Thousands of investors on the Stock Exchange of Thailand would consider Wednesday November 22, 2017 as the day they may have struck the jackpot of the lottery, had they managed to get their hands on the initial public offering of one of Thailand’s leading power producers – Gulf Energy Plc.
Gulf Energy Plc on November 22 had announced that it had raised close to $733 million in an IPO that valued the company’s shares at 45 baht a piece thus giving the country’s then 3rd largest power producer a market capitalization of 96 billion baht.
So heavy was the demand for the shares that Gulf’s IPO was 18 times over subscribed, and on the debut day the shares surged by nearly a third of its value. Many investors would have locked in their profit and walked out with the nearly 30% gain on the 1st day, but that would have been a mistake, because the rally of the shares that started on the debut day in early December 2017 has continued up until now.
GULF, which has a power generation capacity of 4,772.1 MW on the day it listed, has openly stated that it had plans to add another 6,353.6 MW by 2024.
The power producer has seen its market capitalization rise from 96 billion baht to as much as 417 billion baht in the nearly 25 months since its IPO. In other words the shares have risen by as much as 437%, far greater than the SET Index – which has actually declined by as much as 7.05% over the same period and the SET Energy & Utilities sector index which has risen by a mere 13.23% in the past 25-months.
Data from Refinitiv, the data provider shows that the shares as of January 21, 2020 are trading at 92.86x their price to earnings ratio and its dividend yield stats at a mere 0.61%, a yield lower than even the lowest bank deposits in Thailand.
This year alone the shares of GULF has risen by as much as 19.28% and this is not because of anything else but supposedly the news that was released on Monday January 20 that it has taken a 35% stake in Buraphathim Power Project a 540 MW yet-to-be operational combine cycle power plant in Chachoengsao province.
The 120-million-baht acquisition has helped increase the value of GULF by 19%, or around 66.03 billion baht.
At the current value of 198 baht a share (as of January 21, 2020) then the shares are trading at multiples that hardly justify any utilities company in this part of the world.
This euphoria has led the market to continue to expect more and the current expectations are that GULF is set to deliver earnings growth of 28%, 16% and 30% respectively for 2019, 2020 and 2021.
The stock which is trading at 92.86x the PE of 2020 is very hard to justify even if it is one of the strongest companies on the planet.
To give the investors a perspective of things, the Stock Exchange of Thailand (SET) is trading at a mere 14.48x PE and SET Energy & Utilities Index is trading at 17.32x PE.
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The actions of most equity analysts in Thailand seems mired in a herd mentality and although most had buy when the shares were listed on the bourse 25-months ago, they have kept raising the target price as the shares kept rising.
Only a handful of analysts have a ‘sell’ or ‘underperform’ rating on the stock, although according to Bloomberg, the 12 month target price from 13 analysts shows that they target the shares to be at 164 baht a share, or a 17.17% lower than the price on January 21, 2020. The consensus rating is that just over 36% of the analysts put a ‘sell’ rating while the same number put a ‘hold’ rating and only 27% of the analysts have a ‘buy’ rating even when GULF is trading at 198 baht a share.
Analysts have price range from 80-200 baht per share but valuing the company at 200 baht a price would mean that the analyst are using very low discount rate (the required return on the investment), which is the usual tool used to make decisions when investors put their money into the market.
Some Good News
It is not a gloom and doom scenario in GULF’s performance and one can see that since the 4th Quarter of 2018 the company’s earnings before interest, tax, depreciation and amortization (EBITDA) has been growing not lower than 74% year-on-year. Since then until the latest quarter available (Q3 2019) the EBITDA has grown from 1.39 billion to 2.29 billion baht. This is an impressive growth of 113.5% but compare this to the surge in the stock price which has over the same period risen by as much as 160%.
This is nothing more than pure optimism from shareholders perspective in which they are too excited about its performance and, most importantly, began to extrapolate this high growth well into the future.
If you think that the higher EBITDA can be something that justifies the higher valuation of GULF then you may have to think again because there are other players in the market that are trading at far less multiples than GULF.
Take for example, Banpu Power Plc, a power producer with 2,506 MW capacity (nearly half of GULF) but the the company is trading at a mere 13.46x PE multiple. Banpu Power is offering a dividend yield of 3.82% at the current price of 17 baht a share. Banpu Power also has stated its plans to raise its power generation capacity to 4,300 MW by 2025 and is implementing various growth strategies to achieve that goal.
At the same time BGRIMM Power Plc is trading at just over 65 baht a piece is trading at PE multiples of 82.58x, while it’s dividend yield is a mere 0.49% far less than what one can earn in deposits in the bank.
Leaving all difference in financial structure aside, GULF is as twice times more expansive than its 2nd most expensive peers in the sector. Its EV/EBITDA is 46.8x, compared to GPSC and EGCO which are traded at 20.8x and 21.1x, respectively.
It’s now trading at its historical high based on its own valuation range which has an average level of 33.75x. Note that if we compare across the sector, BDMS and CPALL– the largest private hospital and convenience stores chain in Thailand – is traded at the current EV/EBITDA of only around 21.0x and 25.9x, respectively.
The lottery that investors had been able to participate in November 2017 seems to have run its course and based on the aforementioned thesis, the valuation of GULF at the current share price seems to have taken the company to the ‘overvalued’ territory.
Investors who had participated in purchase of the lottery could be on the verge of hitting their jackpot and it may be about time that they start to look at possibly lowering if not exiting their portfolios.
Even the most bullish assessment of the company currently available fundamentals suggest that the company’s valuations are a little stretched. Based on the market consensus, GULF’s 2021E earning-per-share is around 2.78 baht per share, applying the most bullish PE ratio of 40 times. We think its long-term fair value should be around 110-130 baht per share and it’s only a matter of time before the market starts to rationalized and notice its lower growth, compared to what it delivered in 2019 or could possibly deliver going forward.