Saif Power Limited: New kid on the block
Saif Power Limited (SPL) is set to offer 48.3mn shares to the general public, HNWIs and institutional investors. Completing four years of operations, with a duel fuel (gas and HSD) fired, combined cycle power plant, operating under a 30yr PPA with the NTDC, SPL has exceptional fuel efficiency. While gas supply disruptions are the key risk, forcing SPL to switch onto expensive HSD, we believe the attractive valuation set on offer supports an investment case. In this regard, SPL has declared an interim dividend of PkR2/share to be paid to new shareholders which adds charm to the offering. Book building, which will set the price for the general public offering, will take place within a PkR18/share-PkR30/share range. While subscription even at PkR30/share (indicative CY14F P/E: 5.87x, D/Y: 11.7%), we believe superior shareholder value will arise from the middle band within book building (PkR23/share - PkR26/share).
The Company: SPL initiated commercial operations in Apr'10 under the 2002 Power Policy, operating a combined cycle, gas and HSD power plant with a capacity of 225MW (net 209MW), situated 15km northeast of Sahiwal. The principal owner, Saif Holdings Ltd. is owned by the Saif Group which has investments spanning telecommunications, textiles, oil & gas exploration and healthcare, amongst others. SPL operates at an efficiency of 51.2% on gas and 48.5% on HSD. Key agreement includes a 30yr PPA with the NTDC, 25yr Fuel Supply Agreement with SNGPL and 12yr agreement with Shell for HSD. While SPL maintains high plant availability, reaching 98% in 1HCY14, reduced dispatch to the NTDC resulted in utilization levels falling from 74% in CY10 to 41% in 1HCY14. As such, supply of gas remains the greatest threat to SPL's profitability as operating the plant on HSD vastly increases the cost of producing electricity (PkR18.8 per KwHr).
The Offer: Sponsors intend to divest 48.3mn shares, with book building to account for 75% (36.23mn shares) of the offer size, with the remaining 25% (12.07mn shares) to be disseminated through a general public offering. Under newly established rules, book building will take place on Sep 30'14 with a price band between PkR18/share and PkR30/share, with a minimum bid amount of PkR1mn and qualifying bids chosen through Dutch auction with the strike price, for the remaining public offering, determined through this process.
Result Review: SPL posted NPAT of PKR471.1mn (EPS: PkR1.22) in 2QCY14, up 91%QoQ due to drastically higher utilization (27% in 1HCY14 vs 55% in 2QCY14). In addition, SPL has declared an interim dividend of PkR2/share to be paid to new shareholders which adds charm to the offering. In CY13, SPL posted NPAT of PkR1.22bn (EPS: PkR3.17), lower by 16%YoY on reduced utilization (40% vs. 49% in CY12); however, CY13 dividend was robust at PkR3.5/share.
Boon in the middle band: Peer comparison indicates SPL is being offered at an attractive rate, with room for price appreciation even at the upper end of book building strike price (PkR30/share). Initial workings suggest SPL trades within a CY14F P/E range of 3.51-5.87 and D/Y range of 11.7%-19.4%. The latter compares favorably against a D/Y of 10% for HUBC and KAPCO. While acknowledging risks emanating from gas supply, we believe superior shareholder value will arise from the middle band within book building (PkR23/share - PkR26/share).