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A defensive stock with growth options from relatively untapped market Calapan Ventures, Inc. (CVI) plans to list via an Initial Public Offering of its shares on the second board of PSE. The company intends to offer 42,161,000 primary shares at an offer price of Php2.50/share. The offer shares represents 26% stake in the Company post IPO. Calapan Ventures, Inc. is directly engaged in the product procurement business. It is also engaged in the water utility and tube ice manufacturing businesses through its subsidiaries: Calapan Waterworks Corporation and Kristal Water Source Corporation. The Companys water business contributes bulk of CVIs profit and revenues, accounting for 81.63% of the Companys total sales in 1H11. We forecast revenue growth of 27% in FY11 and Compound Annual Growth Rate (CAGR) of 11% in the next few years. Higher revenues will be supported by the growth of the Companys subscriber count and increase in tariffs. Meanwhile, we expect doubled operating income this year and 31% operating income growth on the next, as the Company enhances its margins through more efficient operations and better pricing. We also see tailwind from CVIs new business as it will provide additional profit to the Company. In our view, the IPO offer price has fairly discounted the growth prospects of the Company. The offer price of P2.50/share suggests 9.84x FY12E P/E, cheaper than Manila Water Companys FY12E P/E of 10.80x. We recommend SUBSCRIBE.
Joanna M. Capiral jmc@unicapital-inc.com
Issuer Domestic Offer Period Listing Date Offer Shares Offer Price
Calapan Ventures, Inc. 14-18 November 2011 24 November 2011 42,161,000 primary common shares Php 2.50 per share 60% for QIBs or 25,296,600 shares; 30% for TPs or 12,648,300 shares 10% for LSI or 4,216,100 shares
Domestic Offering
Operating Highlights (Pmn) (in PhP Thousands) Water service Sales Others Total Revenues Gross Profit Operating Income EBITDA Net Income EPS 2009 (pro-forma) 75,573 2,831 33 78,437 38,953 12,870 26,139 15,897 0.1319
2010A 90,569 27,338 140 118,047 49,686 22,260 29,260 30,599 0.2540
2011E 120,133 30,072 304 150,509 80,246 44,008 50,966 32,521 0.2005
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Business Overview
The Company was incorporated on January 30, 2009, under its original name Calapan Equity Ventures, Inc. as a wholly-owned subsidiary of Jolliville Holdings Corporation (JOH). The Company is directly engaged in the product procurement business. It began its operations last December 2009. It purchases, on a wholesale basis, and resells merchandise such as food and beverage items, grooming and personal hygiene supplies, and cleaning and housekeeping materials and supplies. Its clients are generally companies that outsource part or all of their purchasing needs to reduce overhead costs associated with maintaining an in-house purchasing department. The Company charges a mark up on the goods procured for consideration of its services. In previous years, this segment posted positive growth of revenues and stable margins. The Company is also engaged in water utility and ice manufacturing businesses through its subsidiaries: Calapan Waterworks Corporation (Calapan Water) engaged in the business of developing and utilizing water resources. It currently operates, manages and maintains the water supply systems in Calapan City and Tabuk City. Kristal Water Source Corporation (Kristal Water) engage in the production and distribution of ice. The Company has set up an ice plant facility that will service the needs of residential and commercial businesses in Calapan City. The facility will start operating in 2H11.
99.61%
100%
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The water business serves as a key driver of CVIs value. This business has two-way growth potential: increase in rates and expansion of subscriber base.
Business:
Expansion
of
Calapan Waters household connection grew by a CAGR of 12.11% from 2008 to 2010. This is higher than Manila Water Companys (MWC) household connection CAGR of 5.92% from 2008 to 2010. Despite the robust growth, we still expect notable expansion moving forward as large portion of the Companys concessions remain underserved. As of 30 June 2011, the water supply system in Calapan City is serving 17 urban barangays and 15 adjoining rural barangays or 8,613 households. The citys current number of households is at 25,137, suggesting that over 66% or 16,000 households are still underserved. To take advantage of this growth area, the Company plans to extend its distribution lines in 2012 to 2 barangays with about 1,300 households. The company aims to service 100% of Calapan City over the next ten years. Meanwhile, the water system in Tabuk City is serving 8 barangays or 2,809 households as of June 30, 2011. The citys total number of household is at 17,280 which means over 14,000 households or 83.74% are still underserved.
12.11% CAGR
14% 80%
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Growth in topline will be complemented by better margins which shall boost the Companys profits in the coming years
Management Operation
Moves
toward
More
Efficient
We expect better margins and higher profits on the following years as the Company strives to improve the efficiency of its network. In particular, the Company targets to reduce its Non-Revenue Water (NRW) to 20% or less by the end of 2012. NRW comprises both physical water losses due primarily to leakage from its water system and non-physical water losses due to meter errors, improper classification of customers, fraud and illegal connections. Through managements expertise in the industry, Calapan Water managed to bring down the NRW in Calapan Citys water system to 33.1% in 2010 from 64% pre-acquisition. Meanwhile, Tabuk Citys NRW was trimmed down to 27% in 2010 from 31% in 2007. The Company aims to further improve the efficiency of its system through water pressure management, replacement of old transmission and distribution lines, and the adoption of new technology.
However, this risk is mitigated by the fact that the Company has the same key executive officers with its subsidiaries and by being the majority shareholder of its subsidiaries.
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TPs/QIBs Roadshow Presentation Pricing Signing of underwriting agreement Domestic offer period Lodgement of Shares with PDTC Target Listing Date
The installation of transmission and distribution lines to new areas and construction of 1 overhead reservoir. Installation of district meters and isolation valves to be undertaken in 26 barangays; massive meter replacement to reduce non-revenue water to 20% target level.
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Disclaimer:
Note: In the interest of timeliness, this report has not been edited.
The information provided in this report has been prepared without taking account of your objectives, financial situation or needs. You should, before acting on the advice, consider the appropriateness of the advice having regards to these matters and, if appropriate, seek professional financial, investment and taxation advice. All observations, conclusions and opinions expressed in this report reflect the personal views of USI analysts and are subject to change without notice. The information this report has been obtained from sources USI believes to be reliable. However, USI does not warrant the accuracy, completeness or currency of, and will not be liable for any inaccuracies, omissions or errors in, or for any loss or damage (including any consequential loss) arising from reliance on, the information in this report. USI does not guarantee the performance of any investment discussed or recommended in this report. Any information in this report relating to the distribution history or performance history of any investment should not be taken as indication of the future performance of the relevant investment. In this report, USI may express an expectation or belief as to future events, results or returns generally or in respect of particular investments. USI makes such statements in good faith and believes them to have a reasonable basis, however, such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from such forward-looking statements. No guarantee of future returns is given or implied by USI.
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