LVL Energy Fund IPO price shows discount to valuations

The multiple valuations of LVL Energy Fund Limited shows its shares are going to be issued at a discount at the upcoming Initial Public Offer (IPO) demonstrating the company has more intrinsic value than what the issue price denotes.  

The LVL Energy Fund, a venture capital fund specialized in multi-source energy generation projects in Sri Lanka, Bangladesh and Nepal earlier this month announced it would issue 120 million ordinary voting shares at an issue price of Rs.10. 

But the multiple valuations arrived at by the independent valuer to the issue suggests that the company has more value than what its issue price suggests, hence the IPO price is a more conservative valuation of the company, which has more upside..

Capital Alliance Partners Limited—the independent valuer—upon the request of the company arrived at a price range of Rs.10.60 to Rs.16.62 based on the Sum of The Parts (SOTP) valuation method as the venture capital fund has many subsidiaries and joint ventures for each of its energy project undertaken. 

This is a discount of between a lower of 5.66 percent and a high of 39.8 percent to the IPO price.
LVL Energy Fund holds stakes in six operational mini-hydro power projects with a cumulative capacity of 16.9 MW, two wind power projects with capacity of 15.3 MW and two thermal energy projects with a combined capacity of 104.4 MW operated in Bangladesh. 

Three other hydro-power projects with a combined capacity of 13.9 MW are either under construction or to be constructed bringing the total energy capacity of LVL Energy up to 150.5 MW in Sri Lanka, Bangladesh and Nepal.     

The SOTP valuation measured the present value of the future cash flows for the next three years – from 2018 to 2020— of each of these projects.  Meanwhile, as an alternative valuation, the independent valuer assigned a price of Rs.13.18 a share based on the future earnings potential of the energy fund, which is again a 24.1 percent discount to the IPO price. 

However, the issue price is a 92.3 percent premium to the net asset value per share of Rs.5.21 of the company. 

The LVL Energy Fund IPO breaks the month-long drought of initial public offers since the Rs.368 million raised in February by the brush maker, Beira Group, and the Rs.960 million raised by RIL Property Limited in March. 

Most of the recent IPOs are currently trading below the issue price and the short-term investors are seen struggling to exit.

The prospectus of LVL Energy Fund released yesterday said Rs.480 million of the IPO proceeds would be used to settle debt while the balance Rs.720 million would be invested in the three hydro-power projects being considered. 

The company will settle Rs.300 million bridge loan made available by DFCC Bank PLC, a related party while another Rs.180 million will be used to settle the short-term loan obtained for the purpose of redeeming the preference shares issued to the same bank. Meanwhile, equity investments will be made in the planned three hydro power projects – Rs.140 million in Bambarapana, Rs.115 million in Pupulaketiya and Rs.465 million in Makari Gad project in Nepal in return for equity stakes of 40 percent, 90 percent and 45 percent, respectively.

Further, the company will allocate 40 percent of the shares in full to the retail individual investor category while a 10 percent has been assigned to the unit trust investor category.

The balance 50 percent is allocated to  the non-retail investor category. 

While the company will seek for a Main Board listing, it said it would seek a Diri Savi Board listing unless at least 20 percent of the shares are in the hands of a minimum of 500 public shareholders to qualify to be on the Main Board.  The issue which opens on December 14 is managed by Acuity Partners Private Limited, which holds 80 percent in Lanka Ventures PLC, under which LVL Energy Fund was set up in 2006. Acuity Partners is a joint venture between DFCC Bank PLC and HNB Bank PLC and the CEOs of both banks sit on the board of the LVL group.  For the quarter ended June 30, 2017 (1Q18), LVL group reported earnings of 33 cents or Rs.138.4 million compared to 59 cents or Rs.247.4 million reported in the comparable period, last year, as the hydro power performance was affected by the prolonged drought.