Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

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Electric Power Development C / Equity Capital Markets

<p>Electric Power Development (EPD) recently announced plans to raise ~JPY135bn (USD1.1bn) in fresh capital by selling treasury shares and issuing new shares. We would take the deal given:</p><ul><li>The company intends to use the proceeds to fund construction of its thermal power plants in Japan and Thailand, plans for which have been announced earlier. Although given the long construction schedule, the projects are unlikely to add to earnings before 2018-20.</li><li>Deal has been well flagged by the company, with management having earlier indicated its willingness to sell treasury shares to fund growth. Furthermore, part of the treasury shares were acquired from TCI in 2008 and have only recently moved in the money with respect to their acquisition price of JPY3,830/share, thus, a sell down of these treasury shares was expected by the market, and would in fact lift an overhang for the stock.</li><li>The stock price has corrected by ~9%, since the deal was announced on 17<sup>th</sup> Feb 2015, this is in-line with the dilution from issuance of primary shares of ~9.9%. Thus, the surprise element (of issuance of primary shares along with treasury shares) is more or less build in the price now, which limits further downside risks, in our view.</li><li>Post the deal, debt to equity will decline to 220%-240%, which is more in-line with its listed peers, thus, providing the company more debt headroom to spend on its new projects, thus, further issuance in the near term appears unlikely.</li><li>Earnings growth this year is likely to continue being supported by the coming online of its two 800MW units in June and Dec 2015 as a part of its Nong Saeng IPP project in Thailand. Furthermore, the company recently revised up its forecasts, leading to a spate of upgrades, thus, earnings momentum appears supportive.</li><li>Most analysts expect supply/demand in Japan&rsquo;s wholesale electricity market to remain tight and see this as an advantage for firms like EPD. Most of EPDs domestic power generation business is based on long-term contracts, but over the next few years the company plans to dissolve some of these contracts to increase sales of electricity on the wholesale market, once wholesale price regulations are lifted in April 2016. This could lead to more earnings upside, as the current long term contract prices remain below market rates.</li></ul>

Electric Power Development (EPD) recently announced plans to raise ~JPY135bn (USD1.1bn) in fresh capital by selling treasury shares and issuing new shares. We would take the deal given:The company intends to use the proceeds to fund construction of its thermal power plants in Japan and Thailand, plans for which have been announced earlier. Although given the long construction schedule, the projects are unlikely to add to earnings before 2018-20.Deal has been well flagged by the company, with management having earlier indicated its willingness to sell treasury shares to fund growth. Furthermore, part of the treasury shares were acquired from TCI in 2008 and have only recently moved in the money with respect to their acquisition price of JPY3,830/share, thus, a sell down of these treasury shares was expected by the market, and would in fact lift an overhang for the stock.The stock price has corrected by ~9%, since the deal was announced on 17th Feb 2015, this is in-line with the dilution from issuance of primary shares of ~9.9%. Thus, the surprise element (of issuance of primary shares along with treasury shares) is more or less build in the price now, which limits further downside risks, in our view.Post the deal, debt to equity will decline to 220%-240%, which is more in-line with its listed peers, thus, providing the company more debt headroom to spend on its new projects, thus, further issuance in the near term appears unlikely.Earnings growth this year is likely to continue being supported by the coming online of its two 800MW units in June and Dec 2015 as a part of its Nong Saeng IPP project in Thailand. Furthermore, the company recently revised up its forecasts, leading to a spate of upgrades, thus, earnings momentum appears supportive.Most analysts expect supply/demand in Japan&rsquo;s wholesale electricity market to remain tight and see this as an advantage for firms like EPD. Most of EPDs domestic power generation business is based on long-term contracts, but over the next few years the company plans to dissolve some of these contracts to increase sales of electricity on the wholesale market, once wholesale price regulations are lifted in April 2016. This could lead to more earnings upside, as the current long term contract prices remain below market rates.

Electric Power Development (9513 JP) - Well flagged deal to fund expansion

Japan

Electric Power Development Co.,Ltd. generates, transmits, distributes, and sells electric power using hydroelectric, wind-power, nuclear, coal-fired and other thermal power stations throughout Japan.

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Electric Power Development C (9513 JP)

Electric Power Development (9513 JP) - Well flagged deal to fund expansion

Electric Power Development (EPD) recently announced plans to raise ~JPY135bn (USD1.1bn) in fresh capital by selling treasury shares and issuing new...

Sumeet Singh

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