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MPSEZ’s Australian deal valuation appears expensive

MPSEZ’s Australian deal valuation appears expensive
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First Published: Thu, May 05 2011. 10 57 PM IST
Updated: Thu, May 05 2011. 10 57 PM IST
Mundra Port and Special Economic Zone Ltd’s (MPSEZ) investors reacted with concern to their company’s winning bid for a long-term lease of a coal terminal in Australia. Its share has fallen by 10.4% to Rs129 in the last three trading days compared with the 4% decline in the Bombay Stock Exchange’s benchmark Sensex.
On Tuesday, the company had announced that it was the successful bidder for a 99-year lease of Abbot Point X50 Coal Terminal (APCT), Australia. MPSEZ, a subsidiary of Adani Enterprises Ltd, would pay about Australian dollar (A$) 1.8 billion (aroundRs 8,700 crore) for operating this terminal. That is 20% higher than the Queensland government’s initial expectation of A$1.5 billion.
The deal valuation may be one concern for investors. Bloomberg estimates suggest MPSEZ’s EV/Ebitda ratio for fiscal 2012 (FY12) is 15.4 times on a consolidated basis. EV is enterprise value and Ebitda is earnings before interest, tax, depreciation and amortization.
B. Ravi, chief financial officer of MPSEZ, said, “From the estimates that are available right now, it looks like APCT is likely to make revenues of about A$160 million and an Ebitda of A$100 million in FY12 (ending June).”
On that basis, the EV/Ebitda works out to about 18 times. That appears a bit higher than MPSEZ’s current valuation.
Another concern is funding the transaction. The exact details of financing would be clear next month, said Ravi.
But, assuming the entire acquisition is funded by debt at a cost of about 7% (Libor plus 190 basis points), the total interest outgo works out to about A$126 million. That is higher than the estimated Ebitda for FY12. One basis point is one-hundredth of a percentage point.
“Post-deal, the debt-to-equity ratio would increase to about 1.7:1 from 0.7:1 currently,” said Ravi. Part-funding the acquisition through equity, either in MPSEZ or the terminal operation, could ease concerns on this front.
How will MPSEZ benefit from this deal? Its capacity will increase significantly. It will add 50 million tonnes (mt) of capacity to the current 130 mt capacity of MPSEZ. The APCT terminal’s current capacity of 21 mt will increase to 50 mt next month after an ongoing expansion programme is completed. Eventually, it could go up to 80 mt.
Getting users for its capacity should not be a problem, given the appetite for Australia’s coal. Users for the 50 mt capacity have been contracted under take-or-pay agreements, which assure revenue for MPSEZ. In FY11, the terminal is expected to have revenue of A$110 million and an Ebitda of A$59 million.
In a statement, MPSEZ has said that APCT’s Ebitda margin is expected to improve to 70% in FY16 from 54% in FY11. APCT’s current margin, however, is lower than that of MPSEZ (68% for the nine months ended December).
But the acquisition will add to revenue growth. “Entire capacity has take-or-pay agreements and can add 21%/18% to MPSEZ’s revenues/Ebitda in FY12,” wrote analysts from Religare Capital Markets Ltd in a note.
The deal gives MPSEZ a boost on the capacity front. But an optimal financing structure is essential to minimize the impact on its balance sheet. Till more clarity emerges on the financing structure and the acquisition’s impact on MPSEZ’s margin, the deal overhang on the stock is likely to remain.
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First Published: Thu, May 05 2011. 10 57 PM IST