foreign companies also tend to postpone floatations until local businesses bulk up.
Holcim Philippines, the local unit of Swiss cement giant Holcim, was a rare case that chose to list at a relatively early stage of the business’s growth. The decision to take the company public at a market capitalisation of $215 million in 1996 means it has given up the huge upside over the past two decades, during which the business expanded to a market size of $2.1 billion.
The good news is that these same factors should ensure strong demand for those sellers who do overcome their reluctance. Cemex, in particular, offers foreign investors a good bet on one of the hot topics in the Philippines at the moment: the need to improve the country's infrastructure.
“The deal fits the Philippine demographic sweet spot,” PSE’s Sicat said. “There's going to be a lot of infrastructure being built in the country over the next few years. That's going to be a key theme going forward.”
Philippines’ president-elect Rodrigo Duterte has pledged to increase spending on infrastructure projects and accelerate the public-private partnership scheme initiated by outgoing president Benigno Aquino III.
Duterte announced plans in late May to build a new railway system to connect Manila to three locations in Luzon: Nueva Ecija, Sorsogon and Batangas. He has also unveiled plans to establish a railway system in the southern island of Mindanao.
An ECM banker working on the Cemex Philippines IPO said the initial feedback from pre-deal meetings has been positive and that investors are upbeat on the company’s prospects because the surge in infrastructure spending will boost demand for cement, Cemex’s main product line.
CLOSER TO HOME
Cemex Philippines, which is in the middle of premarketing the IPO when this article was being written, is planning to offer up to 2.33 billion shares, including the greenshoe, at a maximum price of Ps17 per share. That means the deal could be worth as much as Ps39.7 billion ($853 million), although bankers familiar with the matter have told FinanceAsia that a deal of around $500 million is more likely.
In either case, it will be the biggest listing since Robinson Retail Group’s $621 million IPO in 2013, and is likely to hold its record at least until Shell Philippines finally comes to the market, bankers familiar with the market said.
There is one local deal that could challenge for the title. Philippine food and beverage company Monde Nissin has become a global player through a series of acquisitions, including the purchase of UK meat substitute manufacturer Quorn last year. The deal, if it comes, “could be a record-breaker,” said a head of ECM in Southeast Asia.
That deal will be also be backed by a spate of smaller, local listings.
Golden Haven Memorial Park, which is likely to come to market after Cemex, is planning a deal worth just under $17 million. Renewable energy company Green Power Panay Philippines, miner TVI Resource Development (Philippines), and construction companies Datem and DM Wenceslao are others that could follow.
These deals will keep bankers busy, or at least busier than they have been. They will be supplemented by the occasional big IPO from a local firm. But bankers are realistic enough to know that a deal like Cemex is a rarity. Foreign companies, by and large, will keep their stock to themselves for the time being.
