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Stock Commentary

Citicore Energy REIT final notes heading into the last hours of the offer period

Merkado Barkada
Citicore Energy REIT final notes heading into the last hours of the offer period
With CREIT’s offer period ending today at noon, that’s about as best as I can sketch it out.
Merkado Barkada

With the offer period ending at noon today, and with news coming out that the institutional tranche of the offer has been fully taken-up (basically, demand will probably exceed supply, for that tranche), I wanted to dig a little deeper into Citicore Energy REIT's [CREIT 2.55 pre-IPO] plan that we talked about on Friday.

As you remember, the company plans to expand from its initial post-IPO capacity of 145 megawatts (MW), to up to 780 MW by the end of 2024.

Just to set the scene, CREIT’s parent company and sponsor, Citicore Renewable Energy Corp (CREC), will reinvest the proceeds of the CREIT IPO into the development of a portfolio of renewable energy projects that it hopes could amount to over 1,500 MW of capacity over the next 5 years.

This portfolio is CREC’s infusion pipeline, as it is from this collection of projects that CREC will transfer operating projects to CREIT by way of sale (through CREIT taking on debt) or swap (through CREIT providing CREC with shares in exchange for property).

While we can’t know the terms of the potential debt, or the prices that CREIT might pay in any sale or swap, we can use CREIT’s existing financials to, in a very very rough way, estimate how its potential revenues might change as all this capacity is (hopefully) transferred into CREIT through to the end of 2024.

Welcome to Disclaimertown: Big disclaimer here; everything in this post deals with things that COULD happen. Nothing here is guaranteed, and all of CREC’s plans for CREIT involve risks, uncertainties, and assumptions that could make what actually happens very different from the current plan. You have to understand this before going forward. In many ways, everything here should be considered a best-case scenario, and all the news about CREC and CREIT should be evaluated against how it might impact this plan. Need an example? CREIT planned to IPO and raise this money in December, but the PSE couldn’t make space in its IPO calendar for the company until mid-February. That’s almost a full quarter of slippage. 

The estimation tools: If CREIT’s estimated 2022 revenues are P1.355 billion on 145 MW of capacity, then that’s about P9.34 million in revenue per MW of generational capacity. That’s an ugly number, and a mouthful, but back-of-the-envelope time is not a time for beauty! To estimate the potential cost of the projects to be added, we can use the two properties that CREIT will add after the IPO as a placeholder; P2.55 billion to acquire P300.7 million of annual revenue gives us another ugly number: P8.48 million per P1 million of annual revenue. 

Projecting future revenues: If we use this weird “millions of revenue per MW of generational capacity” figure, we can apply that to CREC’s property infusion plan to very roughly chart how CREIT’s revenues might grow over time. This method is extremely rough, and subject to many limitations that we’ll talk about in the next section. By the end of 2022, CREIT plans (remember that “forward looking statements” talk above) to add 121 MW of capacity to its base of 145 MW of capacity, for a total of 266 MW of capacity. Multiplied by our ugly “millions of revenue per MW of generational capacity” number, we get a theoretical revenue generating potential of P2,484 million. By the end of 2023, after adding another 195 MW of capacity, CREIT’s theoretical revenue-generating potential would be P4,305 million. By the end of 2024 and after adding yet another 319 MW, CREIT plans to have 780 MW in its portfolio, with a rough revenue-generation potential of P7,285 million per year. Slapping that weird cost estimator on to that annual revenue, we get an estimated value of P50.2 billion for the properties/projects that CREIT would need to add to get to 780 MW of capacity. 

Limitations: While we can estimate the revenues that these new facilities will bring, we can’t easily (or accurately) estimate the expenses that CREIT might take on in order to obtain the assets, so it’s difficult to estimate the potential changes to CREIT’s distributable income, and therefore, its yield. If CREIT were to pay for the assets using debt (taken out against the properties that it already owns), the distributable yield would be net of those financing charges. If CREIT paid for the properties using newly-issued shares, the balance sheet wouldn’t take on any new liabilities, but the 2024 revenue-generation potential (and subsequent dividend) would need to be split between a greater number of shares. How many shares? I don’t know how to estimate that. 

Limitations(1): Even if we could know the price of the properties that CREC would transfer to CREIT ahead of time (and I’m positive that my P50.2 billion estimate isn’t that accurate), there’s no good way to estimate CREIT’s share price at the time of the anticipated transfers in 2022, 2023, or 2024, further limiting the accuracy of our potential per-share dividend estimations. Changes in interest rates might make debt more expensive and drive down CREIT’s underyling stock price, putting CREIT at a disadvantage in both debt and swap scenarios.

Even further in the future: If (and that’s a really huge if) CREC eventually transfers the entirety of its 1,500 MW of generation capacity that it plans to develop over the next five years, for a total of 1,645 MW (145 MW starting capacity, plus additional 1,500 MW), then CREIT could have a revenue-generating potential of approximately P15.3 billion per year. Again, that if (and all the other ifs) are doing an incredible amount of heavy lifting here. 

MB BOTTOM-LINE

With CREIT’s offer period ending today at noon, that’s about as best as I can sketch it out.

I think that if I had more resource at my disposal, I’d be able to run a few more of the variables to ground, and I’d be able to start building up a placeholder range of expenses that, when matched against he best-case scenario revenues, result in a range of potential yields through the years.

But I don’t have a great way of estimating the value of the properties that CREC plans to inject into CREIT.

As usual, none of this is meant to act as an endorsement of the IPO, or of the stock, but only to serve as a (frightening?) glimpse into the kinds of things that I end up doing when I read disclosures with a calculator.

The above math could contain errors or bad assumptions, so please if you found it interesting, attempt the analysis for yourself before taking any action.

I just wanted to show how CREC’s injection plans, as we’ve been told of them in terms of capacity, could impact CREIT’s revenues, where CREIT’s lease rates are based on electricity sales revenue figures that are, themselves, loosely bound by capacity. 

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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.

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