Pre-marketing for Malaysia's largest initial public offering (IPO) in three years was launched on Monday, with Malakoff Corporation Berhad hoping to raise up to M$3.17 billion ($873.5 million) including its greenshoe.
South East Asia's largest independent power producer (IPP) by generating capacity is proceeding with the float despite tepid Malaysian equity markets and has sensibly underpinned the deal by locking in strong support from domestic cornerstone investors.
The Kuala Lumpur Composite Index has performed reasonably well this year, rising 5.34% in the year to Tuesday, but foreign investors have seen most gains erased by FX losses. The Malaysian ringgit has lost 4% since the beginning of January and is down 12.7% over the past seven months, Asia's worst performing currency.
Foreign investors are also likely to be sensitive to the looming threat of a ratings downgrade. Fitch has Malaysia's A- sovereign rating on negative outlook and recently commented that it may in fact belong in the BBB category.
These factors are unlikely to hold as much weight with domestic institutions, who are more familiar with the Malakoff brand and likely to be attracted to the stability of a utility's cash flow and the prospective 2015 dividend yield of 4.6%, double that of domestic comparables such as Tenaga on 2.2% and YTL Power on 2.8%.
As a result, one source close to the deal said a group of 11 domestic accounts have agreed to take up just under 60% of the institutional tranche, which has a base deal size of 728.7 million shares and greenshoe of 228.26 million shares. These include: CIMB Asset Management; Corston Smith Asset Management; Eastspring Investments; Great Eastern; Hong Leong Asset Management; Maybank Asset Management; Pilgrims Fund Board; RHB Asset Management; Social Security Organization and UOB Asset Management.
The remaining 792.5 million shares are also earmarked for domestic investors. Some 550 million shares have been set aside for Bumiputera investors, with 242.5 million shares to be taken up by domestic retail investors and company employees according to a term sheet seen by FinanceAsia. In total, the deal amounts to 30.4% of the company's enlarged share capital pre greenshoe, with a split of 65.7% primary shares and 34.3% secondary shares.
The greenshoe comprises secondary shares. If exercised, parent company MMC Corporation Berhad's stake will drop from 51% to 36.5%, with the Employees Provident Fund reduced from 30% to 17.4%, Kumpulan Wang Persaraan from 10% to 5.8%, SCI Asia from 6.5% to 3.8% and SAESAF Power from 2.5% to 1.5%.
Valuation
The deal has been given an upper floor price of M$1.80, which equates to a market capitalization of M$9 billion ($2.45 billion). At this level, the transaction has been valued on a syndicate consensus 2016 EV/Ebidta ratio of 8.1 times.
This places it at a slight premium to electricity distributor Tenaga, which is trading around eight times, but at a discount to YTL Power on 9.1 times, although the latter is more of a Singaporean play since it only derives 10% of its revenues from Malaysia.
Domestic gas companies such as Petronas Gas and Gas Malaysia trade at much higher multiples. The former is valued at 14.8 times and the latter 19.8 times.
Malaysian electricity utilities are also trading at a discount to other regional comparables such as the Philippines Aboitiz Power Corp on 12.7 times, plus Thailand's Egco and Ratchaburi on 15.6 times and 11.3 times respectively.
Malakoff's valuation looks considerably more attractive on an EV/Ebitda basis than it does based on a p/e ratio in the high teens to low twenties subject to 2015 net profit forecasts ranging from M$419 million to M$545 million. Tenaga and YTL Power are both trading in the low teens, alongside the Thai IPP's.
Aboitiz is currently in the high teens, while Malaysian gas companies command the highest ratio of all with Petronas Gas on 25 times 2015 earnings and Gas Malaysia at 28 times.
Valuing Malakoff is complicated by recent swings in its profitability. In 2013, it reported net profits of M$234.6 million sharply down from the M$547.8 million it recorded in 2012. In the three months to September 2014, net profits bounced back 25.3% year-on-year to M$280 million.
The company ascribed the decline in 2013 profits to remedial work at its forthcoming Tanjung Bin T4 power project. In recent years, a number of Malaysian power companies have experienced difficulties completing projects on time and Malakoff recently denied media reports that the forthcoming 1,000 MW plant will fail to complete on schedule in March 2016.
Project delays aside, power sector analysts have also expressed concern about inconsistencies in amending tariffs and a lack of transparency in awarding new contracts. Over the past couple of years, for example, new contracts have not been subject to open tender but awarded after direct negotiations.
And casting a shadow over the entire sector is the fate of government-owned 1MDB, the country's second largest IPP, which overloaded itself with debt in the process of expansion. "No one has an issue with the inherent quality of the power assets," said one banker. "It's all about the way it has funded itself."
Contingent government liabilities amounting to $11 billion are one of the factors Fitch has highlighted as a pressure on the sovereign rating. Prospective Malakoff investors are undoubtedly put off by the lack of clarity over whether the government plans to execute a trade sale or IPO of 1MBD's power assets and the overall direction of Malaysia's national energy policy and asset ownership structure.
Selling points
But those comfortable with the intertwined business and political threads of Malaysia Inc, are likely to be attracted by the country's power demand profile and Malakoff's overseas expansion plans. Analysts and investors responded positively to the spin-off from parent MMC, which has outperformed the overall market, rising 14.36% year-to-date.
In a recent research report, investment banking firm Affin Hwang said the IPO will enable the parent to pare down its debt by one third and should boost 2015 earnings by 13%. It values Malakoff at Rmb10.6 billion.
UOB KayHian also highlights the positive impact of the reduction in the parent's net gearing from 2.7 times to 0.6 times. It has assigned Malakoff a target price of M$2.40.
In its regulatory filings, Malakoff has said 90% of the IPO proceeds will be used to de-leverage the parent's balance sheet. This will put the group in a far stronger position to consider new assets, particularly overseas.
As of September 2014, 89% of Malakoff's power generation assets were based in Malaysia, with 6% in Bahrain, 3% Saudi Arabia and 2% Australia. At this point, electricity generation and distribution accounted for 96.5% of revenues, with the Malaysian portfolio split between coal-fired plants (35% of its fuel mix), gas on 47% and mixed fuels the remaining 18%.
The company has a total of 11 assets with installed gross generating capacity of 9,498 MW. Its Malaysian capacity accounts for 24.9% of the country's total.
During roadshows, company officials are likely to argue that they are well positioned to benefit from growing electricity demand in Malaysia and other target markets. Locally, demand is forecast to grow by a compound annual growth rate (CAGR) of 9.7% between 2014 and 2016. The MENA region has a forecast CAGR of 9.4% over the same period.
They will further point to the stability of Malakoff's cash flows, which are supported by lengthy concessions and off-take agreements with government-related entities. Malakoff has the longest remaining PPA term of any Malaysian IPP, with a weighted average remaining term of 13 years.
In terms of future growth, the company wants to boost its Malaysian power generating capacity from 5,346 MW in 2014 to 10,000 MW by 2020. It is also focused on renewable energy in line with the government's plan to increase capacity from 219 MW in 2011 to 2,080 WM by 2020.
Malakoff has also been debating how to expand its reach in neighbouring countries. The company has recently conducted a feasibility study at its Tanjung Bin site with a view to expanding capacity there by 1,000 WM to export to Singapore and a second study regarding a 1,000 WM plant in Northern Malaysia to sell power to Thailand.
Timetable
Having completed two days of pre-marketing in Singapore, investor presentations move to Hong Kong on Wednesday and then to Kuala Lumpur on Friday. A formal price range will be set when management begin official roadshows on April 17.
The order book will formally open on the same day, with pricing and allocations scheduled for April 29. Listing will take place on May 15.
Joint global co-ordinators are CIMB, Credit Suisse, Maybank and JP Morgan, with joint bookrunners comprising Bank of America Merrill Lynch, Deutsche Bank, HSBC, Morgan Stanley, Nomura and RHB.
