Live Case Study: GREEN

Greenergy Holdings, Inc. (GREEN, the Company) has wonderful business developments that are potentially capable of bringing substantial future cash flow for the Company. The recent approval of feed-in tariff rates by the Energy Regulatory Commission (ERC) lowers the riskiness of renewable energy businesses in the future. [1] Feed-in tariff rates are fixed rates payable to renewable energy producers for not less than 12 years. Also, renewable energy producers will have priority purchase and transmission which assures the sale of their produced electricity. [2]

GREEN’s disclosure on November 16, 2012 contains the following: [3]

  1. Investment in companies or acquisition of assets relating to the businesses of Mr. Antonio L. Tiu.
  2. Amendments of the Company’s Articles of Incorporation and By-Laws to effect the following changes:
    1. Change in corporate name
    2. Increase in authorized capital stock up to P10 billion
    3. Issuance of shares through private placement transaction.

     

GREEN is in need of capital for their renewable projects. The Company has a short-term investment commitment of P252 million for the biomass project with Cleantech. [4] GREEN managed to meet the 45-day deadline of the required capital infusion by issuing new 25.2 billion shares and had 25% of the increase in shares issued to investors as private placement. For those new in corporate law, an increase in shares is required to be 25% subscribed and at least 25% of the subscribed be fully paid.

As illustrated above, GREEN still has to raise P167 million (P252m – P85m) in order to comply with commitment with Cleantech.

Other than commitment with Cleantech, GREEN has another upcoming capital intensive projects that are not yet fully funded which are the hydropower projects, currently under a preliminary agreement with Hydroring Capital BV (HC) and subject to financial and technical feasibility. The joint venture agreement is scheduled to be signed until January 13, 2013. [5]

With GREEN’s business development, it could be expected that GREEN will raise capital through the market in the near future but not before increasing shareholder value.

It could then be expected that GREEN may do the following:

  1. Change in corporate name.
  2. Increase in authorized capital stock to P10 billion.
  3. Acquisition of companies owned by Mr. Antonio Tiu through issuance of shares.
  4. Declare as property dividend their 39% interest in Music Semiconductors Philippines, Inc. (MSPI).
  5. Declaration of follow-on offering.

Rationale of the expectations:

  1. The change in name will properly reflect GREEN’s new businesses.
  2. Increase in authorized capital stock will provide GREEN more shares for issuance.
  3. Issuance of GREEN shares to acquire businesses relating to Mr. Antonio L. Tiu will allow GREEN to obtain control without any cash outlay. The issuance of shares will potentially wipe out the deficit of GREEN which stands at 284 million as of September 2012 and increase the assets of GREEN making it more attractive for investors.
  4. Distribution of MSPI shares as property dividend will increase shareholder value.**
  5. The follow-on offering will enable GREEN to raise the much needed cash.

GREEN’s par value could reasonably be expected to be increased from its current P.01 since an authorized capital stock of P10 billion at P.01 par value will translate to 1 trillion shares. There are no regulatory limitations for the number of authorized shares for issuance but 1 trillion shares for issuance sounds awkward in my opinion.

** This expectation was supported in the recent definitive information statement of the company where GREEN includes in the agenda for December 11, 2012 stockholders meeting their intention to list MSPI. [6]Listing of MSPI will most likely be through “listing by way of introduction” which requires distributing the shares to the public through property dividend just as PX and MER did with PXP and ROCK respectively.

Sources:

  1. ERC Approves Feed-in Tariff rates, http://www.erc.gov.ph/PressRelease/ViewPressRelease/ERC-Approves-Feed-in-tariff-rates
  2. RA 9513, http://www.doe.gov.ph/Laws%20and%20Issuances/RA%209513.pdf
  3. Board approval of investment or acquisition of assets, amendments to Articles of Incorporation and By-Laws, issuance of shares through private placement; Lifting of trading suspension, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-8302_GREEN.pdf
  4. Comprehensive Corporate Disclosure re: Investment Agreement with Cleantech; Trading halt, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6341_GREEN.pdf
  5. Preliminary agreement with Hydroring Capital BV re: development operation and management of multiple hydropower projects, infrastructures and/or facilities in the Philippines, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-6703_GREEN.pdf
  6. Definitive Information Statement for Annual Stockholder’ Meeting on December 11, 2012, record date November 16, 2012, http://www.pse.com.ph/resource/corpt/2012/GREEN_D20IS_11202012.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

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Trans-Asia Oil and Energy Dev’t Corp. Update

Trans-Asia Oil and Energy Dev’t Corp. (TA)’s first half report shows the already promising future of the Company. The earnings for June 2012 surged by 70% or a jump from P129 million in June 2011 to P220 million this year. Earnings were mainly driven by TA’s trading gains of 313 million. Trading gains are the result of the company’s participation in Wholesale Electricity Spot Market (WESM). The Company’s purchased electricity from third party and excess electricity generated by the Company’s own power plants are sold to WESM. The Company usually enters into a contract with an independent power producer for a certain period of time. The fixed price in the contract allows TA to profit should electricity prices be higher than the cost in the contract. Electricity is a commodity that could not be stored; therefore, if electricity prices are lower than the contract cost, TA will be forced to sell at a loss.

Few electricity producers combined with high demand for electricity would mean high electricity prices traded in the WESM. Increase in profit due to high electricity prices is not a sustainable source of growth for the Company. However, with electricity demand to surpass the existing capacity and committed capacity in the coming years, electricity trading might be one of the major drivers of growth for the Company.


Source: www.doe.gov.ph

As depicted in the chart above, we can speculate that there will be an electricity crisis by 2016-2017 in Luzon should there be no substantial investments in the Philippine electricity industry from this year to 2014 (which appears to be the case).

Trans-Asia’s Future

TA has promising business developments on their power generation segment and oil exploration segments which I expect to contribute substantial revenue for the Company in the future.

TA has two major power plants under construction, 20 MW Maibarara geothermal power plant in Sto. Tomas, Batangas and 135 MW coal-fired power plant in Calaca, Batangas.

The Maibarara geothermal power plant is constructed by Maibarara Geothermal, Inc. a joint venture company of Petroenergy Resources, Inc through its subsidiary PetroGreen Energy Corp. (65%), PNOC Renewable Corporation (10%), and TA (15%). The construction is 35% completed as of June 2012 and is expected to be in commercial operation by third quarter of 2013.

The 135 MW coal fired power plant is constructed by South Luzon Thermal Corporation a joint venture company between Ayala Corporation (50%) and TA (50%). Construction has not commenced yet as of June 2012 but the power plant is expected to be in commercial operation by the fourth quarter of 2014.

TA’s oil exploration segment includes their minority participation in SC 55 which covers 900,000 ha. in offshore West Palawan. The SC 55 block includes the Cinco prospect with 500 million barrels mean resource potential. Drilling in the ultra deep prospect with BHP Billiton is expected to be on the first or second half of 2013.

A Note on TA’s Strategy to Maintain Their Share Price

The Company has a habit of declaring cash dividend and subsequently declaring share rights offering to replenish the cash they declared as dividend. At first glance, their P.04 cash dividend per year appears to be attractive but it eventually burdens shareholders with the SRO that effectively dilutes the earnings attributable for each share. Also, declaration of cash dividend would cost the Company 10% withholding taxes and declaration of SRO would require them to pay costs to the PSE relative to the amount they are willing to raise.

Despite the frictional costs, why is the Company doing what they are doing? In my opinion, cash dividends are declared to maintain TA’s stock price above P1. Management probably rationalized that the benefit of declaring cash dividends substantially outweighs the costs.

Maintaining the Company’s share price above its par value (P1) is necessary for the Company to issue shares to the public. Issuance of shares below par is illegal.

TA had consistently declared P.04 cash dividend since 2005 and I expect the company to maintain their strategy in the coming years.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Stock Selection Dividend Approach

In selecting stocks with dividend as a consideration, take note of the following:

1.   Dividend Paying
2.   Company that is interesting to you
3.   Good payout ratio
4.   Good ROE
5.   Manageable or no debt
6.   Consistent revenue and earnings growth
7.   Business model that you can understand

Dividend Paying
Self explanatory

Company that is interesting to you

A company that is interesting to you is a company that you enjoy following and talking about with others. A company that is interesting to you will motivate you to learn more about that company.

Good payout ratio

The formula for the payout ratio is Dividends/Earnings. Basically, a lower payout ratio is better. Low payout ratios hints that a company may still have the capacity to increase their dividends in the future while plowing back enough money to the company. A good payout ratio is not more than 60%.

Good ROE

ROE or Return on Equity’s formula is profit/equity. A good ROE can roughly be defined as anything more than 10%. A good ROE is important because it indicates that a company can generate profit without much capital outlay. It also indicates that the company has strong market dominance and it should mean that the company is resilient.

Manageable or no debt

This can be determined through the use of debt to equity ratio. A debt to equity ratio of less than 200% is most desirable.

Consistent revenue and earnings growth

Generally, a higher growth rate in earnings and revenue is better than lower growth rate since the value of your shares will rise faster.

Business model that you can understand

Start with a company that you can understand how they make money so that you’ll know when they will make good and when they will do poorly.

Let’s apply what we had learned in real life! 🙂

(Selection is made on May 1, 2012 prices)

STEP 1: Dividend paying?

All of the companies that compose the PSEi are dividend paying except for BEL and FGEN so we are going to eliminate it from the list leaving us only 28.
1.   AC
2.   AEV
3.   AGI
4.   ALI
5.   AP
6.   BDO
7.   BPI
8.   CEB
9.   DMC
10.   EDC
11.   GLO
12.   ICT
13.   JFC
14.   JGS
15.   MBT
16.   MEG
17.   MER
18.   MPI
19.   MWC
20.   PX
21.   RLC
22.   SCC
23.   SM
24.   SMC
25.   SMDC
26.   SMPH
27.   TEL
28.   URC

STEP 2: Interesting to me?
Here, personal preferences vary but let’s just assume that I find all the companies interesting.

STEP 3: Good payout ratio?

Using this formula: Payout ratio = 2011 dividend / 2010 EPS

We are going to screen the stocks with payout ratio not beyond 60%.

STEP 4: Good ROE?

As stated in the previous post, we assumed that a good ROE is above 10%. We used 2010 ROE since some companies had not yet released their
2011 financial statements.

Now we have a narrowed list.

STEP 4: Manageable or no debt?

We are looking for a company that has a debt not more that 200%.

All the companies passed the screen.

STEP 5: Consistent revenue and earnings growth?



It appears that our selection is trimmed down to only two:

STEP 6: Business model that you can understand.
Another subjective criterion in this approach is determining whether the business model is simple to understand or not.

Describing the company in one simple sentence is a good exercise to determine whether it is understandable or not to you.

This is what’s going on in my mind if DMC and JFC are mentioned:

DMC:
uhmmmmmmmmm……….

JFC:
They make money by selling good chicken joy and jollyhotdog and they also have Mang Inasal as a subsidiary which I like to go eat with my family and friends.

Conclusion:
After grueling screening, we ended up selecting JFC.

Selected:
JFC @ 112.10