The Sharqiyah Desalination Plant’s initial public offering which was open till June 13 is good value for money for the public, says Philippe Da Costa, Chief Financial Officer, Sharqiyah Desalination Company (under transformation), in this interview with OER. Excerpts:
What made Sharqiyah Desalination Plant (SDC) to go for an IPO?
The company was created in 2007 and at that time the Founder Shareholders, Veolia and National Power and Water, signed an agreement with the Ministry of Finance to be listed four years after the incorporation of the company. It was planned in 2011 but unfortunately it was delayed during the construction period due to the cyclone Gonu. Therefore the Ministry of Finance agreed to postpone the IPO process by two years. The aim of the contract between the founder shareholders and the Ministry of Finance is to give access to all Omani residents and citizens to a safe investment in a safe sector like water.
What is the reason for restricting the IPO to only individual investors and keeping out the corporate investors?
Usually IPOs are open for individuals’ and juristic persons such as pension funds, corporate customers etc. However due to the small size of our IPO, just 2.28 million shares, it has been a requirement by the Capital Market Authority (CMA) to restrict it only to individuals. The Founder Shareholders will offload 2.28 million shares representing 35 per cent of the paid up capital which is RO6.52mn. The IPO earnings will go to the Shareholders namely Veolia, the global leader in environmental services, which holds 55 per cent and National Power and Water (part of the Suhail Bahwan Group) which has 45 per cent.
What is the actual project cost including capex and opex?
The project cost was initially $170mn in terms of capital expenditure. During the year 2012, the revenue was RO9.6mn with an OPEX of RO4mn. After deduction of administrative, general expenses and finance charge, the net revenue was RO2.76mn. The revenue stream and net profit margin was quite high for the past three years. In the coming years we expect the net profit margin to be between 18 and 27 per cent of the revenue.
How did you arrive at the share premium?
The offer price is set as per a formula defined in the Project Founders Agreement. By applying this formula, the offer price is RO1.063 per share. The nominal value of the share is RO1 and there are offer expenses of 20 baiza per share; then the share premium is only 43 baiza per share. The Founders are offering a discount of 44 per cent compared to the book value. Therefore this IPO will allow Omani residents to have an access to a safe investment.
What are the financials of the company?
The projections were done by the reporting accountant Ernst & Young. The revenue is composed by a fixed part (around 80 per cent of the total revenue) which is based on the plant capacity and by a variable part which is as per the water delivery. The output water is forecasted to reach the full capacity of the plant by 2015. Then the cost of sales like O&M (Operation & Maintenance) will increase as per the agreement with the O&M company that SDC has a contract with for the next 16 years. In terms of finance cost, the rate is hedged at 75 per cent of the national loan amount. Therefore the revenue and expenses are quite easy to predict. The basic earnings per share is expected to be RO0.28 and RO0.41 per share over the next five years. We forecast to distribute 90 per cent of the net profit as dividend. During the next 3 years, we expect to distribute a dividend of RO1 per share when one purchases SDC share at a price of 1.063. The dividend yield is very high and allows individuals to recover their investment cost.
After the IPO what will be the shareholding pattern?
Since the founder shareholders are offloading 35 per cent of their respective part of the capital, the shareholders’ hold will decrease and become 37.75 per cent for Veolia, 29.25 per cent for National Power and Water and 35 per cent for the public. Once SDC is listed, the management should remain unchanged however, the board of directors will increase from five to seven directors. 45 days from the closing of the IPO offer (June 13), we will call for an AGM to elect the board of directors. There will be 7 board members appointed amongst shareholders and non-shareholders, provided that the shareholder candidate owns at least 10,000 shares.
Can you share details of the company operations?
The operation of the plant started in October 2009. Between 2010 and 2012, the water production has increased by around 30 per cent every year to reach 21.2 million m³/ year in 2012. The full capacity of the plant is expected to be reached by 2015 with a capacity of 80,000m3/day. The desalination plant is operated and maintained by Bahwan Veolia Water Company owned by Bahwan Engineering Company and Veolia. SDC, through its plant operator has received in July 2012 a triple certification for its integrated management system compliant with the following standards: ISO 9001:2008, ISO 14001:2004, and OHSAS 18001:2007.