Regency Petroleum Limited | IPO Analysis

Valuation and Recommendation

To estimate the fair value of Regency Petroleum, we used a Justified P/E valuation approach. Key assumptions included a cost of equity of 24.79% and a growth rate of 18.30%, which resulted in a justified P/E of 18.22x. The estimated growth rate is relatively high but is appropriate given where RPL is in its life cycle, with rapid expansion expected over at least the medium term. This growth rate was estimated considering a number of fundamental ratios, such as net profit margin, debt-to-equity ratio (leverage), total asset turnover ratio, etc. We also forecasted an earnings per share of $0.09 for FY2023, which resulted in a fair value estimate of $1.56. RPL is listing at a P/E multiple of 20.25x on a trailing twelve-month basis, which is in line with the Junior Market Average (excluding outliers) as at November 18, 2022 of 20.54x. However, due to the tax break that will be granted once listed, the Company’s profit before tax will be equal to its net profit in the immediate future, therefore, the TTM price-to-profit (P/PBT) before tax ratio is more relevant for comparison purposes. The Company is being listed at a TTM P/PBT ratio of 15.42x which is well below the Junior Market P/E average, making the offer relatively attractive. Based on our fair value estimate, we believe this offer provides a suitable margin of safety for investors. As such, given the potential growth from the initiatives highlighted above and the margin of safety from a relative valuation standpoint, balanced with the risks highlighted, we believe the offer is attractively priced and we recommend investors PARTICIPATE in this offer

OFFER SUMMARY 

Issuer Regency Petroleum Co. Limited
Close Price J$5.61
Offer Initial Public Offer of up to 287,157,354 Ordinary Shares Non-Reserved Shares: 115,196,354 Reserved Shares: 171,961,000 RPL Employees & Key Strategic Partners: 55,500,000 GK Investments Loan Conversion: 100,000,000 Associates Loan Conversion: 16,461,000
Lead Broker GK Capital Management Limited
Subscription Price I. Non-Reserved Share Applicants: J$1.00 per share, and
II. Reserved Share Applicants: J$1.00 per share
Minimum Subscription Each Application for Shares must be for a minimum of 1,000 Shares, with incremental shares of 100 thereafter
Use of Proceeds I. To liquidate the total existing indebtedness of the Company (~J$160m)
II. To complete the construction of the Paradise Pen service station in Westmoreland and expand the LPG business (~J$75m)
III. Towards general corporate expenses and capital expenditure, including the purchase of additional cylinders to satisfy growing demand (~J$30m) IV. To pay the expenses of the Invitation (~ J$22 million)
Dividend Policy If the company is admitted to the Junior Stock Exchange, the directors intend to pursue a liberal dividend policy of up to 30% of net profits available for distribution, which will be subject to the company’s reinvestment needs from time to time

As at November 25, 2022

Regency Petroleum Limited | IPO Analysis

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