Evaluation of United Power Generation & Development – Financial & Strategic Perspective

Evaluation of UPGD – Financial & Strategic Perspective

Prepared By Md. Shihabur Rahman

Objective

Financial Perspective: Evaluate UPGDCL’s prospective share price based on both its financial fundamentals and industry situation.

Strategic Perspective: Provide an insight of macro-economic condition, industry situation and current market position of Power sector and UPGDCL.

Methodology : Data Collection

Primary Data

Road show by UPGDCL Representative & Interview of financial industry & power sector

professional.

Secondary Data

Information Memorandum of UPGDCL Publicly available financial reports

Methodology: Sampling & Interview

Sampling Technique: Non probabilistic , Snowball Sampling

Interview Style: Depth Interview Open-ended questions

Valuation : Discounted Cash flowCritical Assumptions

1. Capacity Assumption: Installed capacity = Declared Capacity * 92% (From previous years’ pattern)Production Capacity = Installed Capacity *90% (During peak production year)

2. Tariff Growth Assumption:Tariff rate growth will follow the current pattern of 2011-2012 (30%) for next two years. So for year 2013, 2014 tariff growth will be 30%. For rest four years (2015- 2018) tariff

growth will follow 7% growth.

3. WACC Assumption:Risk free rate is assumed to be 360 Days’ Treasury bill rate of Bangladesh Bank. Risk Premium is assumed to be 7%. Tax rate is assumed zero

4. Terminal Value Assumption:Long-term growth rate of cash flow is assumed to be equal to GDP growth

Valuation : Discounted Cash flow

With WACC 14.44% & GDP 6.3%

Depending on the optimistic or pessimistic assumption of Long Term cash flow growth & Tariff growth this share price varies

Share Price WACC GDP77.52 Tk 14.44% 6.3%

LTG=2% LTG=6.73%

Share Price

56.14 77.52 Tariff Growth=13.23%

Share Price

44.71 67.20 Extra Ordinary Tariff Growth=30%

Valuation: Relative Method We have used five methods of relative

valuation:  Method-1: Net Asset Value (NAV) per share Method-2: Historical earnings based value per share Method-3: Price based on P/E ratio of similar stocks Method-4: Market P/E ratio based fair price Method-5: Market P/E ratio based fair price

The average price of above five methods is Tk. 58.93

Valuation: Relative Method

With contrast to DCF valuation, share price based on relative valuation has also been conducted. Net asset value per share 17.67 Taka , Historical earnings based value per share is 42 taka , Price based on P/E ratio of similar stock is 85.27 taka , Market P/E based fair price is 80.51 taka and sector P/E based fair price is 68.57 taka. The average price of above five methods is Tk. 58.93. Considering 10% discount the bidding price should be Tk. 53.00 per share.

Valuation: Market Comparison Current Market Scenario

UPGD Target : Sell 30,000,000 shares at BDT 100.00 each

Company Latest Closing Price

DESCO 79.4SUMITPOWER 34.7POWERGRID 55.3KPCL 52.3GBBPOWER 24.8UPGD 58.91 ~ 77.52

Total Expansion Cost 5,396,383,000 IPO Proceeds 3,000,000,000 Own Financing 2,396,383,000

Valuation : Decision

Before beginning trade UPGD share price is hanging between 58.93 to 77.52 Taka, being moderately optimistic.

That is to say to say after trading begins we can expect UPGD price rise more. This is compliant with UPGD expectation of selling each share at 100 Taka to fund their expansion cost.

Macro-environment AnalysisPESTEL

Political Govt encouragement for quick rental and other large scale power-plants Beneficiary policies for power production plants

Economic Economic Growth Gas Price Tax rebate for large scale power plants

Macro-environment AnalysisPESTEL

Social Increasing demand of electricity as quality of life improves Increase in town based population Festive nature of urban culture Technological Development of telecommunication infrastructure Industrial development Future establishment of nuclear plant Discovery of new gas field

Macro-environment AnalysisPESTEL

Environmental Pollution Control Deforestation Taking up huge amount of cultivable lands

Legal Importing machinery Payables Contractual agreement

Macro-environment AnalysisBuilding Future ScenarioNew Gas Reserve Found Gas Reserve Decreased

Advancement inRenewable Energy Sector

Availability of Gas will ease Power Production But Newly created dependability on Renewable Energy might see Govt policies shift away from Gas based plants

Gas based plants will fail to continue. Both Govt & Pvt run power plants will shift to alternative energy sources as well as renewable energy sources.

Innovation in Renewable Energy Sector is Stagnant

In lack of renewable energy source , Gas based power plants will thrive as more and more new gas fields are found

Govt. & Pvt sector investor of power plant will shift to coal and HFO based production. Power production as a whole will hamper.

Industry Analysis Porter’s Five Forces : Indication

Power sector seems moderately attractive Industry friendly Govt policies, high entry barrier and high capital expenditure helping the current establishments of the industry to thrive fast Substitute does not even exist in many cases as Bangladesh is yet to meet its daily demand of power supply.

Forces ScoreBuyer Power 2.8Supplier Power 3Threat of New Entrants 3.2Threat of Substitute 2.8Industry Rivalry 2.8

Industry AnalysisComparative Industry Structure

Buyer Power

Supplier Power

Threat of New EntrantsThreat of Substitutes

Industry Rivalry

2.5

3

3.5

2.8

3

3.2

2.8

2.8

ScoresScores

Market SegmentationFactors Retail Consumer Industrial ConsumerScale ( Large or Small)

Small scale Plants not applicable for retail consumer

Small scales power plants for industrial area

Privately owned small power plant for own industry

Private owned industry buying from external power plants

Govt Funded or Private run

Retail consumers get power supply from the main grid which is combination of Govt & Pvt sector power production

Industrial Consumers get power supply from the main grid.

Special Industrial zones get power supply from private sector power plants.

Quick Rental or Long Term Establishment

Quick Rental is for emergency power solution and comes with a high tariff rate. Retail consumer enjoy subsidized tariff rate in case of quick-rental

Often when Govt fail to meet industrial power demand quick-rental’s come to play. Industrial consumers do not enjoy subsidized tariff rate.

SWOT AnalysisStrength

• Fixed Consumer base

• Tariff rate variable

• Gas supply contract for 15 years

• No tax

• Long project life

Weakness• Availability of Gas in future is not certain

• Expansion opportunity is low

• Can not sell excess production to external consumers during off-peak season

Opportunity• No competitor inside EPZ area.

• Can utilize Govt encouragements like tax-benefits

• Build & Operate policy allows to establish plant facilities inside EPZ area

Threat• Scarcity of Gas supply

• Increasing price of Gas

• Technological advance of Renewable Energy sector

Stakeholder Mapping Minimum Effort

Wartsila, Utility Provider, Competitors (Summit ,Energypac)

Keep Informed

Dhaka Bank, DBBL, REB, BPDB, Individual Investors

Keep Satisfied

CEPZ, DEPZ, Regulators,

Key players

GTCL, Titas Gas, Owners, BEPZA

Interest

Pow

Low High

High

Conclusion Complying with the first objective mentioned we have

valuated UPGD’s share price in two different method and determined as 77.52 Tk & 58.93 Tk. We conclude given current market scenario investment in UPGD will be profitable

According to the second objective, all four layers of business environment is examined to create an insight of the Power sector business. We have examined unique patterns of power sector of Bangladesh and seen that UPGD is enjoying some crucial advantage over other market players making it and lucrative business opportunity