March 14, 2012

PPWSA stock offering slated to outperform


The Kingdom’s first initial public offering is fast approaching, and demand is expected to be robust.

Book-building, the process during which bids for the IPO are taken and a price is set for shares, ended yesterday. The final offering price is expected before the subscription for the IPO begins March 29, with the listing date set for April 18.

PPPWSA shares will be available to both Cambodian citizens – a 20 per cent allotment has been provisioned – and non-Cambodian citizens. Permitting foreign investor participation should dramatically improve the prospects for the IPO as this will be the only publicly traded equity exposure in Cambodia.

Only 13 million shares will be floated, and a maximum of 10.4 million shares will be available to foreign investors. At the highest end of the offering price, it will take a miniscule US$16.5 million to fully subscribe to the maximum foreign allotment. There is no mention of a “greenshoe option”, a provision allowing the underwriter to sell more shares than originally set by the issuer, if demand warrants.

The fact of the matter is that PPWSA has a lot going for it. The company’s in the business of water supply, an everyday necessity that we cannot live without. It is a monopoly supplier covering Phnom Penh’s eight districts and also supplies northern Takmao town.

Licences to new suppliers are granted by the government, who will retain 85 per cent majority ownership post-IPO, in areas where there is no existing water supplier. Quite simply, as a monopoly, PPWSA is the only supplier of an irreplaceable service without any competition in its market.

Despite being a state-owned enterprise, PPWSA has emerged as an internationally recognised leader in its industry. The trophy case includes the “Water for All” award from the Asian Development Bank in 2004 and “Stockholm Industry Award Water Award” in 2010.  To quote the International Award Jury for the latter award, “a self-sufficient company, operating without subsidies from the state, PPWSA provides 24-hour service and 90 per cent coverage to a city of 1.3 million and fully recovers its costs as it continues to develop both its infrastructure and management”.

The financials look pretty solid. Revenues were $26 million in 2010, up 10.4 per cent from 2009, which saw an increase of 4 per cent from 2008. In 2011 revenues were expected to have increased close to 8.7 per cent.

Over the last two years revenue growth averaged 9.9 per cent, not at all bad for a water utility. Net income for 2010 was $7.5 million, a 13.2 per cent increase from 2009. Net income will likely be flat in 2011. Earnings before interest, taxes, depreciation and amortisation increased 9 per cent in 2010, and will likely increase 3 per cent in 2011. In the five-year period from 2005-2010, production capacity increased 28 per cent.

The proceeds of the offering will be used to reduce debt, which strengthens the balance sheet, and fund expansion, which is good for future revenue growth and earnings. The price-to-earnings ratio is reasonable at 11.5 to 18. However, the offering price is likely to be four to 5.9 times net asset per share, which is quite expensive. The company is expected to pay a dividend, providing a cash-flow to investors.

It is not unusual for an underwriter to price an IPO in such a way that it is well positioned for a successful opening day, which makes investors happy, and results in good press. Yelp, an online consumer review site, recently debuted on the New York Stock Exchange with a targeted range of $12-$14, opened at $15, and traded up 64 per cent its first day. PPWSA may not have a similar run, but odds are it will do quite well.


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