Tuesday, October 26, 2010

Sri Lanka Laugfs IPO

Laugfs group, the second firm that make up the duopoly in Sri Lanka's gas business is going public to raise 2.5 billion rupees by offering 75 million ordinary voting shares at 23 rupees a share, and 52 million ordinary non-voting shares at 15 rupees each.
Steep Discount?
Capital Alliance, joint placement managers for the issue say the firm has a trailing price to earnings multiple of 15 times, and a forward P/E of 8.5 times.
Laugfs group, of which financial accounts end in March made a profit of 229.3 million rupees in 2009, while in the following year its bottom line rocketed 130.4 percent to 528.3 million.
For the first four months ending July 31, the firm has made a profit of 262.3 million rupees.
Capital Alliance is projecting a one billion rupee bottom line by March 2011.
In 2010 group revenues were almost 5.6 billion rupees, up 23 percent from the corresponding period last year.
In 2009, Laugfs group made a profit of 94 cents per share, 2.03 rupees in March 2010, and till July 2010 made an annualized profit of 3.03 rupees per share.
By March 210, Laugfs group assets were down 3.85 percent to almost six billion rupees.
"The valuations were done very conservatively," Deshan Pushparajah, corporate finance manager at Capital Alliance said this at a Luagfs IPO presentation recently.
Pushparajah says the Laugfs Group based on EV (Enterprise Value)/ EBIDTA (earnings before interest, taxes, depreciation and amortization), usually done at mergers and takeovers is worth 39.83 rupees per ordinary share, while non-voting shares are valued at 27.88 rupees.
EV factors in debt and cash stock into valuations.
Capital Alliance values the group at over 77 million dollars, while Merchant Bank of Sri Lanka (MBSL), the lead managers to the issue gives a market cap of 75 million dollars.
EV/EBIDTA multiples are sometimes criticized by analysts for ignoring profitability, which can push up valuation multiples of companies that have lower net margins.
Pushparajah is benchmarking the industry average EV/EBIDTA multiple on US based Amerigas Partners, Suburban Propane Partners and Ferrell Gas Partners at an average P/E of 10.5 times.
An analysis using a developed market as a benchmark may not reflect a true valuation.
For an example a 10 percent interest rate may not stir a hornets' nest in Sri Lanka, but will create quite a stir in developed western markets like the US, EU and UK.

Hijaz Suhair, assistant manager at MBSL says the IPO share price was valued taking the downside into consideration.
The price was calculated to attract the big corporate and high net worth investors who look for capital gains after a couple of years, Suhair said.
Group Structure
The group has four main sub-business units which consist, liquid petroleum gas retail, property development, gas emission testing and leisure.
Laugfs key gas business will be a benefactor with Sri Lanka's per capita income rising and more consumers switching to gas cylinders for their home cooking needs, Pushparajah, said.
By March 31, 2010, Laugfs key gas business contributes 93.5 percent to revenue and 99.2 percent to group profits.
Laufgs to date lays claim to 30 percent share of the domestic cooking gas cylinder market, 60 percent of industrial gas and 90 percent of auto gas.
Achilles Heel
The group's gas business will have high organic growth, but sustaining growth in a politically risk inclined business will be challenging mid to long term, an analyst from FRANDS Consultancy said
About 45 percent of the firm's gas is sourced from state owned Ceylon Petroleum Corporation at world market rates (Ceylon Petroleum Corporation), while the rest is imported at spot rates.
Laugfs Gas saves 25 to 30 percent in freight and insurance costs from buying nearly half of its needs locally, and is blessed with a guaranteed 30 percent mark up on imported gas, thanks to a court ruling.
Independent analyst say Laugfs Gas has an Achilles heel.
"The court order and costs savings from locally sourced gas has helped Laugfs sell gas cheaper (than Shell Gas) and maintain margins," independent analyst said.
"However the chink in Laugfs armour will be exposed if the court order is reversed or if the new state gas company buys the CPC gas for its own need."
Earlier this month the government in a media release said it plans to wrap up the purchase of multinational energy company Royal-Dutch Shell's Sri Lankan gas unit within a month.
The government is paying 63 million US dollars for a 51 percent stake in Shell Gas Lanka in which it already owns 49 percent and for a 100 percent stake in a storage terminal company.
Monopoly Blues
W K H Wegapitiya, chairman of Laugfs Gas in an exclusive interview on LBR said said after his company was beaten by the state in a deal to acquire the local unit of Shell Gas, has now set eyes on managing the new state owned gas company.
Wegapitiya's proposal, if inked to a deal by the government will monopolize the Sri Lankan gas market. Monopoly's hurt consumers, as a single seller with no competition that can up prices and sacrifice quality with no one to challenge.
Monopolies are against free market principals of many players in a single market.
The government granted a five year monopoly to the Anglo Dutch gas firm Shell which ended in 2001 when Laugfs stepped in as the only local rival.
The 37 US dollar investment by Shell was used to build a port delivery terminal and boost distribution network which was in tatters in 1995.
Sri Lanka suffered frequent shortages of gas and new cylinders were not available to prospective new customers when gas distribution was a government monopoly.
"If a foreign company can hold and own a monopoly why can't a local company?" questioned Wegapitiya.
Shell had had running battles with the state over pricing until the island's Supreme Court ruled that gas should be re-priced bi-monthly on a price formula.

The offer is opening for subscription on November 04, 2010.   

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