Windforce IPO biggest in 9 years opens today; billed to be heavily oversubscribed

Renewable energy giant Windforce Ltd.’s Initial Public Offering (IPO) worth Rs. 3.2 billion, the biggest in nine years, will have its official opening today, heralding a landmark milestone for both the company and the capital market. 

Styling itself as Sri Lanka’s biggest and fastest growing producer of renewable energy, the Windforce IPO offers 15% stake or 202,615,341 new ordinary voting shares of par value of Rs. 10 at Rs. 16 each. The previous biggest IPO in recent years was that of People’s Leasing (PLC) worth Rs. 7 billion in 2012.

Windforce currently operates 27 power plants with a total installed capacity of 218MW. Bulk (55.4%) of this is based in Sri Lanka while the rest are spread across Pakistan (31.2%), Uganda and Ukraine.

In terms of energy, the company has seven wind plants (69.2MW), 10 solar power plants (123MW) and 10 mini hydro plants (26.4MW).

Windforce’s share structure is primarily consisted of leading local family businesses – including Akbar Brothers Group (post IPO stake of 33%), Hirdaramani (20.7%), Debug Investments (12.1%) and MAS Holdings (3.3%).

Of the funds raised, Rs. 927 million will be utilised to construct a15MW wind plant in Mannar, Rs. 1.4 billion will be utilised to construct a 30MW solar plant in Senegal and Rs. 932 million will be kept as funds retained for future investments. 

In FY20, the company posted revenue worth Rs. 3.5 billion, up by 24% from a year earlier and gross profit rose by 18.5% to Rs. 2.3 billion and operating profit by 17.5% to Rs. 2.04 billion. Pre-tax profit was Rs.2.35 billion, up 37.5% and after tax profit amounted to Rs. 1.89 billion, up by 28%.

For the nine months of FY21, revenue grew by 36% to Rs. 3.7 billion and pre-tax profit by 7% to Rs. 2.1 billion and post-tax figure was Rs. 1.97 billion up by 5.5% from a year earlier.

The IPO has been up for subscription since 2 March and likely to be closed today on its official opening day. Brokers to the issue are CT CLSA Holdings and Capital Alliance.

Apart from them several other brokers too have recommended “Buy” given the company’s performance and future outlook as well as the growing demand for and reliance on renewable energy locally and globally. 

SC Securities said its IPO price at Rs. 16 per share represents a 10% discount to a value-per-share of Rs. 17.77 based off DCF valuation method. It said the Implied PER is at 7.04x, based off FY21E earnings.

First Capital said valuation indicates a Target Price of Rs. 17.5 for FY22E and Rs. 21.0 for FY23E yielding an annualised return of 17% and 19% respectively. Total Return with DPS: FY22E- 18% (AER 17%) and for FY23E it is 42% (AER 19%).

Asia Securities put post-money fair value of Rs. 16/share on its SOTP-based DCF model. 

“We supplement this with a P/E, P/B and DDM model which gives us a range of fair values from Rs. 16-19.50/share,” Asia said.

“It is likely that any upside to our valuation from this point forth will only come by inorganic means with either 1) commissioning of new power plants, 2) acquisitions or 3) Increasing stakes in associates,” Asia added.

It also sees stable earnings in FY22E and FY23E despite three power plants switching to the second tier in the tariff structure

“Given the magnitude and interruptions that could be associated with the ongoing pandemic, we expect the new Mannar and Senegal power plant projects to be completed in FY24E, indicating a three to six month delay compared to the stated completion dates,” Asia said. 

Upon stress-testing WIND’s earnings, Asia said it is confident in WIND’s ability to sustain dividend payments and maintain an average yield of 9.1% over FY22E-FY24E. This places WIND among the highest dividend yielding stocks on the CSE.

“We are positive on WIND’s long-term growth trajectory surrounding its international and local expansion plans, predominantly in wind and solar, that will lead to a spreading of its risks and smoothening earnings seasonality in the medium to long-term,” Asia said.

“While a sharp fall in cost/MW will help future expansions, the tariff structures account for this efficiency gain. Therefore, the possibility of power producers generating supernormal profits is removed,” it added. 

Basis of allotment proposed is if IPO is oversubscribed, 30% to retail individual investors, 10% to unit trusts, 7.5% to group employees and directors and 52.5% for non-retail investors. If the IPO is undersubscribed, allocation for retail individual investors is 40%, unit trusts 10%, group employees and directors 7.5% and non-retail investors 42.5%.