GBCM Research SMN Power Note

7/31/2019 GBCM Research SMN Power Note

1/24

SMNPowerHoldingSAOGUnderTransformation

OfferPrice:RO3.520 Outlook:Subscribe


2/24

S M N P o w e r H o l d i n g I P O

2|Page OmanEquityResearch

SMNPowerHolding SteadyCashflow,Dividendplay

Outlook:Subscribe

IPO

Rating:

Average

Utilitiesplayprovidingfixedreturns Bestportfoliofitforlowriskappetiteinvestors Fairvaluefactoringforhigherdividendpayouts

September26,2011

Issueforlowriskappetiteinvestors

Asacombinedentityoftwoprojectcompanies,theSMNPowerHoldingSAOG (undertransformation)owns

the largestpowergenerationcapacities inSultanateofOman.Keypromotersofthecompany include

Kahrabel (fully owned subsidiary of International Power), Mubadala Power Holding Co and the National

TradingCo.

Power demand to remain intact: As per the latest seven year projections (201117) of OPWP, the

averageelectricitydemandinMainInterconnectedSystem(MIS)isestimatedtogrowfrom1,924MW

in 2010 to 3,464 MW in 2017, reporting a CAGR of about 8.8%. Key drivers for demand include the

estimated economic growth, investment in various tourism projects along with the development of

variousindustrialhubsinSohar,SurandDuqm.

Steadycashflowgeneration:AsperthePPA,therevenueofthecompanyisfixedthroughthePower

andwaterPurchaseagreement(PWPA)withthesingleofftaker,OmanPowerandWaterProcurement

Co(OPWP).Owingtothis,webelievethatthecompanyhasastrongrevenuevisibilityprovidingstable

andreliablecashflowgenerationovertheprojectperiod,whichprovidescomforttotheinvestors.

Strongshareholdersupport: The presence of robust shareholder strength for SMNPower Holding in

the form of International PowerGDF Suez, parent of Kahrabel, which is one of the leaders in global

independent power generation with 72,360 MW (gross) 42,225 MW (net) in operations across the

world. Added, Kahrabel / International Power are the largest private power and water producers in

Oman.

Outlook Steadycashflow,DividendPlay

Overall the stable industry performance along with the steady cash flow generation in the Utilities

sectormakestheissueanattractivedividendplay.WeratetheSMNPowerHoldingIPOasanaverage

issueinourratingsalewiththefairvaluefactoringforhigherdividendpayouts.BasedonourValuation

methodologies(DividendDiscountModel),wehavearrivedatourfairvalueofRO3.877forSMNPower.

Werecommendthelowriskappetiteinvestorstosubscribefortheissuewiththemediumtolongterm

horizon.Wealsobelievethatthe issuewouldbeabestfitfor longonlyfundsand institutions.We

expect the issue to see limited upside on listing, however considering the dividend yield we

recommendtosubscribefortheissue.

KanagaSundar

[email protected]

+96824790614Ext:534

VijaySridharan

[email protected]

+96824790614Ext:533

AbdulazizAlLawati

[email protected]

+96824790614Ext:570


3/24



Index PageNo

IssueHighlights.. 4

ShareholdingDetails.. 6

Backgroundofthecompany. 7

EconomicOutlook 8

OmanPowerSectorAnintroduction.. 9

InvestmentRationale. 11

RisksandConcerns. 14

ConcernsonPostPPAvaluation. 15

ValuationsandRecommendations..... 16

Outlook... 20

FinancialSummary.. 21


4/24



OfferDetails

Table1:TermSheet

IssueDetails KeyTerms

NameoftheCompany

SMNPowerHoldingSAOG(undertransformation).The

companyistheholdingcompanyofthetwopower

projects.

AuthorizedCapital RO70.00million

NominalValue RO1.000

IssuedandPaidCapital(Pre&PostIPO) RO19.964million

NumberofSharesOfferedforsubscription35%(6.987millionshares) oftheCompanystotalshare

capitalaspertheobligationsstipulated.

PurposeoftheIPOComplywiththelistingobligationsstipulatedinPFA

Requires35%availableforpublicsubscription

Allocation

OpentoOmaniandNon OmaniInvestors Totalforeignownershipfollowinglistingshallnot

exceed70%ofthepaidupsharecapital.

AllGCCnationalsaretreatedasOmaninationalsinrespectofownershipofandtradinginshares.

ProposedAllocation

CategoryI RetailInvestors

60%of

the

Offer

(4.192

million

shares),

for

individuals

andjuristicpersonsapplyingforamaximumof5,000

Shares.

CategoryII InstitutionalInvestors

40%oftheOffer(2.795millionShares),forindividuals

andjuristicpersonsapplyingformorethan5,100

Shares.

AnyundersubscriptioninanyCategoryshallbecarried

overtotheotherCategory

OfferPriceforeachShare RO3.520 OfferpriceofRO3.500plus20Baizas

towardsIssueExpenses

Source:IPOProspectus,GBCMResearch


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TermSheetdetailscontd

IssueDetails KeyTerms

TotalOfferSize RO24.595million

MinimumLimitfortheSubscription

CategoryI:100Sharesandinmultiplesof100

thereafter

CategoryII:5,100Sharesandinmultiplesof100

thereafter

Allotmentwould

be

on

a

proportionate

basis

MaximumLimitfortheSubscription

CategoryI:5,000Shares

CategoryII:10%ofthetotalOffersizerepresenting

698,725shares

Allotmentwouldbeonaproportionatebasis

OfferOpeningDate 11September2011

OfferClosingDate 10October2011

ApprovalofCMwithregardstoallotment 22October2011

Listingof

Shares

in

MSM

25

October

2011

SellingShareholders

KahrabelFZE(47.5%oftheoffershares) MubadalaPowerHolding(47.5%oftheoffer) NationalTradingCo(5%oftheoffer)

SubscriptionBanks

BankMuscat

NationalBankofOman

OmanArabBank



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ShareHoldingPattern PreIPO

S.No Shareholder %Holding

1 KahrabelFZE 47.50%

2 MubadalaPowerHolding 36.63%

3 MDCIndustryHolding 10.88%

4 NationalTradingCo 5.00%


ShareHoldingPattern PostIPO

S.No Shareholder %Holding

1 KahrabelFZE 30.88%

2 MubadalaPowerHolding 20.00%

3 MDCIndustryHolding 10.88%

4 NationalTradingCo 3.25%

5 Public 35.00%


Graph1:PreIPOShareholding Graph2:PostIPOShareholding

Source:Prospectus,GBCMResearch

47.50%

36.63%

10.88%

5.00%

KahrabelFZE MubadalaPowerHolding

MDCIndustryHolding NationalTradingCo

30.88%

20.00%

10.88%

3.25%

35.00%

KahrabelFZE MubadalaPowerHolding

MDCIndustryHolding NationalTradingCo

Public


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Backgroundofthecompany

SMN

Power

Holding

SAOG

(undertransformation)

is

the

holding

company

which

owns

two

major

power

projects in Oman namely Rusail Power Company (RPC) and SMN Barka Power Company (SMNBPC). As a

combinedentity,theSMNPowerownsthe largestpowergenerationcapacities inSultanatecurrently.Key

initial promoters of the power projects include Kahrabel (fully owned subsidiary of International Power),

Mubadala Power Holding Co and the National Trading Co. As part of a privatization plan in 2006, the

company had purchased the assets of RPC unit from the Government of Oman (EHC and Ministry of

Finance), which is relatively an old one. On the contrary, SMN Barka is a newly built unit which had

commencedoperationsinNov2009.

BoththeprojectshavebeenformedundertheBuild,OwnandOperate(BOO)scheme.AsperOmanPower

and

Water

Procurement

Co

(OPWP)

statistics,

the

overall

installed

power

capacity

of

the

two

power

companiescombined formsabout35%ofthe totalcapacityofthecountrysMain InterconnectedSystem

(MIS).Thecompanyalsorepresentsabout33%ofthetotalgeneratedpowerinOmanfor2010,formingthe

biggestone.Aspertheprospectus,for2010thenewplantSMNBarkaoperatedatanaverageavailabilityof

powerofabout92.07%andtheplant loadfactor(PLF)wasat37.5%.WhilefortheRPCPlant,theaverage

availabilitywasat90.8%andthePLFwas59.3%.

SMNPower HoldingStructure

Source:Prospectus,GBCMResearch

Purposeof

the

offer

The holding company plans to go for the IPO to comply with the specified obligations under the project

foundersagreement(PFA)whichrequires35%oftheshareholdingavailableforpublicsubscription.

Proceedsoftheoffer

TheIPOrepresentsapureofferforsalewiththesharesoffereddonotrepresentanyissuanceofnewshares

bythe company.The totalproceeds of the offer which includesthepremium wouldbe going only to the

sellingshareholders.Thereby,theproceedsfromtheIPOwouldnothaveanimpactonthefinancials.

RusailPower

Co

SMNBarka

SMNPowerHoldingSAOG

PowerCapacityof

666MW

PowerCapacityof678MW

WaterCapacityof26.4MIGD


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EconomicOutlook

OmanEconomicGrowthremainsstable

The continuance of robust Government spending towards the development of Infrastructure has led to

incrementalallocationoffundstokeysectorsespeciallytheUtilitiesprojects,whichwouldbethedriversfor

economicgrowth.ThestabilityinOmanseconomyoverthepreviousyearshasledtohigherprivatesector

investmentsinvariouscriticalsectorslikeOil&Gas,Banking,diversifiedindustriesandthePowerandwater

arena.Added,theprevailinghigheroilpricesalongwiththeGovernmenteffortstakentowardsthenewjob

creationwouldinturnkeepupthesteadyGDPgrowthmomentumcontinuingoverthecomingyears.

Thethrustonthedevelopmentofdiversified incomeespeciallythenonoilcontributiontoGDPhas ledto

hugeprojectinvestmentsinIndustrialhubs;Oil&Gasrelatedindustriesandalsotheinvestmentintourism

sector. We have also seen the Governments commitment towards the development of local human

developmentbyincrementalallocationstohealth,educationandotherpersonalsectors,whichwebelieve

would be critical in the longer term. Omans Eighth five year plan too targets continuance of stable

economicgrowththerebyachievingthelongtermobjectivesofOmanVision2020strategy(19962020).

ThrustremainsofProjectspend

Eighth Five Year plan is anticipated to give local economy the right stimulus by offering development

orientedgrowthtocontinueoverthecomingyears.Thesustainable levelsoffiscalspendingandtheclear

focusonnewjobcreationisanticipatedtobringinlongtermbenefitstowardsachievingstabilityingrowth.

ThepresenceoffavorabledemographicsandthecontinuanceofInfrastructurespendisbelievedtoattract

foreign investments in wide variety of industries moving ahead. Economic Diversification efforts and the

creationofworkforceareexpectedtoleadinconsumptionleadgrowthmovingforward.Withtheconsensus

oil price estimates of above USD 90 per barrel in FY2011E, we believe that the project investments

undertakenbyGovernmenttogoonastrongerpaceofgrowth.

OmanNominalGDPGrowthTrend

Source:MoNE,GBCMResearchEstimates

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009P 2010f 201 1p 2011b 2011o

GDPatmarketprices 7,639 7,671 7,807 8,343 9,487 11,883 14,151 16,111 23,288 18,020 21,552 21,813 23,589 25,440

GrowthRate 2 6. 5% 0 .4 % 1 .8 % 6 .9 % 1 3. 7% 2 5. 3% 1 9. 1% 1 3. 8% 4 4. 5% 22 .6 % 19 .6 % 1 .2 % 9 .5 % 1 8. 0%

30%

20%

10%

0%

10%

20%

30%

40%

50%

5,000

10,000

15,000

20,000

25,000

30,000

ROMlns


9/24



OmanPowerSector AnIntroduction

OverallDemandforelectricityinOmanhasbeengrowingatabout67%perannuminrecentyears,fuelled

byrobust industrialactivityandsteadyeconomicgrowth.AspertheOPWP,around2,100to3,000MWof

additional power generation resources to be added to Main Integrated System (MIS) by 2015E. Overall

annual Power consumption is estimated to increase by about 8% every year till 2020, which shows the

stableindustrynature.Governmenthasplannedanaggravatedprogrammetocatertothegrowingdemand

forPowersector.

Oman isalsothe firstcountry intheregiontohavea conceptofprivatepowertherebyproviding hostof

new opportunities for private sector players towards Sector development. This led to the entry of global

majors

like

AES,

International

Power

and

Suez

Energy(largest

investor

in

Oman

Power

Sector).

The

first

publiclyownedpowerplantinOmantobetransferredtotheprivatesectorwastheAlRusailfacility(thisis

partofSMNPowerHolding)soldtoSuezandMubadalaDevelopmentworthc.$550millionin2006.

PowerDemandgrowthremainssteady

The Main Interconnected System (MIS) covers major portion of Sultanate comprising of several power

generation facilities including SMN Power Barka and Rusail Power. Currently there are nine power

generationcompanies,threedistributionunits,onetransmissioncompanyandaruralfirmcoveringremote

areas. Over the last ten years, the overall electricity demand in MIS has grown by 79% annually. During

2010,the

demand

has

increased

by

7%

YoY.

Withthecontinuing investmenttowardsthedevelopmentofdiversifiedeconomicgrowth,webelievethat

the demand for power would grow at a stable pace going forward. According to OPWP data, the overall

powerdemandintheMISgrewataCAGRof9%over2005to2010whichismainlyonthebackofstronger

economicgrowth,increasing populationandthedevelopmentofnewindustrialandtourismprojects.

MIS ElectricityDemandProjections

Source:OPWP,GBCMResearch

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

Avergedemand(MW) PeakDemand(MW)

CAGRof8.8%over2010to2017E


10/24



AverageDemandtogrowby8.8%CAGRover20102017E

As per the latest seven year projections (201117) of OPWP, the average electricity demand in MIS is

estimatedtogrowfrom1,924MWin2010to3,464MWin2017,reportingaCAGRofabout8.8%.Keydrivers

for demand include the estimated economic growth, investment in various tourism related projects along

withthedevelopmentofvariousindustrialhubsinSohar,SurandDuqm.TheupcomingtwonewIPPs(Sohar

IIandBarkaIII)arescheduledtobecommissionedinphasesduring2012and2013.Thiswouldadd495MW

in 2012 and 250 MW in 2013 with the total addition of 1,490 MW. On the other hand, the new Sur IPP

(installedcapacityof1,500to1,200MW) isexpectedtobeoperationalbyend2013.Governmenthasalso

initiatedstudiestowardstheinvestmentinSolarPowergeneration,whichcouldbebeneficialinlongerrun.

2011 2012 2013 2014 2015

2016

2017CurrentContractedCapacity (MW)

Ghubrah 475 475 325 235 235 235 235

Rusail 687 687 687 687 687 687 687

WadiAlJizzi 325 245 245 245 157 157 157

Manah 273 273 273 273 273 273 273

AlKamil 297 297 282 282 282 282

Barka1 450 450 435 435 435 435 435

Sohar1 590 590 590 590 590 590 590

Barka2 710 710 679 679 678 678 678

Sohar2 495 745 742 740 739 738

Barka3 495 745 742 740 739 738

Total 3,807 4,717 5,006 4,910 4,817 4,815 4,531

Source:OPWP,

GBCM

Research

DemandfordesalinatedWatercontinuestogrow

AccordingtoOPWPstatistics,theoveralldemandforpotableand industrialwaterintheMISisexpectedto

growfromabout163millionm3/annumin2010to278millionm3/annumin2017,reportingaCAGRof8%.

Thegrowthindemandisonbackoftheassumptionsofincrementalpopulation,steadyeconomicgrowthand

alsothechangeinpolicytowardsloweringtherelianceofgroundwaterresourcesmovingahead.SMNPower

BarkacomesundertheBarkaZonewherethedemandisestimatedtogrowby8%CAGRover201017E.The

BarkaZoneislocatedbetweenSoharZoneandGhubrahZoneallowingPAEWtotransferwithinthezones.

Figuresin000m3/day 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E CAGR(201017E)

PeakWaterDemand

GhubrahZone 258 270 284 299 314 330 330 330 3.6%

BarkaZone 177 197 219 243 269 299 303 307 8.2%

SoharZone 83 101 121 122 139 168 174 214 14.5%

SurZone 40 45 52 59 67 76 77 79 10.2%

AdDuqmZone 1 3 6 12 14 16 18 21 54.5%

TotalAll Zones 559 616 682 735 803 889 902 951 7.9%

Source:OPWP,GBCMResearch


11/24



InvestmentRationale

Leadershipposition

in

Oman

Currently, SMN Power Holding is the largest power company in terms of installed electricity capacity and

generated output in Oman. Overall installed capacity of the holding company stands at about 1,343 MW,

comprisingofSMNBarkawiththecapacityof678MWandRusailPowerwithacapacityof665MW,formingc.

35%ofOmanstotal installedelectricityMIScapacity.Whilethe120,000m3/daywatercapacityofSMNBarka

formsabout20%ofthewaterdemandintheMainSupplyZone.Thepresenceofhighercapacityisbelievedto

provideeconomiesofscaleinthelongerrun,whichwebelievewouldapositiveone.

Asofnow,boththeprojectcompaniesofSMNPowerHoldingoperateunderhigherefficiency,whichiscritical

for the steady revenue growth. With regards to SMN Barka, the reliability factor stands at 98.8% and the

availabilityforpowerisat92.7%levels(end2010),whilethewaterreliabilityandavailabilityisabout90.3%and

84.3%respectively.InthecaseofRusailPower,thereliabilityisat97.7%andavailabilityisat90.8%(end2010).

Robustshareholdersupport

The presence of strong shareholder strength for SMN Power Holding in the form of International PowerGDF

Suez,parentofKahrabel,whichisoneoftheleadersinglobalindependentpowergenerationwith72,360MW

(gross)42,225MW(net) inoperationsacrosstheworld.Added,Kahrabel/InternationalPowerarethe largest

private power and water producers in Oman with the equity participation in Sohar IWPP, Al Rusail, Barka 2

IWPP,AlKamil,AlSuwaidi(underconstruction)andAlBatinah(underconstruction).SMNalsohasthebackupof

Mubadala,theregionalleaderinthePowersectorandtheOmaniestablishmentNationalTradingCo.

Kahrabelisexpectedtomaintainabout22.75%ofequityineachoftheprojectcompaniesuntilNov2013which

come under the PFA. The major shareholders have developed a wider knowledge of the sector through the

implementationofvariousindependentpowerandwaterplantsacrosstheglobe,whichwebelievewouldgive

theholdingcompanyexpertiseintheeffectiveimplementationandefficientoperationofboththeplants.

MajorPlantCapacitiesinMIS

PlantOwner

Plant

Status

Plant

Type

Capacity

Developer

Contract

Expiry

RusailPower Operational OCGTNaturalgasfired 666MW Kahrabel 2022

UnitedPower Operational OCGTNaturalgasfired 280MWSEI(Divestedto

MENAIF)2020

AlKamilPower Operational OCGTNaturalgasfired 285MW Inter.Power 2017

ACWAPower Operational CCGTNaturalgasfired 427MW/20MIGDAES(Divestedto

ACWA)2018

SoharPower Operational CCGTNaturalgasfired 585MW/33MIGD Kahrabel 2022

SMNBarkaPower Operational CCGTNaturalgasfired 678MW/26.4MIGD Kahrabel 2024

AlBatinahPower Construction CCGTNaturalgasfired 744MW Kahrabel 2028

AlSuwadiPower Construction CCGTNaturalgasfired 744MW Kahrabel 2028

Source:OPWP,IPOProspectus,GBCMResearch


12/24



Revenuevisibilityremainsstrong

As per the PPA, the revenue of the company is fixed through the Power and water Purchase agreement

(PWPA)withthesingleofftaker,OPWP. Intermsofoperatingcosts,thefuel(naturalgas) isthemajorone

which is chargeable to OPWP on an actual usage basis. We believe that the other costs especially the

operations and maintenance charges, general and admin costs, depreciation, finance and tax rate remain

mostlypredetermined forthe projectcompanies.Owing to this,we believethatthecompanyhasastrong

revenuevisibilityprovidingstableandreliablecashflowgenerationovertheprojectperiod,whichprovides

comforttotheinvestors.

Overalloutputoftheinstalledcapacitiesoftheprojectcompanieswouldbecontractedthroughasinglelong

termPWPA

each.

The

agreement

on

the

off

take

gives

low

risk

to

price

and

volume

with

the

revenue

directly

linkedtotheavailabilityoftheplantwiththetariffsbeingfixedduringPPA.Thesamewouldbevalidtillthe

expiry of the PWPA period for Rusail Power which is at March 2022 and for SMN Barka the same is at

November 2024. We also believe that the total electricity and desalinated water demand is anticipated to

growonastablephaseoverthecomingyearsdrivenbyeconomicgrowth,developmentofnewindustrialand

tourismprojects.

Securedoperationalandmaintenancecosts

The

project

companies

(RPC

and

SMNPBC)

has

secured

long

term

operation

and

maintenance

contract

towards the generation of electricity and production of water for supply to OPWP from Suez Tractebel

Operations and Maintenance LLC (STOMO). This would ensure efficient management of spare parts, tools,

materials and consumables required for the operation and maintenance (O&M) of the project companies.

STOMOisrequiredtooperateandmaintaintheSMNBarkaPlantuntil31st

Mar2024,whiletheagreementto

operateandmaintaintheRPCPlantistill31st

Mar2022.WebelievethepresenceofsecuredO&Magreement

gives comfort to the investorstowards the efficientrunningof the plantoperations,which iscritical inthe

longrunofpowerplant.Added,this isexpectedto lowertheoperationalriskoftheprojects intheformof

anyunexpectedincreaseinoperatingandmaintenancecosts.

CommittedGassupplyagreements

BoththeprojectcompaniesofSMNPowerHoldingusenaturalgasastheprimaryfueltobothoftheplants.

Thecompaniesgetacommittedsupplyofgas(subsidizedpriceatUSD1.5perMMBTU)overtheperiodofthe

PWPA based on the longer term contracts (Natural gas sales agreement NGSA) entered by both the

companieswiththeMinistryofOilandGasofOman.However,thecompaniesusedtohaveastrategicback

upoffueloil inventorytocoveruptothreedaysofoperations inemergency.Added,asperthePWPAthe

projectcompaniesdoesnotcarrythe fuelpriceriskwiththe incremental fuelcostsbeingpassedontothe

OPWPtillthePWPAperiod,whichwouldkeeptheoperationalcostsincontrollablelimits.


13/24



Hedgingmechanismtoprotectagainstchangesininterestrates

The project companies (RPCandSMNBarka) has its interest rate set based on 6 months LIBOR (London

Interbank offer rate) and the interest rate volatility is hedged by interest rate swaps as per the hedging

policyofthecompany.Aspartofitsinteresthedging,boththeprojectcompanieshavehedgedat95%levels

currently(increasedfrom80%to95%levelsinMarch2009)untilMarch2013,whichalsofulfilsthefacilities

agreements.

AsfarasRPC isconcerned,theprojectcompanyhasentered intoan interestrateswapagreement inNov

2008 increasingthehedgedamountto95%from80%forfouryearstillMar2013atafixedrateof3.30%

per annum. While SMNBPC has also entered into new hedging agreement increasing the amount hedged

from80%

to

95%

of

the

term

loan

for

the

period

until

Mar

2013

at

a

fixed

rate

of

3.36%

per

annum.

This

wouldinturn improvethestability incashflowstoshareholders intheformofdividends.Onbackofthis,

webelievethedividendoutflowtotheshareholderswouldnothavemajorimpactduetofinancialcoststill

Mar2013.


14/24



RisksandConcerns

EPCrelatedClaims

Duringlatelastyear,SMNBarkahasreachedanagreementwithitsEPCpartner,Doosantowardsthedelay

liquidatedclaimsforfailuretoachievethescheduledEarlyPowerandCommercialOperationDates.Bothof

themhavereachedanagreement(inprinciple)forfinalsettlementwiththebasisthatDoosanwouldpayto

SMN Barka about USD 27 million in respect of delay liquidated damages under the EPC contract and has

agreed to relinquish all costs claims to an extent of USD 38 million. As of now quoting prospectus, SMN

BarkaisalsoassistingDoosanstowardsobtainingadditionalmonetaryrelieffromOPWP.Themanagement

ofthecompanybelievesthisclaimnottohaveanynegativefinancialimpactgoingforward.

OPWPrelatedClaims

AsaresultofdelaysinachievingtheCommercialOperationsdatesoftheBarkaIIProject,SMNBarkafacesa

claim by the OPWP under the PWPA. OPWP claims liquidated damages to an extent of USD 19.3 million.

AlthoughthecompanybelievesthatOPWPmaynotwaivetheintegralityofclaimswithrespecttoliquidated

damages,theyareoptimisticthatadditionalrelieffromOPWPmaybeobtained.Nevertheless,thecompany

is also confident that it will be made whole for the full amount because any amount at which a final

settlementshallbereachedwithOPWPshouldberecoveredbytheSMNBarkathroughabacktobackclaim

againstDoosan.ThesamewouldhaveaneutralimpactonSMNPowerfinancials.

MinistryofOilandGasrelatedClaims

SMN Barka also has a claim arising under the SMN Barka NGSA which is towards the failure to meet the

scheduledfirstgasdeliverydatewhichresulted inadelaytotheProjectofabout61days.Thetotalclaim

amountstoUSD8.47million,aswellasrelatedcostsofaboutUSD6.82million.SMNBarkaisconfidentthat

thesamewouldbemadecompletelyforthefullamountoftheclaimsbecauseanyamountwhichcannotbe

recoveredfromMOGshouldcorrespondtothedelaybyDoosan.

RPC relativelyoldplant

OneoftheprojectcompaniesofSMNPowerHolding isRusailPowerwhichwebelieve isrelativelyanold

plantwiththegasturbinesinstalledinfourphasesbetween1984and2000.Thisfacilitywasboughtbythe

company in 2006 as part of Government privatization process. Added, the company has spent significant

initialexpendituretowardsincreasingtheperformanceoftheplant.In2010,RPChasperformedatechnical

studytoassessthelifespanofthreetransformersinRPCandhasmadeprovisionstoanextentofRO1.34

million, over the remaining period of PPA period, from 2010 to March 2022. We believe that any further

expensestowardstheRPCcouldimpactthecashflowoftheprojectcompanymovingforward.


15/24



ConcernsonPostPPAvaluation

UnlockingValuebeyondPPA

TheoperatingcashflowsoftheprojectcompanyhavebeenestimatedwiththecertaintyforthePPAperiod

whichisNov2024forSMNBarkaandMar2022forRPC.TheprojectionsforpostPWPAperiodcashflowshave

been provided by IPA, an independent consultant (Source: Prospectus). Further quoting the prospectus, the

estimated cash flows post PWPA involve assumptions including demand for power and water, available

capacities,alternativesources,tariffs,availabilityofgas,pricingofgas,offtakearrangementsetc(18different

scenarios). The offer has been valued based on the assumptions and estimates for cash flows given by the

independent consultant. As per the prospectus, the projections have been incorporated for the expected

capex

and

dividend

distributions.

We

perceive

the

concern

of

the

post

PPA

valuation

in

terms

of

various

dynamicmarketfactorsprevailingduringthatperiod,whichmightimpacttheprojectvalueunlockingbeyond

PPAperiod.

Valuation postPPA

Asper IPA+WaterEconomics report,there would beasignificantvalue fromthe Plantspost PWPAperiod

either by extending the offtake agreements under the single buyer approach or by operating in liberalized

marketsforpoweranddesalinatedwater.Aspertheprospectusquotingthe independentadvisors,thebase

caseaverageannual EBITDA projectedby IPA for RPC from the expiry of the PPA periodto 2039 is RO 11.8

millionandforSMNBarkafromtheexpiryofthePWPAperiodto2045isRO39.8million.Webelievethatthe

concernremainsintheformofseveralalteringissuesduringthepostPWPAperiodintheformofavailability

of Gas, pricing of Gas for the project beyond PPA, inflationary scenarios, adverse refurbishment costs etc,

whichcouldimpactthevaluationsofthecompany.


16/24



ValuationsandRecommendation

DividendDiscountModel

As of now, the project companies have not distributed any dividends since the completion under the

financingagreements,whichwereachievedonAug2011.Asperthecompany,thefirst interimdividend is

estimated to be paid by end of Nov 2011, representing a dividend per share of RO 0.193. The second

dividend of RO 0.250 baiza (expected to be announced inMar 2012) would be paid for the 2011E retaining

earningsbasedonthecashflowpositionattheendofMar2012.Postthis,thecompanyexpectstopaythe

dividendstwiceinayear,oncefortheperiodendedSeptemberandoncefortheperiodendedMarch.

Withthe

presence

of

relative

stability

in

cash

flow

generation

(dividend

outflow)

and

the

prevailing

off

take

agreementwiththesinglebuyer,webelievethattheprojectionsofthecashdividendcanbetheaptonefor

thevaluations.WehaveusedtheDividenddiscountmodel(DDM)forourvaluationbasedontwodifferent

scenarioswiththebasescenarioconsideringthedividendssimilartotheoneestimated intheprospectus.

Ontheotherhand,wehavearrivedataprobablescenariowherewehavereducedourdividendpayoutto

about90%levelsbeyond2012E(Pleasefindthedetailedvaluationsheetinthenexttwopages).

CashSweepfacilitymightimpactdividends

Asper

the

facilities

agreement,

the

project

company

RPC

would

have

its

cash

sweep

prepayment

of

starting

fromthe30Sep2016until31Mar2022(endoftermloan).FortheSMNBarka,cashsweepprepaymentof

the Loan will apply starting from the 30 Sep 2018 until the end of the term of the Loan 31 Mar 2024.

However, if the project companies are able to refinance the loan before the commencement of the cash

sweep,thedividenddistributiontotheinvestorswouldbepossiblesubjecttofreecashavailability.


17/24



DividendDiscountModel(DDM)ValuationMethodology

BaseCaseScenario

AssumedthedividendpayouttoremainatthesamelevelswhichismentionedintheprospectusDDMModel BaseCase FY2011E* FY2012E* FY2013E* FY2014E* FY2015E*

NetProfitRO000's 3,775 6,245 7,256 7,637 8,518

Payout(%) 234.3% 121.5% 104.6% 99.3% 89.1%

DPSRO 0.443 0.380 0.380 0.380 0.380

DivYieldonOfferPrice 12.6% 10.8% 10.8% 10.8% 10.8%

ExpectedDividends(RO000's) 8,844 7,586 7,586 7,586 7,586

NPVofExpectedDividends 8,399 6,523 5,907 5,348 4,843

Assumptions

CostofEquity 10.4%

TerminalGrowthRate 0.00%

NPV(TerminalValue)RO000's 46,386

Fairvaluepershare(RO) 3.877

OfferPrice(RO) 3.520

Upside(%) 10.1%

Source:GBCMResearchEstimates;*ConsideredtheMarchdividendsasthepreviousyearpayment

*DividendforMarchisexpectedtobepaidfrompreviousyearretainingearningsbasedoncashflowpositionattheendoffirstquarter

InthebasecasescenarioofourDDMvaluationmodel,wehaveassumedadividendpayouttoremainatthe

samelevelsmentionedintheIPOprospectusfrom2012Eto2015E.Onthis,wehavearrivedatafairvalueof

RO3.877.WehaveassumedCostofEquityofabout10.4%levelsandalsoestimatedzeroterminalgrowth.In

our valuation model,we have used the BETA of 0.68 (Source:Bloomberg) taken based on the comparable listed

playerACWAPowerBarka.

SensitivityAnalysis(FairValueRangesbetweenRO3.692toRO3.945)

CostofEquity

TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%

0.0%

4.038

3.945 3.877 3.692 3.541

3.4030.5% 4.168 4.067 3.994 3.794 3.633 3.485

1.0% 4.312 4.203 4.123 3.907 3.733 3.575

1.5% 4.474 4.354 4.267 4.032 3.844 3.674

SensitivityAnalysis(%ChangefromOfferPrice)

CostofEquity

TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%

0.0% 14.7% 12.1% 10.1% 4.9% 0.6% 3.3%

0.5% 18.4% 15.5% 13.5% 7.8% 3.2% 1.0%

1.0% 22.5% 19.4% 17.1% 11.0% 6.1% 1.6%

1.5% 27.1% 23.7% 21.2% 14.5% 9.2% 4.4%

Source:GBCM

Research

Estimates


18/24



ProbableScenario

Wehaveassumedthedividendpayouttoremainatabout90%levelsstarting2012Etill2015E,whichislowerascomparedtothecompanyprojectionsgivenintheprospectus.

DDMModelProbableScenario FY2011E* FY2012E* FY2013E* FY2014E* FY2015E*

NetProfitRO000's 3,775 6,245 7,256 7,637 8,518

Payout(%) 234.3% 90.0% 90.0% 90.0% 90.0%

DPSRO 0.443 0.282 0.327 0.344 0.384

DivYieldonOfferPrice 12.6% 8.0% 9.3% 9.8% 10.9%

ExpectedDividends(RO000's) 8,844 5,621 6,530 6,873 7,666

NPVofExpectedDividends 8,399 4,833 5,084 4,846 4,894

Assumptions

CostofEquity 10.4%

TerminalGrowthRate 0.00%

NPV(TerminalValue)RO000's 46,874

Fairvaluepershare(RO) 3.753

OfferPrice(RO) 3.520

Upside(%) 6.6%

Source:GBCMResearchEstimates;*ConsideredtheMarchdividendsasthepreviousyearpayment

*DividendforMarchisexpectedtobepaidfrompreviousyearretainingearningsbasedoncashflowpositionattheendoffirstquarter

In

our

probable

case

scenario

of

DDM

valuation

model,

we

have

assumed

a

dividend

payout

of

90%

from

2012E

to2015E.Onthis,wehavearrivedatafairvalueofRO3.753.Wehaveassumedcostofequityof10.4%anda

terminalgrowthrateofzero. Inourvaluationmodel,we haveusedtheBETAof0.68 (Source:Bloomberg) taken

basedonthecomparablelistedplayerACWAPowerBarka.

SensitivityAnalysis(FairValueRangesbetweenRO3.567toRO3.821)

CostofEquity

TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%

0.0% 3.914 3.821 3.753 3.567 3.417 3.279

0.5% 4.045 3.945 3.871 3.671 3.509 3.362

1.0% 4.191 4.081 4.002 3.785 3.611 3.453

1.5%

4.354

4.234 4.147 3.911 3.723

3.553

SensitivityAnalysis(%ChangefromOfferPrice)

CostofEquity

TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%

0.0% 11.2% 8.5% 6.6% 1.3% 2.9% 6.9%

0.5% 14.9% 12.1% 10.0% 4.3% 0.3% 4.5%

1.0% 19.1% 16.0% 13.7% 7.5% 2.6% 1.9%

1.5% 23.7% 20.3% 17.8% 11.1% 5.8% 0.9%Source:GBCMResearchEstimates


19/24



CompanyComparableValuations

Company P/E P/BVCash

DividendDividendPayout DividendYield

FY10 FY11E FY10 FY11E FY10 FY11E FY10 FY11E FY10 FY11E

SMNPowerHolding* 18.6 2.1 0.443 234.3% 12.6%

AESBarka 5.3 5.3 1.4 1.3 0.095 0.125 73.5% 95.8% 6.9% 9.1%

AlKamilPower 6.3 6.1 0.9 0.9 0.080 0.160 31.1% 60.4% 4.9% 9.9%

UnitedPower 7.7 8.2 0.6 0.6 0.200 0.120 151.6% 96.6% 19.6% 11.8%

SoharPower 10.0 9.5 1.5 1.5 0.160 0.160 97.5% 93.1% 9.7% 9.7%

Source:CompanyReports,GBCMResearchEstimates;Closingpriceupdatedasof25Sep2011

*ForSMNPower ConsideredtheMarchdividendsasthepreviousyearpayment;*DividendforMarch isexpectedtobepaidfrompreviousyear

retainingearningsbasedoncashflowpositionattheendoffirstquarter

*SMNPower FY2011EarningsincludesoneoffexpensesformingaboutRO0.124/share;NormalizedEPSfor2011EworksouttobeRO0.313,Onthe

basis,thecompanytradesatPEof11.2X,whichisstillexpensivetothecomparables.

On a PE (FY11E EPS) and PBV (FY11E BV) basis, the SMN Power Holding IPO issue looks pretty expensive ascomparedtothelistedpeergroup.Thetotalprofitofthecompanyisestimatedtoremainlowerfor2011Eand

2012Eonthebackofoneoffanticipatedexpenses(NonrecurringitemspersharestandsatboutRO0.124bz).EPSis

estimated

to

normalize

beyond

2012.

The

existing

listed

comparable

players

clearly

remain

cheaper

at

the

currenttradinglevels.

EstimatedaverageOmanUtilitiessectordividendyieldfor2011Eworksoutbeabout10%levelsascomparedtothe estimated dividend yield of 12.6% for SMN Power Holding Co. We believe that the issue commands a

premiumowingtothepresenceofhigherdividendspostIPOperiod.

DividendPayoutratioofSMNPowerHoldingremainshigherduringtheinitialyearswiththecompanypayingoutfromitspreviousyearretainedearnings.Theriskremainsintheformofanyunexpectedcostsinthedueclaims

and the higher maintenance costs / unscheduled outages which could lead to decline in earnings moving

forward,thereby

impacting

the

dividend

payout

to

the

new

shareholders.


20/24



.

Outlook

Steady

cash

flow,

Dividend

Play

OverallthestableindustryperformancealongwiththesteadycashflowgenerationintheUtilitiessectormakes

theissueanattractivedividendplay.WeratetheSMNPowerHoldingIPOasanaverageissueinourratingsale

with the fair value factoring for higher dividend payouts. Based on our Valuation methodologies (Dividend

DiscountModel Basescenario),wehavearrivedatourfairvalueofRO3.877forSMNPower.

We recommend the low risk appetite investors to subscribe for the issue with the medium to long term

horizon.Wealsobelievethattheissuewouldbeabestfitforlongonlyfundsandinstitutions.Weexpectthe

issuetoseelimitedupsideonlisting,howeverconsideringthedividendyieldwerecommendtosubscribefor

theissue.

Onarelativevaluationbasis,theexistinglistedcomparableplayersremaincheaperthanSMNPower.However,

wemaynotabletoaccumulatethesecounters inthemarketbecauseofthe illiquidnature inthesecondary

market.Hencewerecommendtheinvestorslookingatadividendyieldstorymaycapitalizethroughsubscribing

for the issue.Wealsofeel that the stockmightfind supportwith thehigherdividendyieldprotecting the

downsidefromtheofferprice.


21/24



IncomeStatementHighlights

FiguresinRO000s 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Revenue Group 24,969 30,814 36,310 78,322 79,342 83,026 85,335 87,700 90,201

Operatingcosts (21,869) (25,764) (29,868) (49,525) (52,531) (54,314) (56,572) (59,041) (61,847)

Grossprofit 3,100 5,050 6,442 28,797 26,811 28,712 28,763 28,659 28,354

G&Aexpenses (686) (580) (547) (1,142) (8,257) (8,278) (8,295) (8,313) (8,333)

OperatingProfit(EBIT) 2,414 4,095 4,886 19,771 18,554 20,434 20,468 20,346 20,021

Financecharges (3,286) (4,256) (8,341) (15,511) (13,594) (13,044) (12,190) (11,633) (10,303)

Profit(loss)beforetax

andextra.items(872) (161) (3,455) 4,260 4,960 7,390 8,278 8,713 9,718

Profit(loss)beforetax (819) 139 15,865 4,197 4,960 7,390 8,278 8,713 9,718

Netprofit(loss) (921) (31) 13,741 1,189 3,775 6,245 7,256 7,637 8,518

Source:CompanyProspectus,GBCMResearch

CashFlow

Highlights


Cashfromoperations 8,225 (6,663) 42,342 22,640 17,560 33,422 32,088 32,209 32,140

Provisionforre.costs 4,740

Financechargespaid (3,133) (3,978) (7,074) (15,244)

Incometaxpaid (147) (65) (148) (159) (206) (131) (139) (134) (133)

Otherincomes 300 5

Netcashfromoperations 9,685 (10,406) 35,125 7,237 17,663 33,503 31,973 32,080 32,004

Netcashfrominvesting (145,650) (68,903) (46,737) 3,989 335 (263) (388) (308) (31)

Repaymentoftermloans (11,282) (11,966) (12,591) (13,119) (13,566)

Interestpaid (13,742) (12,737) (12,000) (11,516) (10,083)

Proposeddividends (3,845) (8,784) (7,586) (7,586) (7,586)

Shareholderloans (9,957)

Netcashfromfinancing 138,599 77,863 16,961 11,825 (28,413) (43,444) (32,177) (32,221) (31,235)

Netchangeincash 2,634 (1,446) 5,349 23,051 (10,415) (10,204) (592) (449) 738

Cashatthebeginning 2,634 1,188 6,537 29,588 19,173 8,969 8,377 7,928

Cashattheendoftheyear 2,634 1,188 6,537 29,588 19,173 8,969 8,377 7,928 8,666



22/24



BalanceSheetHighlights


Financeleasereceivables 48,243 46,290 43,134 40,305 40,357 37,333 34,088 30,636 26,957

Property,plantandequip 114,934 186,910 231,448 223,523 215,514 207,500 199,479 191,450 183,411

Deferredtaxasset 92 4,657

Others 1,406 1,551 1,445 1,084 975 865 756 646

InvestmentinJV 250 250 250 250 250

Goodwill 15,889 15,739 15,739 15,739 15,739 15,739 15,739 15,739 15,739

Totalnon

current

assets

179,158

255,002 291,872 281,012 272,944 261,797

250,421

238,831 227,003

Inventories 2,673 2,660 2,794 2,689 2,689 2,689 2,689 2,689 2,689

Tradeandotherreceivables 934 8,522 42,320 40,243 42,604 7,508 8,009 8,425 8,583

Financeleasereceivables 3,778 4,120 6,389 5,249

Cashandbank 2,634 1,262 6,537 29,588 19,172 8,969 8,376 7,928 8,665

Totalcurrentassets 10,019 16,564 58,040 77,769 64,465 19,167 19,073 19,042 19,938

Totalassets 189,177 271,566 349,912 358,781 337,409 280,964 269,494 257,873 246,941

Equityandreserves

Sharecapital 500 500 500 500 19,964 19,964 19,964 19,964 19,964

Legal

reserve

543 1,168

1,893

2,657 3,509Retainedearnings (921) (952) 12,622 13,811 13,668 10,504 9,448 8,735 8,816

Shareholdersfunds (421) (452) 13,289 14,478 34,175 31,636 31,305 31,356 32,289

Hedgingdeficit (3,322) (37,742) (17,189) (23,827) (23,827) (23,827) (23,827) (23,827) (23,827)

Totalequity (3,743) (38,194) (3,900) (9,349) 10,348 7,809 7,478 7,529 8,462

Liabilities

Longtermloan 173,489 246,032 228,701 240,117 240,578 229,055 216,885 204,163 190,969

Shareholderloans 9,957

HedgingInstruments 3,679 42,667 19,412 27,080 27,080 27,080 27,080 27,080 27,080

Total

non

current

liabilities

179,137

292,306 252,158 273,338 285,593 265,494

254,394

242,795 230,849Cur.portionlongtermloan 5,247 40,080 11,282

Tradeandotherpayables 13,783 12,207 61,574 53,788 41,468 7,661 7,622 7,549 7,630

Shareholderssub.loan 29,722

Totalcurrentliabilities 13,783 17,454 101,654 94,792 41,468 7,661 7,622 7,549 7,630

Totalliabilities 192,920 309,760 353,812 368,130 327,061 273,155 262,016 250,344 238,479

Totalequityandliabilities 189,177 271,566 349,912 358,781 337,409 280,964 269,494 257,873 246,941



23/24



RatioAnalysis

Keyratios 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Profitabilityratios

GrossProfitMargin 12.4% 16.4% 17.7% 36.8% 33.8% 34.6% 33.7% 32.7% 31.4%

EBITMargin 9.7% 13.3% 13.5% 25.2% 23.4% 24.6% 24.0% 23.2% 22.2%

PBTMargin 3.5% 0.5% 9.5% 5.4% 6.3% 8.9% 9.7% 9.9% 10.8%

NetProfitMargin 3.7% 0.1% 37.8% 1.5% 4.8% 7.5% 8.5% 8.7% 9.4%

ReturnonEquity 218.8% 6.9% 103.4% 8.2% 11.0% 19.7% 23.2% 24.4% 26.4%

ReturnonAssets 0.5% 0.0% 3.9% 0.3% 1.1% 2.2% 2.7% 3.0% 3.4%

PerShare

Ratio

EPS (1.842) (0.062) 27.482 2.378 0.189 0.313 0.363 0.383 0.427

BookValuepershare (0.842) (0.904) 26.578 28.956 1.712 1.585 1.568 1.571 1.617

Dividendpershare 0.443 0.380 0.380 0.380 0.380

Investmentratios**

Price/Earnings (1.91) (56.77) 0.13 1.48 18.62 11.25 9.68 9.20 8.25

Price/Bookvalue (4.18) (3.89) 0.13 0.12 2.06 2.22 2.24 2.24 2.18

Dividendyield(%) 12.6% 10.8% 10.8% 10.8% 10.8%

DividendPayoutRatio 0.0% 0.0% 0.0% 0.0% 234.3% 121.5% 104.6% 99.3% 89.1%

Activity&

Efficiency

ratios

Assetturnover 0.13 0.11 0.10 0.22 0.24 0.30 0.32 0.34 0.37

Inventoryturnoverratio 9.34 11.58 13.00 29.13 29.51 30.88 31.73 32.61 33.54

DaysofInventory 44.61 37.68 34.14 19.82 18.68 18.07 17.35 16.62 15.87

DaysReceivables 13.65 100.95 425.41 187.54 195.99 33.01 34.26 35.06 34.73

DaysPayables 230.04 172.94 752.46 396.42 288.13 51.48 49.18 46.67 45.03

CashConversioncycle (171.78) (34.31) (292.90) (189.06) (73.45) (0.41) 2.43 5.02 5.57

Liquidityratio

Quickratio 0.53 0.80 0.54 0.79 1.49 2.15 2.15 2.17 2.26

Currentratio 0.73 0.95 0.57 0.82 1.55 2.50 2.50 2.52 2.61

Leverageratio

Debt/Equityratio (412.1) (555.9) 20.2 17.4 7.0 7.2 6.9 6.5 5.9

Source:CompanyProspectus,GBCMResearchEstimates;CalculatedonOfferpriceofRO3.520


24/24



StockRating

Methodology:

Buy Upsidemorethan20%

Accumulate Upsidebetween10%and20%

Neutral Upsideordownsidelessthan10%

Reduce Downsidebetween10%and20%

Sell Downsidemorethan20%

NotRated Stocksnotinregularresearchcoverage

|InstitutionalBrokerage TalalAlBalushi,(+968)24790614 560|InstitutionalSales HunainaBanatwala,(+968)24790614 559|

Disclaimer:Thisdocumenthasbeenpreparedand issuedbyGulfBaaderCapitalMarketsSAOC ("theCompany")on thebasisofpublicly

availableinformation,internallydevelopeddataandothersourcesbelievedtobereliable. Whileallcarehasbeentakentoensurethatthe

factsstatedareaccurateand theopinionsgivenare reasonable,neitherGulfBaaderCapitalMarketsSAOCnoranyemployeeshallbe in

anywayresponsibleforthecontentsofthisreport.TheCompanymayhaveapositionandmayperformbuying/selling foritselforitsclientsin

anysecuritymentionedinthisreport. Thisisnotanoffertobuyorselltheinvestmentsreferredtherein.

Documents

GBCM Research SMN Power Note