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INVESTMENT RESEARCH

INITIAL PUBLIC OFFER (IPO)

RESEARCH NOTE

Offer Opens: May 10, 2015

Offer Closes: June 8, 2015

Offer Price: Bzs 110 per share

Fair Value: Bzs 129 per share

IPO NOTE

May 2015

ANALYST Gaurav Ramaiya Asst. Vice President - Research Email: [email protected] Tel: (+968) 24822300 Ext. 348 Nandakumar Chenicheri Asst. Vice President - AMD Email: [email protected] Tel: (+968) 24822300 Ext. 353 Mable C. Pereira Asst. Vice President - Research Email: [email protected] Tel: (+968) 24822300 Ext. 342

PHOENIX POWER COMPANY SAOG (Under Transformation)

INVESTMENT CASE

ª Phoenix Power Company SAOG, owns and operates the Sur independent

power plant, the largest power plant at a single location in Oman with

contracted power capacity of 2,000 MW. The company started commercial

operations on 11 December 2014.

ª The company is backed by a strong and experienced group of promoters,

including Axia Power, Chubu Electric, Qatar Electricity and Water Company and

Multitech.

ª The company has a stable business model with predictable cash flows and

earnings as well as limited operating risk supported by a 15-year power and

water purchase agreement with Oman Power and Water Procurement

Company.

ª At its offer price, Phoenix Power offers a dividend yield of 7% for the next

twelve months, which is above the yields offered by comparable power

companies listed in Oman.

ª Valuation: We estimate a fair value of 129 baizas for Phoenix Power based on

a two-stage discounted cash flow valuation model that assumes a higher

discount rate for the company post PPA termination. Using dividend yield as a

yardstick, the stock can reach a target of 140 baizas per share (5.5% dividend

yield) on listing.

ª Risk Factors: Post the end of PPA with OPWP, revenue and earnings may be

significantly different from those during the PPA period. OPWP may renew its

off-take agreement at less favorable terms as all debt is repaid by 2029 or the

company may sell in the spot market, which is volatile driven by market forces.

Dispute with EPC contractor may result in an unfavorable outcome for Phoenix

Power; Increased costs or capital expenditure may not be recovered under PPA;

Inflation and adverse changes in foreign exchange rates and custom duty rates;

Dividend payout may be below expectation under adverse circumstances.

Above average dividend yield of around 7% at issue price for a relatively low risk business model makes it a good investment case. Power stocks in MSM currently trade at 5.5% yield as investors prefer defensive stocks in a low oil price scenario.

WEALTH MANAGEMENT

Recommendation

SUBSCRIBE

PHOENIX POWER

ISSUE PRICE (RO) : 0.110

FAIR VALUE (RO) : 0.129

OMAN

POWER SECTOR

F I N C O R P W E A L T H M A N A G E M E N T

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PHOENIX POWER CO. – IPO NOTE

Issuer Phoenix Power Company SAOG (Under Transformation)

Authorized share capital OMR 200,000,000 divided into 2,000,000,000 Shares with a nominal value of Bzs 100 per Share.

Issued and Paid up Capital OMR 146,260,146 divided into 1,462,601,460 Shares with a nominal value of Bzs 100 per Share.

Offered shares 511,910,511 Shares, representing 35% of total Issued and Paid-Up Share Capital.

Face value RO 0.100 per share

Offer price RO 0.110 per Offer Share (comprising a nominal value of Bzs 0.100, a premium of Bzs 8 and the Offer Expenses of Bzs 2 per Share).

Offer period and listing

Issue Opens on: May 10, 2015

Issue closes on: June 8, 2015

Approval of CMA of allotment: June 18, 2015

Refund process will start by June 21, 2015

Shares would be listed for trading on the Muscat Securities Market on June 22, 2015

Limit for the subscription under one application

Minimum Limit

Category I: 1,000 shares and in multiples of 100 shares thereafter.

Category II: 600,100 shares and in multiples of 100 thereafter

Maximum Limit

Category I: 600,000 shares

Category II: 51,191,000 Shares, representing 10% of the Offer.

Proposed allocation of shares

In case of over-subscription, the Offer of 511,910,511 Shares shall be split among the eligible investor groups, in the following portions: Category I Investors:

332,741,832 Shares, being 65% of the Offer, on a pro-rata basis.

Category II Investors:

179,168,679 Shares, being 35% of the Offer, on a pro-rata basis. A minimum number of Offer Shares may be distributed equally among subscribers, taking into consideration small subscribers and the remaining Offer Shares shall be allocated on a pro-rata basis. Any under subscription in any Category shall be carried to the other category.

Basis for under subscription

In case of shortfall in subscription and non-subscription by Electricity Holding Co. SAOC (EHC) under Project Founders Agreement (PFA), the promoters are committed to re-offer the unsubscribed shares after one year, for three consecutive years.

Eligibility Omani and non-Omani individuals and juristic persons. All GCC individuals and juristic persons are treated as Omani individuals and juristic persons.

Person prohibited from subscribing

The following applicants shall not be permitted to participate in the subscription: 1. Sole proprietorship establishments: The owners of sole proprietorship establishments may only

submit applications in their personal names. 2. Trust Accounts: Customers registered under trust accounts may only submit Applications in

their personal names. 3. Multiple applications for the subscription: An applicant may not submit more than one

Application. 4. Joint Applications (i.e. applications made in the name of more than one individual) including

applications made on behalf of legal heirs: These applications should only be made in their personal names.

All such applications by prohibited persons defined above will be rejected without contacting the applicant.

Financial Adviser & Issue manager Bank Muscat SAOG

Subscription Banks Bank Muscat, Bank Dhofar, National Bank of Oman, Oman Arab Bank, Bank Sohar, Ahli Bank


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COMPANY OVERVIEW

ª Phoenix Power owns and operates the largest single location natural gas-fired power plant at Sur having a contracted power capacity of 2,000 MW (representing 27.8% of the MIS contracted capacity of 7,197 MW, as of 2014). The company generates revenue pursuant to a 15-year power purchase agreement (PPA) with Oman Power and Water Procurement Company SAOC (OPWP). Phoenix Power has an operation and maintenance agreement with Phoenix Operation and Maintenance Company LLC (POMCo), which is managed by the same shareholders as Phoenix Power.

Phoenix Power Date of Establishment June 25, 2011 Full Commercial Operation Date December 11, 2014 Contract Type BOO PPA Expiry March 31, 2029 Contracted Power Capacity 2,000 MW Location Sur Source: IPO Prospectus

SHAREHOLDING PATTERN

Shareholding Pattern Pre & Post-IPO of Phoenix Power

Pre-IPO Post-IPO Axia Power 50.00% 32.50%

Chubu Electric 30.00% 19.50% QEWC 15.00% 9.75%

Multitech 5.00% 3.25% Public - 35.00%

Total 100.00% 100.00% Source: IPO Prospectus

ª Axia Power, owned by Marubeni, is the largest shareholder and currently owns 50% of Phoenix Power. Marubeni is a leading Japanese trading house with active participation in the power industry and operates I(W)PP projects around the world including in Oman, Saudi Arabia, Qatar. Chubu Electric, the second largest shareholder is owned by CEPCo which is engaged in owning power plants, transmission and distribution systems. Other promoters are Qatar Electricity and Water and Multitech, a part of Suhail Bahwan Group. All the promoters together are offering 35% to the public.


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POWER SECTOR OVERVIEW

ª The electricity and related water sector in Oman is divided into three regional systems partially connected via interconnectors: the Main Interconnected System, the Salalah System and the Rural Areas Electricity System.

ª Oman Power and Water Procurement Company SAOC (OPWP) is the single buyer of power and water for all IPP/IWPP projects within Oman. OPWP procures the required power and desalinated water in bulk from generation and production facilities connected to the MIS, Salalah System and PDO interconnected system.

ª OPWP’s present portfolio of contracted capacity in the MIS comprises long-term contracts with eleven operational plants, having a total contracted capacity of 7,197 MW.

POWER DEMAND OUTLOOK

ª OPWP expects peak demand for electricity in MIS to grow at a CAGR of 11% per annum from 5,886 MW in 2015

to 9,133 MW by 2020 in the base scenario driven by growing personal income, growth in population arising

from general economic growth, and continued government expenditure on infrastructure projects. In the high

case scenario, average peak demand growth could reach 14% while in the lower case, average growth would be

around 7%.

Source: OPWP, IPO Prospectus


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POWER SECTOR – RECENT DEVELOPMENTS

ª In early 2014, OPWP announced plans to implement new arrangements for procurement of power and water from independent power producers and independent power and water producers in Oman. The two principal features of the planned arrangements are, firstly the introduction of a spot market for power and secondly, implementation of a more flexible process for awarding new PPA’s and PWPA’s. The proposed spot market is likely to be operational by 2017.

ª The proposed spot market is expected to provide an alternative way for producers to sell power to OPWP and will operate in conjunction with the existing PPA’s and PWPA’s. Instead of entering into a P(W)PA, qualified producers will participate in a spot market and receive prices determined on a day-to-day basis in accordance with specified market rules.

ª The flexible process of awarding new P(W)PA’s is aimed at allowing bidders to offer more generation options for evaluation to OPWP as opposed to the current procedure wherein OPWP awards new P(W)PA’s following competitive tender process based on a precisely defined project requirement.

REVENUE OVERVIEW

During the term of the PPA

ª As per the terms of the PPA, effective from the commercial date of operation, Phoenix Power is required to

maintain a net generating capacity of 2,000 MW and sell the electrical energy output exclusively to OPWP. In

return, the company receives a tariff covering power capacity charges, electrical energy charges and fuel

charges from OPWP.

ª Owing to the higher electricity demand during the summer months, the company will witness higher revenues

from April to September corresponding to the second and third quarters of the year. The PPA tarrif structure

applies higher capacity charges to compensate for the lack of allowance for planned outages during the season.

ª During winter months i.e. the first and fourth quarters of the year, planned maintenance will be conducted

owing to lower electricity demand. Earnings will therefore be lower during these two quarters.

Beyond the term of the PPA ª The management of both the power companies expects the plants to operate well beyond the term of the PPA

i.e. 15 years. After the expiry of the term of the PPA, the PPA may either be extended or, if the power market in Oman is liberalized during this period, the power produced by the Plants may be sold into a merchant market.


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FINANCING AGREEMENTS

ª Phoenix Power has entered into financing agreements with a consortium of international banks and an export credit agencies, for an aggregate amount of approximately OMR 459.3 million (US$ 1,194 million). As of 31 December 2014, the company had RO 435.9 million of debt which includes RO 127.9 million of commercial facility, RO 244.1 million JBIC facility and RO 63.9 million of NEXI Covered facility.

ª The aggregate amount of drawdown’s under the facilities is repayable in full in 29 half-yearly installments commencing from 28 December 2014 with the final installment being due on 28 December 2028. During 2014 and till date, Phoenix Power has repaid RO 23.345 million of principal and interest due on the term loans in accordance with the terms of its finance agreement.

ª The finance documents of Phoenix Power include an amortized repayment profile, with the final repayment to occur prior to the end of PPA. This is in contrast to many of the listed power companies in Oman, which are subject to a mandatory cash sweep mechanism under their financing arrangements, resulting in either nil or limited dividends in the latter part of the P(W)PA period for the relevant project company or the requirement to refinance existing debt in order to seek the removal of this requirement. The absence of a mandatory cash sweep mechanism in Phoenix Power’s financing arrangements means that Phoenix Power’s ability to pay dividends will not be constrained in the same manner as if a cash sweep was imposed. This means that Phoenix Power is able to pay stable dividends throughout the period of PPA.

ª Phoenix Power is required to maintain a cash balance (or Shareholders’ credit support) equivalent to six months’ of future debt service and interest payments in a separate bank account pledged in favor of its lenders. In addition, starting from the 4th anniversary of COD until the last payment date of senior loan, Phoenix Power is required to maintain a cash balance (or Shareholders’ credit support) equivalent to the debt service and interest payments which will be outstanding for the last 6 month of JBIC and NEXI Facilities in a separate bank account pledged in favor of its lenders.

ª Any fall in the Debt Service Coverage Ratio (DSCR), at any calculation date, below the ratio of 1.05:1 will constitute an event of default under the CTA. The DSCR threshold for distribution of dividends has been set at 1.10:1. In certain specified cases, where a default is capable of remedy, the CTA permits a cure period.

DIVIDEND POLICY

ª Phoenix Power management proposes to follow a reasonable dividend payout policy, subject to debt repayments, working capital and operational expenditure obligations. The amount of annual dividends and the determination of whether to pay dividends in any year may be affected by a number of other factors, including but not limited to the business prospects, financial performance, free cash availability, covenants under the Finance Documents and the outlook for the sector.


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ª After the IPO, it is intended that Shareholders will receive dividends during the term of the project and for the post PPA period. The interim dividend is intended to be paid by July 2015 for the benefit of all Shareholders (including the new shareholders) representing a dividend per share of Baiza 1.7. The dividends are expected to be declared twice in a financial year.

ª The below table shows a forecast of annual dividends as outlined in the company’s IPO prospectus:

COMPETITIVE STRENGTHS

ª Largest power plant at a single location in Oman

Phoenix Power is predominantly the largest power Plant in Oman, with an installed capacity of 2,000 MW,

which represents approximately 27.8% of Oman’s MIS total currently contracted capacity of approximately

7,197 MW based on OPWP’s 7 year statement (2014-2020). Additionally, Phoenix Power is strategically located

in the south east of Muscat, whereas most of the other plants are located north of Muscat. With more demand

expected to grow on the southern side of Oman particularly around the Duqm region, Phoenix Power becomes

a particularly important plant for Oman.

ª Well-established contractual framework with long term power purchase agreement, ensuring cash flow

protection against adverse events such as buyer risk events and force majeure

The entire power output from Phoenix Power’s installed capacity is contracted with OPWP, through a single

long-term PPA which expires on 31 March 2029. Beyond the PPA period, Phoenix Power shall either extend its

PPA with OPWP or sell its output in a liberalized market in a power pool or to eligible customers. The PPA

provides for various buyer risk and force majeure events which outline the relief that Phoenix Power may be

entitled to receive should certain specified events occur that hinder Phoenix Power from performing its

obligations under the PPA, in accordance with and subject to the terms of the PPA.

ª Stable and predictable cash flows, resilient to potential shocks in gas prices and power demand until 2029

Under the PPA, Phoenix Power receives capacity charges from OPWP for the contracted power capacity of the

Plant, which are periodically tested and comprise approximately 97 percent of the total revenues of Phoenix

Power in FY 2015 (excluding fuel revenue, which is virtually a pass-through). As such, subject to certain limited

exceptions, OPWP is obliged to pay capacity charges to Phoenix Power for 100 percent of the available power

capacity of the Plant, irrespective of whether or not power is actually dispatched. In addition, the Fuel revenues

and charges, as well as variable output charges payable to Phoenix by OPWP are also pre-determined and

contracted to be paid for each unit of output delivered. In effect, Phoenix Power has strong predictability of

stable (although seasonal) cash flows that are sheltered from volatility of demand for power and pricing risk.

Forecast of 5-Year Dividends2015e 2016e 2017e 2018e 2019e

Dividends (RO'mn) 6.6 11.6 11.6 11.6 11.6Dividends (Bzs per share) 4.5 7.9 7.9 7.9 7.9Dividend Yield (%) * 7.3% 7.2% 7.2% 7.2% 7.2%Note: 2015 dividend yield is annualized based on 205 days of post-IPO holding

Source: IPO prospectus


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ª State-of-the-art power Plant with high heat rate and flexibility

Phoenix Power’s CCGT power plant, which combines a set of gas-fired turbines with a steam turbine, makes

optimum use of the fuel it consumes and greatly improves overall power plant efficiency. This results in high

flexibility and availability and overall low life-cycle costs. It also leads to lower fuel consumption thereby

resulting in lower operating costs. The CCGT plants are also considered to be among the world’s safest fossil-

fired plants for the environment and climate.

ª Experienced selling shareholders with an established track record to transfer technology and know-how

Phoenix Power has the backing of selling shareholders with a proven track record of implementing large and

complex independent power and water plants globally and in the GCC. The selling shareholders will all remain

shareholders in the Company immediately after the IPO, with a collective holding of 65%.

ª Fully operational project operated by an experienced operator with experienced and skilled operational

personnel

The plant is completed and has been in full commercial operation since December 2014, thereby eliminating

any construction risk. The plant has achieved excellent performance parameters in Q1 2015 with a commercial

reliability of 99.9% which evidences efficient plant operation. The company has also entered into an operation

and maintenance (O&M) agreement with POMCo which largely insulates the company from major operating

and maintenance risks. Phoenix Power also benefits from an experienced management team in addition to the

experienced personnel employed by POMCo.

ª Strong and consistent demand for electricity, ensuring opportunities after the expiration of the current off-

take contract

Overall demand for electricity in Oman is expected to increase significantly according to OPWP, driven by

economic development, population growth, increasing personal income, capital investment, housing,

infrastructure and industrial spending and tourism developments. As a result, Phoenix Power is expected to

remain economically useful in the post-PPA period.

ª Mitigation of fuel risks

Phoenix Power has entered into a long-term agreement with the Ministry of Gas (MoG) to deliver and meet all

of Phoenix Power’s natural gas requirements over the contracted PPA period. Any increase in the price of gas

charged by MoG is directly passed through in the PPA entered by Phoenix Power with OPWP. Also, Phoenix

Power is not responsible for and is shielded against failures of MoG to deliver gas in accordance with the

provisions set out in the NGSA.


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RISKS & CONCERNS

ª Limited operating history

The plant has been in commercial operation for approximately 5 months (since 11 December 2014).

Accordingly, prospective investors have limited information with which to evaluate the operating performance

of the plant and its current or future prospects or financial results and performance.

ª Dispute with EPCC in relation to the delay in completion of early power and final power

The EPCC has to date submitted two claims to Phoenix Power for recovery of (i) all the Liquidated Damages

(LDs) in respect of the delay in completion of the early power (the Early Power Claim) and (ii) a certain

proportion of the LDs in respect of the delay to the COD (the Final Power Claim). In addition, the EPCC has

submitted claims in respect of increased costs and other relief. The Early Power Claim and the Final Power

Claim have been and continue to be rejected by Phoenix Power.

The Early Power Claim has already been the subject of an expert determination by an English law Queen’s

Counsel pursuant to the EPC Contract. The expert determined that the EPCC was not entitled to any relief,

including the recovery of the liquidated damages, in relation to the delay in completion of the EPCD. The EPCC

has, however, subsequently referred the Early Power Claim to arbitration in London in accordance with the

rules of arbitration of the International Chamber of Commerce and the EPC Contract. The Early Power Claim has

an aggregate value of around US$69.1 million.

In case of Final Power Claim, according to the EPCC, the claim relates to events concerning the Omani electricity

grid which, if the EPCC is correct, may be the responsibility of OPWP under the PPA. The EPCC has, therefore,

exercised its right under the EPC Contract requiring Phoenix Power to make a claim against OPWP under the

PPA equivalent to the Final Power Claim. Discussions in relation to the Final Power Claim and Phoenix Power’s

claim against OPWP under the PPA are on-going. The Final Power Claim is still at a preliminary stage and has not

to date been made the subject of a formal dispute resolution process in accordance with the terms of the EPC

Contract. The monetary value of the Final Power Claim has to date not been specified by the EPCC, however, it

appears from the details the EPCC has so far provided that the EPCC may seek to recover LD amount in the

range of US$ 7.8 million and US$ 45.3 million, and potentially some other costs.

In the event that the final outcome of these disputes (which it is hoped will occur in 2015/16) is negative for

Phoenix Power, then depending on the extent of the negative financial impact, Phoenix Power may not be in a

position to pay dividends in the manner forecast in its Prospectus, or may, temporarily, not be in a position to

pay any dividend at all. Phoenix Power may be required to repay some or all of the LDs set out above which it

has withheld or been paid.

ª Post PPA Risks

The 15-year term of the PPA matures before the plants reaches its expected lifetime. However, a substantial

part of the value of the project is expected to be realized beyond the PPA. However, at that point in time, the

plant with an expiring off-take agreement, will face new risks such as Gas supply and price risk, Market risk

(price and capacity), Competition from recent, more efficient technologies, Regulatory risks, Operational risks,

Customer credit risk and Macro-economic risks.


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ª Increased operating and maintenance costs or capital expenditure may not be recovered under the PPA

Although there are provisions within the PPA to protect the Company from changes in law, changes in some

factors (beyond Phoenix Power’s control) could make it more expensive for Phoenix Power to operate the Plant

than projected, and could require additional capital expenditures or could reduce revenues. Additionally,

complications with engineering design and implementation or technology or equipment failure could result in

reduced plant availability or production and/or higher-than-anticipated capital expenditures and/or operating

and maintenance costs.

The rates at which the capacity charges under the PPA were calculated and fixed for its 15-year term, subject to

specified escalations, and cost increases higher than those projected at the outset may not be recovered. The

Project could be subject to changes in the operating cost structure over the 15-year term of the PPA.

ª Dependence on OPWP as the sole customer

OPWP is the sole purchaser of all electricity output from the Plant and also from the other licensed generation

and production operators in Oman. As such, OPWP does not currently face any competition. If OPWP were to

cease fulfilling its obligations under the PPA, Phoenix Power would not be able to sell the Plant’s capacity and

output to another purchaser. However, there can be no assurance that the Government will not open the

electricity markets to competitors or allow bypass sales of power by providers of generation or production

capacity to persons other than OPWP in the future. In addition, no assurance can be made that OPWP’s role in

the sector will not change in the future.

ª No ownership of the land on which the plant is situated

The site used for the Plant is owned by the PEIE which, under the terms of the UAS, has granted a usufruct right

over the Site to Phoenix Power with a term of 25 years from the effective date, which may be renewed for a

further term of 25 years. If Phoenix Power is in material breach of the terms of the UAS, the MoH may, at its

option, elect to terminate the UAS earlier, evict Phoenix Power from, and repossess the Site. A termination of

the UAS would have a material adverse effect on the business, results of operations and financial condition of

Phoenix Power, including the market price of the Shares.

ª Depegging or adjustment in Omani Rial/US Dollar peg

Phoenix Power maintains its accounts, and reports its results, in Omani Rial and in US Dollars. Currently, the

Omani Rial remains pegged to the US Dollar. However, there can be no assurance that the Omani Rial will not

be de-pegged in the future or that the existing peg will not be adjusted in a manner that adversely or

beneficially affects Phoenix Power.

ª Adverse changes in foreign exchange and custom duty rates will adversely affect Phoenix Power’s business

Phoenix Power’s ability to obtain new hedging arrangements depends on numerous factors, including general

economic and market conditions, international interest rates, from banks or other financiers. There can be no

assurance that such hedging arrangements will be available or, will be obtainable on terms or at a cost that is

not unfavorable. If Phoenix Power is unable to hedge its foreign exchange exposure, this could have a material

adverse effect on Phoenix Power’s business and financial condition, including the market price of the shares.


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ª Dividend policy may not be fulfilled

Any payment of future dividends will be dependent on the sufficiency of distributable reserves and liquidity in

order to ensure Phoenix Power’s operational needs and/or business growth are not limited by the unavailability

of funds, as well as Phoenix Power’s known contingencies and compliance with any funding facility covenants.

As such, dividend payments are not guaranteed and the Board may decide at any time and for any reason, not

to recommend dividends. Additional, the company’s dividend policy may significantly restrict Phoenix Power’s

cash reserves and may adversely affect its ability to fund unexpected capital expenditures, as well as the ability

to make interest and principal repayments on its outstanding term loan facilities. As a result, Phoenix Power

may be required to borrow additional money or raise capital by issuing equity securities, which may not be

possible on attractive terms or at all.

VALUATION

Discounted Cash Flow Valuation (Free Cash Flow to Equity) • For valuing Phoenix Power’s equity we have used a two-stage discounted FCFE valuation model, with the

first stage being primarily the term of the PPA, while the second stage is assumed to be the post-PPA period

from 2029 onwards till 2054 (the end of technical life of the plant). We have not assumed any subsequent

terminal growth post the end of the plant life in 2054.

• While the contracted term of PPA allows for visibility and low volatility in earnings and cash flows till the

end of the agreement, the visibility of operations, earnings and cash flows can be very subjective post the

end of the PPA term. In order to make a reasonable assumption of the project returns and cash flows during

the post-PPA period, we have assumed that a revised PPA agreement with OPWP is likely to be

implemented with terms of the payment assumed to be lower relative to the PPA period (since major

financing costs have been completed). As such, we assume the post-PPA terms are likely to be structured to

allow the project to earn a reasonable Return on Equity (ROE) of 9% till the end of the plant’s technical life.

• Cash flows from operations during the PPA period has been assumed to remain constant through 2028,

while during the post-PPA period they have been estimated as net profit plus the straight-line fixed

depreciation charge of RO 17.1 million. Capital expenditure and Net working capital requirements are

assumed to be not significant over the life of the project (with exception of any unplanned maintenance or

growth capex).

• Debt repayment during the term of the PPA is assumed to be as per the amortized debt schedule as

indicated in the repayment terms of the company’s financing agreements with final repayment to be made

in December 2028.

• We assume a Cost of Equity (Ke) of around 8.8% during phase 1 (the PPA period) considering the lower

operating risk during the period, while we assume a Cost of Equity of 11% during phase 2 (post PPA) given

the greater uncertainty and higher risk inherent post the expiry of the current agreement.


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• In forecasting Total Equity, we have assumed a lower dividend payout from 2020 onwards (post the

forecast period provided in the IPO prospectus). This adjustment has been made considering that the

forecasted FCFE during the period of around RO 9.4 million will be lower than the RO 11.6 million of

dividends forecasted annually in the prospectus. Also, the company is likely to use up their available cash

balance by 2020 if dividends of RO 11.6 million are paid annually and result in a need to either raise

additional borrowing or lower dividend payouts. Hence, this adjustment has been made with a view to take

a conservative approach in arriving at the fair valuation of the stock.

Based on the above assumptions and forecast generated in our model, we have arrived at a fair value of 129

baizas per share for Phoenix Power (17.2% upside to IPO issue price of 110 baizas). A summary of our valuation

model is provided in the appendix at the end of this report.

Dividend Yield We have estimated the dividends expected to be paid by the peer power companies in Oman during the next twelve

months, which indicates an average dividend yield estimate of 5.5% for relevant companies at their current price.

We have excluded other peers such as ACWA Power Barka and Al Kamil Power since both have lowered their

dividends due to capital expenditure plans and approaching end of PPA term respectively.

While our fair value of 129 baizas per share for Phoenix Power is based on our DCF valuation model, we believe in

the short-term, post listing, the stock can trade in line with the average dividend yield for listed peers. As a result,

based on the average dividend yield of 5.5%, we foresee a target price of 140 baizas per share for Phoenix Power

(27.3% upside to IPO issue price of 110 baizas) post listing, assuming expected dividends of 7.7 baizas during the

next twelve months.

Dividend YieldCurrent

PriceExpected Dividends

Expected Yield

SMN Power 0.664 0.044 6.6%Sembcorp Salalah 2.400 0.122 5.1%Al Suwadi Power 0.191 0.010 5.1%Al Batinah Power 0.191 0.010 5.0%Note: Market data as of 5 May 2015

Source: Company Disclosure, Bloomberg, FINCORP Research


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FINANCIAL SUMMARY

PHOENIX POWER FY ended Dec 31 2015E 2016E 2017E 2018E 2019E (Values in RO'mn except per share data) INCOME STATEMENT Revenue 112.40 117.60 119.60 128.20 135.60 EBITDA 51.60 50.80 52.90 53.10 52.30 EBIT 34.20 33.50 35.70 35.90 35.20 Net Financing Costs (21.10) (20.20) (19.20) (18.00) (16.90) Net Profit 35.60 18.40 19.10 14.60 15.60 BALANCE SHEET Cash and Cash Equivalents 18.00 13.00 10.70 8.20 4.00 Net Fixed Assets 600.80 584.90 569.00 553.10 537.20 Total Assets 632.30 611.50 593.30 574.80 554.90 Total Debt 414.60 390.40 366.10 340.00 312.00 Total Liabilities 632.30 611.50 593.30 574.80 554.90 Share Capital 146.30 146.30 146.30 146.30 146.30 Total Shareholders’ Funds 187.40 194.20 201.70 204.80 208.80 Hedging reserve (40.20) (40.20) (40.20) (40.20) (40.20) Net Debt 396.60 377.40 355.40 331.80 308.00 CASH FLOW STATEMENT Cash Generated From Operations 53.20 50.90 52.80 53.10 52.40 Capital Expenditures (0.90) - - - - Net Financing Costs (21.20) (20.20) (19.10) (17.90) (16.70) Movement in Financial Debt (21.30) (24.20) (24.50) (26.20) (28.20) Net Increase (Decrease) in Cash and Cash Equivalents 3.30 (5.00) (2.30) (2.60) (4.10)

PER SHARE Basic EPS 0.024 0.013 0.013 0.010 0.011 Dividend Per Share 0.0045 0.0079 0.0079 0.0079 0.0079 Book Value Per Share 0.128 0.133 0.138 0.140 0.143

VALUATION EV/EBITDA (x) 10.80 10.60 9.76 9.28 8.97 Dividend Yield (%)* 7.3% 7.2% 7.2% 7.2% 7.2% MARGINS EBITDA Margin (%) 45.91% 43.20% 44.23% 41.42% 38.57% Net Margin (%) 31.67% 15.65% 15.97% 11.39% 11.50% SHAREHOLDER RETURNS Return on Equity (%) 19.00% 9.47% 9.47% 7.13% 7.47% Return on Assets (%) 5.63% 3.01% 3.22% 2.54% 2.81% Return on Invested Capital (%) 5.15% 5.16% 5.64% 5.89% 5.99% Payout Ratio (%) 18.49% 63.14% 60.81% 79.14% 74.07% LEVERAGE AND SOLVENCY Net Debt / Equity (%) 212% 194% 176% 162% 148% EBIT / Interest Expense (x) 1.62 1.66 1.86 1.99 2.08

Source: IPO Prospectus, FINCORP Research

APPENDIX

Discounted Cash Flow Valuation STAGE 1 (During the PPA period)(RO'million) FY'15 e FY'16 e FY'17 e FY'18 e FY'19 e FY'20 e FY'21 e FY'22 e FY'23 e FY'24 e FY'25 e FY'26 e FY'27 e FY'28 eCash Flow From Operations 53.2 50.9 52.8 53.1 52.4 52.4 52.4 52.4 52.4 52.4 52.4 52.4 52.4 52.4Less: Capex (0.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flow to Firm (FCFF) 52.3 50.9 52.8 53.1 52.4 52.4 52.4 52.4 52.4 52.4 52.4 52.4 52.4 52.4Less: Debt Repayment (42.5) (44.4) (43.6) (44.1) (44.9) (43.0) (43.0) (43.0) (43.0) (43.0) (43.0) (43.0) (43.0) (43.0)Free Cash Flow to Equity (FCFE) 9.8 6.5 9.2 9.0 7.5 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4PV of FCFE 9.3 5.7 7.4 6.7 5.1 5.9 5.4 5.0 4.6 4.2 3.9 3.5 3.3 3.0

Discounted Cash Flow Valuation STAGE 2 (Post PPA period)(RO'million) FY'29 e FY'30 e FY'31 e FY'32 e FY'33 e FY'34 e FY'35 e FY'36 e FY'37 e FY'38 e FY'39 e FY'40 e FY'41 eCash Flow From Operations 46.9 47.1 47.4 47.7 48.0 48.2 48.5 48.8 49.1 49.4 49.7 50.0 50.3Less: Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flow to Firm (FCFF) 46.9 47.1 47.4 47.7 48.0 48.2 48.5 48.8 49.1 49.4 49.7 50.0 50.3Less: Debt Repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flow to Equity (FCFE) 46.9 47.1 47.4 47.7 48.0 48.2 48.5 48.8 49.1 49.4 49.7 50.0 50.3PV of FCFE 10.3 9.3 8.4 7.6 6.9 6.3 5.7 5.1 4.7 4.2 3.8 3.5 3.1

Discounted Cash Flow Valuation STAGE 2 (Post PPA period)(RO'million) FY'42 e FY'43 e FY'44 e FY'45 e FY'46 e FY'47 e FY'48 e FY'49 e FY'50 e FY'51 e FY'52 e FY'53 e FY'54 eCash Flow From Operations 50.6 50.9 51.2 51.5 51.8 52.1 52.4 52.7 53.0 53.4 53.7 54.0 54.4Less: Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flow to Firm (FCFF) 50.6 50.9 51.2 51.5 51.8 52.1 52.4 52.7 53.0 53.4 53.7 54.0 54.4Less: Debt Repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flow to Equity (FCFE) 50.6 50.9 51.2 51.5 51.8 52.1 52.4 52.7 53.0 53.4 53.7 54.0 54.4PV of FCFE 2.8 2.6 2.3 2.1 1.9 1.7 1.6 1.4 1.3 1.2 1.1 1.0 0.9

Total PV of Stage 1 (During PPA) 72.9Total PV of Stage 2 (Post PPA) 100.9Cash & cash equivalents (31 Dec 2014) 14.7Total Equity Value 188.5Value / Share (RO) 0.129

Valuation AssumptionsBeta 0.50Rf 4.5%Rm-Rf 8.5%Cost of Equity (Ke) - PPA period 8.8%Cost of Equity (Ke) - Post PPA 11.0%Source: FINCORP Research, Bloomberg

Source: IPO prospectus, FINCORP Research

APPENDIX (CONTD...)

Supplementary Financial Data STAGE 1 (During the PPA period)(RO'million) FY'15 e FY'16 e FY'17 e FY'18 e FY'19 e FY'20 e FY'21 e FY'22 e FY'23 e FY'24 e FY'25 e FY'26 e FY'27 e FY'28 eNet Profit 35.6 18.4 19.1 14.6 15.6 17.5 18.7 20.0 21.3 22.7 24.2 25.7 27.3 29.0Dividends 6.6 11.6 11.6 11.6 11.6 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4 9.4Payout Ratio (%) 18.5% 63.0% 60.7% 79.5% 74.4% 53.5% 50.0% 46.9% 43.9% 41.2% 38.7% 36.4% 34.3% 32.3%

Beginning Total Equity 158.3 187.4 194.2 201.7 204.8 208.8 216.9 226.3 236.9 248.8 262.2 277.0 293.3 311.3Ending Total Equity 187.4 194.2 201.7 204.8 208.8 216.9 226.3 236.9 248.8 262.2 277.0 293.3 311.3 330.9

ROE (%) 19.0% 9.5% 9.5% 7.1% 7.5% 8.1% 8.3% 8.4% 8.6% 8.7% 8.7% 8.8% 8.8% 8.8%

Supplementary Financial Data STAGE 2 (Post PPA period)(RO'million) FY'29 e FY'30 e FY'31 e FY'32 e FY'33 e FY'34 e FY'35 e FY'36 e FY'37 e FY'38 e FY'39 e FY'40 e FY'41 eNet Profit 29.8 30.0 30.3 30.6 30.9 31.1 31.4 31.7 32.0 32.3 32.6 32.9 33.2Dividends 26.8 27.0 27.3 27.5 27.8 28.0 28.3 28.5 28.8 29.1 29.3 29.6 29.8Payout Ratio (%) 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0%

Beginning Total Equity 330.9 333.9 336.9 339.9 343.0 346.0 349.2 352.3 355.5 358.7 361.9 365.2 368.4Ending Total Equity 333.9 336.9 339.9 343.0 346.0 349.2 352.3 355.5 358.7 361.9 365.2 368.4 371.8

ROE (%) 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Supplementary Financial Data STAGE 2 (Post PPA period)(RO'million) FY'42 e FY'43 e FY'44 e FY'45 e FY'46 e FY'47 e FY'48 e FY'49 e FY'50 e FY'51 e FY'52 e FY'53 e FY'54 eNet Profit 33.5 33.8 34.1 34.4 34.7 35.0 35.3 35.6 35.9 36.3 36.6 36.9 37.3Dividends 30.1 30.4 30.7 30.9 31.2 31.5 31.8 32.1 32.4 32.6 32.9 33.2 33.5Payout Ratio (%) 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0% 90.0%

Beginning Total Equity 371.8 375.1 378.5 381.9 385.3 388.8 392.3 395.8 399.4 403.0 406.6 410.3 414.0Ending Total Equity 375.1 378.5 381.9 385.3 388.8 392.3 395.8 399.4 403.0 406.6 410.3 414.0 417.7

ROE (%) 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Source: IPO prospectus, FINCORP Research

RESEARCH

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