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Initial Public Offering (IPO)

Pre-Research Cover Note

Calapan Ventures, Inc. (H20)

INVESTMENT HIGHLIGHTS 11.08.11 Summary of the Offer


A defensive stock with growth options from relatively untapped market Calapan Ventures, Inc. (CVI) plans to list via an Initial Public Offering of its shares on the second board of PSE. The company intends to offer 42,161,000 primary shares at an offer price of Php2.50/share. The offer shares represents 26% stake in the Company post IPO. Calapan Ventures, Inc. is directly engaged in the product procurement business. It is also engaged in the water utility and tube ice manufacturing businesses through its subsidiaries: Calapan Waterworks Corporation and Kristal Water Source Corporation. The Companys water business contributes bulk of CVIs profit and revenues, accounting for 81.63% of the Companys total sales in 1H11. We forecast revenue growth of 27% in FY11 and Compound Annual Growth Rate (CAGR) of 11% in the next few years. Higher revenues will be supported by the growth of the Companys subscriber count and increase in tariffs. Meanwhile, we expect doubled operating income this year and 31% operating income growth on the next, as the Company enhances its margins through more efficient operations and better pricing. We also see tailwind from CVIs new business as it will provide additional profit to the Company. In our view, the IPO offer price has fairly discounted the growth prospects of the Company. The offer price of P2.50/share suggests 9.84x FY12E P/E, cheaper than Manila Water Companys FY12E P/E of 10.80x. We recommend SUBSCRIBE.
Joanna M. Capiral

Issuer Domestic Offer Period Listing Date Offer Shares Offer Price

Calapan Ventures, Inc. 14-18 November 2011 24 November 2011 42,161,000 primary common shares Php 2.50 per share 60% for QIBs or 25,296,600 shares; 30% for TPs or 12,648,300 shares 10% for LSI or 4,216,100 shares

Domestic Offering

Operating Highlights (Pmn) (in PhP Thousands) Water service Sales Others Total Revenues Gross Profit Operating Income EBITDA Net Income EPS 2009 (pro-forma) 75,573 2,831 33 78,437 38,953 12,870 26,139 15,897 0.1319

2010A 90,569 27,338 140 118,047 49,686 22,260 29,260 30,599 0.2540

2011E 120,133 30,072 304 150,509 80,246 44,008 50,966 32,521 0.2005

2012E 143,155 33,079 176,234 93,962 57,723 67,865 41,198 0.2541

Source: CVIs financials, Unicapitals estimates

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Calapan Ventures, Inc. (CVI)

Business Overview
The Company was incorporated on January 30, 2009, under its original name Calapan Equity Ventures, Inc. as a wholly-owned subsidiary of Jolliville Holdings Corporation (JOH). The Company is directly engaged in the product procurement business. It began its operations last December 2009. It purchases, on a wholesale basis, and resells merchandise such as food and beverage items, grooming and personal hygiene supplies, and cleaning and housekeeping materials and supplies. Its clients are generally companies that outsource part or all of their purchasing needs to reduce overhead costs associated with maintaining an in-house purchasing department. The Company charges a mark up on the goods procured for consideration of its services. In previous years, this segment posted positive growth of revenues and stable margins. The Company is also engaged in water utility and ice manufacturing businesses through its subsidiaries: Calapan Waterworks Corporation (Calapan Water) engaged in the business of developing and utilizing water resources. It currently operates, manages and maintains the water supply systems in Calapan City and Tabuk City. Kristal Water Source Corporation (Kristal Water) engage in the production and distribution of ice. The Company has set up an ice plant facility that will service the needs of residential and commercial businesses in Calapan City. The facility will start operating in 2H11.

The Water Business

The Company, through its subsidiary Calapan Water, manages the local waterworks in Calapan City and Tabuk City. It sources groundwater from wells and pumping stations and distributes them to the households within the city. As of June 30, 2011, the water system in Calapan City is serving seventeen (17) urban barangays and fifteen (15) adjoining rural barangays. Meanwhile, the Tabuk Water Supply System is servicing eight (8) barangays as of the same period. Both water systems are regulated by the National Water Resources Board (NWRB). Chart 1: CVIs Group Structure



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Equity Research Report

Calapan Ventures, Inc. (CVI)

The water business serves as a key driver of CVIs value. This business has two-way growth potential: increase in rates and expansion of subscriber base.

Growth of Water Subscriber Base




Chart 2: Calapan Waters Subscriber Growth

Calapan Waters household connection grew by a CAGR of 12.11% from 2008 to 2010. This is higher than Manila Water Companys (MWC) household connection CAGR of 5.92% from 2008 to 2010. Despite the robust growth, we still expect notable expansion moving forward as large portion of the Companys concessions remain underserved. As of 30 June 2011, the water supply system in Calapan City is serving 17 urban barangays and 15 adjoining rural barangays or 8,613 households. The citys current number of households is at 25,137, suggesting that over 66% or 16,000 households are still underserved. To take advantage of this growth area, the Company plans to extend its distribution lines in 2012 to 2 barangays with about 1,300 households. The company aims to service 100% of Calapan City over the next ten years. Meanwhile, the water system in Tabuk City is serving 8 barangays or 2,809 households as of June 30, 2011. The citys total number of household is at 17,280 which means over 14,000 households or 83.74% are still underserved.

12.11% CAGR

Source: Calapan Waters Financial Statements

Growth of Water Business: Higher Rates

One of the key risks in the water business is the adverse effect of regulatory restrictions. Water tariff rate adjustments are formula-driven. However, Calapan Water mitigated this risk through good working relationship with the NWRB and relevant LGU. In the past years, the Company has been successful in obtaining appropriate tariff rate adjustments as well as water permits.
In fact, NWRB recently approved Calapan Waters petition to increase its water rates in Calapan City. The new rates, which are implemented beginning August 19, 2010 up to August 19, 2013, are 80% higher than the rates implemented in 2010. In comparison, the increase in the effective tariff of Manila Water in the past three years was only at 17%. Calapan Water was also granted with another 14% increase beginning August 20, 2013 up to August 20, 2015. These rate increases will enhance not only the Companys topline but also the Companys profitability. The increase in water rates had no significant impact to sales volume or to the growth of subscriber base. The Companys sales volume still escalated in 1H11 despite the 80% increase in tariff in August 2010. Quality service and high switching costs due to limited access of clean water in the city justified the increases.

Chart 3: Calapan City Water Rates (first 10 cubic meters)

14% 80%

Source: Calapan Water

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Calapan Ventures, Inc. (CVI)

Growth in topline will be complemented by better margins which shall boost the Companys profits in the coming years

Management Operation





Other Opportunities for Expansion

The success of Calapan Water operations in Calapan City and Tabuk City provided the Company with opportunities to expand into other parts of the country. Other municipalities are now interested in having their water system be developed or operated by Calapan Water. The Company is currently exploring these options as well as the opportunities to enter into joint venture arrangements or partnerships with other water districts.

We expect better margins and higher profits on the following years as the Company strives to improve the efficiency of its network. In particular, the Company targets to reduce its Non-Revenue Water (NRW) to 20% or less by the end of 2012. NRW comprises both physical water losses due primarily to leakage from its water system and non-physical water losses due to meter errors, improper classification of customers, fraud and illegal connections. Through managements expertise in the industry, Calapan Water managed to bring down the NRW in Calapan Citys water system to 33.1% in 2010 from 64% pre-acquisition. Meanwhile, Tabuk Citys NRW was trimmed down to 27% in 2010 from 31% in 2007. The Company aims to further improve the efficiency of its system through water pressure management, replacement of old transmission and distribution lines, and the adoption of new technology.

Tailwind from New Profit Stream

Calapan Water, through its subsidiary Kristal Water, will operate an ice plant facility in Calapan City. The facility has a production capacity of 30 metric tons per day and is expected to produce around 5,800 metric tons of tube ice in a year. The total project cost is currently estimated at PhP27,800,000. The ice plant is expected to be operational by the second half of 2011. We are optimistic on the success of this business due to high demand for tube ice products in the city. Moreover, the threat of competition is very minimal. Currently, there are only 3 manufacturers of block ice in Oriental Mindoro. However, none of them manufactures tube ice products. Thus, this venture will make the Company the pioneering manufacturer tube ice in the province.

Chart 4: Non-Revenue Water (In % of Total Output)

Key Risk: Dependence on Performance of Subsidiaries

Calapan Ventures, Inc.s financial performance is highly dependent on the performance of its subsidiaries, particularly on its water utility unit. The water business contributes 81.63%, while the Companys product procurement business only contributes 18%. The product procurement businesss contribution to income is also minimal due to tight margins.
Source: Calapan Water

However, this risk is mitigated by the fact that the Company has the same key executive officers with its subsidiaries and by being the majority shareholder of its subsidiaries.

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Equity Research Report

Calapan Ventures, Inc. (CVI)

Summary of the Offer

Calapan Ventures, Inc. (CVI) plans to list via an Initial Public Offering of its shares on the second board of PSE. The company intends to offer 42,161,000 primary shares at an offer price of Php2.50/share. The offer shares represents 26% stake in the Company after the IPO. Tables 1 and 2 show the other details of the offer.

Table 1: Offer Timetable

15 September 24 October 26 October 14-18 November 22 November 24 November

TPs/QIBs Roadshow Presentation Pricing Signing of underwriting agreement Domestic offer period Lodgement of Shares with PDTC Target Listing Date

Table 3: Use of Proceeds

Expansion Zoning Works

P52.50 Mln P92.85 Mln

The installation of transmission and distribution lines to new areas and construction of 1 overhead reservoir. Installation of district meters and isolation valves to be undertaken in 26 barangays; massive meter replacement to reduce non-revenue water to 20% target level.

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Equity Research Report

Calapan Ventures, Inc. (CVI)

Ratings and Recommendations:

USI Research's fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. Buy = More than 10% upside from the current price; Hold = Upside within +/-10% from the current price; Sell = More than 10% downside from the current price. Meanwhile, USI Research's technical comments and recommendations are short-term and trading oriented.

Note: In the interest of timeliness, this report has not been edited.

Unicapital Securities Inc

3/F Majalco Bldg, Benavidez cor. Trasierra Sts. Legaspi Village, Makati City, Philippines 1229 Tel: +632-892-0991 Fax: +632-818-2127
Sales Team Rommel M. Macapagal Ma. Concepcion G. Yao- Fernandez Juan Paolo G. Martirez Research Team Jan Michael B. Acebo Joanna M. Capiral

The information provided in this report has been prepared without taking account of your objectives, financial situation or needs. You should, before acting on the advice, consider the appropriateness of the advice having regards to these matters and, if appropriate, seek professional financial, investment and taxation advice. All observations, conclusions and opinions expressed in this report reflect the personal views of USI analysts and are subject to change without notice. The information this report has been obtained from sources USI believes to be reliable. However, USI does not warrant the accuracy, completeness or currency of, and will not be liable for any inaccuracies, omissions or errors in, or for any loss or damage (including any consequential loss) arising from reliance on, the information in this report. USI does not guarantee the performance of any investment discussed or recommended in this report. Any information in this report relating to the distribution history or performance history of any investment should not be taken as indication of the future performance of the relevant investment. In this report, USI may express an expectation or belief as to future events, results or returns generally or in respect of particular investments. USI makes such statements in good faith and believes them to have a reasonable basis, however, such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from such forward-looking statements. No guarantee of future returns is given or implied by USI.

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