Phoenix Park: Is The Price Right?

22 July 2014


Welcome to The Price is Right, the Firstline edition! 

The-Price-is-RightNo, we’re not launching a game show (but should we?)

However, we will be analysing the Trinidad & Tobago Natural Gas Liquids Limited / Phoenix Park Gas Processors Limited from a variety of different perspectives, to figure out if this IPO’s price is right.

We don’t yet have full financials for 2013 to make our calculations so in the interim we’ve used the numbers that we do have (up to YE 2012) and have come up with a preliminary assessment of the value being offered, since we already have indications of the price.

A BRIEF PRIMER ON VALUATION

Phoenix Park Plant

Benjamin Graham explained it best when he said, “Price is what you pay; value is what you get.” Graham was Warren Buffet’s professor at Columbia Business School and became his mentor, helping shape the investment strategy of arguably the world’s most successful equities investor.

Let’s say you had to choose between two hypothetical investment opportunities — two different stores, for example:

Would you rather pay 100 dollars for a store that makes 10 dollars a year, or pay 105 dollars for a store that makes 15 dollars a year?

If you are focused on valuation and on maximizing your potential profits, you would choose the 105 dollar business, which you would be buying for 7 times its profits (105 divided by 15), as opposed to the 100 dollar business, which you would have bought for 10 times its profits of 10 dollars.

This is a very simplified example, and there are many other variables to consider before making an investment. However, the principle behind valuation remains: what are you getting for the price you are paying?

PHOENIX PARK BY THE NUMBERS

As you may have already heard, PPGPL is in the business of processing natural gas to remove liquids so that the downstream industry in T&T gets pure methane, as well as for the production and export of LPG and natural gasoline. In fact, PPGPL is the only company that processes natural gas in this way for T&T’s vast downstream industry.

PPGPL Numbers

PPGPL Numbers

 

 

 

 

 

 

Source: CariCRIS; Business Guardian

PPGPL is quite a profitable business, whose profitability was curtailed in 2012 by natural gas supply issues related to maintenance in several major gas fields. According to financial data from CariCRIS’s ratings rationale, profit after tax fell to USD 213.3 million in 2012 from USD 322.3 million in 2011, representing an almost 34% decline. Profits are likely to have recovered in 2013, although we are still unclear as to what extent.

Nevertheless, with Net Profit Margins roughly between 23% and 28%, PPGPL remains much more profitable than the overall T&T Composite Index, which represents all companies listed in the TTSE and which currently has a profit margin around 10%. In other words, for every dollar that PPGPL makes, it keeps between 23 and 28 cents after paying all of its bills and servicing its debt, while the TTCI would only keep 10 cents.

A FAST AND DIRTY VALUATION

Firstline has done some calculations to determine a few key valuation metrics. You guys like math? No? Bear with us.

We know that TTNGL Ltd (which is the actual entity which will be listed) holds 39% of the equity in PPGPL. TTNGL Ltd has around 75.85 million shares. 65% of those shares, or around 49.5 million, will be offered to the public.

65% of 39% is 25.47%, so effectively, the shares on offer represent around a quarter of all of the shares in PPGPL. Now, to deduce how many equivalent shares are in PPGPL as a whole, we divide 1 by 25.47% to get a multiplier number. Once we have that number we can multiply the amount of shares (49.5 million) by the multiplier (in this case, 3.93) to get the total amount of shares: 194.49 million.

 Confused Emoticon

Why go through all this trouble?

 

 

Well, now we can calculate earnings per share and book value per share! Those two metrics are crucial to be able to do a quick and easy valuation of PPGPL.

PPGPL Valuation Metrics

PPGPL Valuation Metrics

 

 

 

 

 

 

 

Based on the calculations using the 2012 net profit, and a price of TTD 25 per share, PPGPL represents GREAT VALUE.

A Price/Earnings ratio at 3.41 for a business as strong as PPGPL would be a screaming buy on any market, in any part of the world. Keep in mind that if profits recovered in 2013 and 2014, as we expect, that ratio would be even lower — higher earnings would mean higher earnings per share. Compare the 3.41 P/E ratio to the overall P/E ratio for the T&T Composite, which stands at 16. However, the Price/Book Value metric is 2.37, which would put PPGPL well above the T&T Composite’s 1.81.

Nevertheless, the theoretical Dividend Yield based on 2012 profits would be quite high even with lower than average profit payout ratios (the percentage of profits distributed to shareholders as dividends).

PPGPL Return Scenarios

 

 

 

 

 

Based on a payout of 15% of profit, the dividends per share would be TTD 1.10 or a dividend yield of 4.40%. If PPGPL paid out 25% of profit to shareholders as dividends, an investor would make TTD 1.83 per share, or a dividend yield of 7.33%. For comparison, the T&T Composite has a dividend payout ratio of 54%.

That being said, we wouldn’t expect PPGPL to pay out that much profit, for reasons which we might explore in another blog. In either scenario, a 4.40% to 7.33% dividend yield is far superior to any other issuer of this quality available to local investors.

CONCLUSION

Final investment decisions should not be made without up to date financial information, specifically the 2013 financial statements. We are hoping that this information will become available by or before the fourth quarter, when the offering is now supposed to take place. As more information comes in, we will continue to analyse the data and write about our findings.

However, Firstline thinks that TTNGL is an excellent candidate for investment given what we do know:

  • Extremely strong strategic position as the only natural gas processing plant in T&T
  • Highly robust profitability as measured through margins and returns on equity
  • Very low valuation based on earnings, along with potential for exceptional dividend income

The offering is months away, but Firstline staff are happy to discuss this opportunity with you and answer any questions you have regarding PPGPL and its merits. Email info@nullfirstlinesecurities.com or call 868.633.4638 to discuss the PPGPL IPO or your investment needs in general. We look forward to hearing from you.

Michael John Cooper
Consultant

2 Responses to “Phoenix Park: Is The Price Right?”

  1. Patricia says:

    Hello,

    I’ve just skimmed through this newsletter (will go back to it at another time), but liked what I saw.

    Much effort seems to have been put into engaging the reader and I appreciated this. The usual trade terms alone are a turn off to me since I’m new to this type of investing but feel that I would understand the article which I really read it.

    Regards,
    Patricia

    • FSL says:

      Hi Patricia,

      Have you had a chance to read the article through yet? Give us a call at 633-4638 (ask to speak to either Neil, Ihsan or Osmond) and they can go through any of the terms or content of the article.

      Hope to hear from you soon,

      Firstline Team