Analysts at Morgan Capital Group have expressed concerns over what they described as possible risks and overvaluation of the $500 million initial public offering (IPO) of SEPLAT Petroleum Development Company Plc.
An equity research made available by Morgan Capital at the weekend indicated that Seplat’s IPO pricing range might be overvalued by more than 200 per cent and there are many inherent risks. The report however noted that Seplat is a good company.
SEPLAT had commenced the book building for its IPO with indicative price range of N535 and N700. However, the final price will be determined by the bid prices. The minimum order for individual investors is set at 25,000 shares, implying minimum investment of N13.375 million and N17.500 million at the indicative price range of N535 and N700. Also, the minimum order for institutional investors is set at 85,000 shares, which implies minimum application size of N45.475 million and N59.50 million at the bottom and ceiling prices.
The initial offer size is expected to raise gross proceeds of approximately $500 million, equivalent to £300.9 million and N82.5 billion. SEPLAT plans to list its ordinary shares on the London Stock Exchange (LSE) and Nigerian Stock Exchange (NSE) after the IPO. With this, and based on the mid-point of the price range, SEPLAT’s implied market capitalisation upon listing would be about £1,200.9 million, equivalent to $ 1,995.5 million and N329.5 billion.
Morgan Capital stated that it undertook a fundamental valuation of SEPLAT and got a target price of N173.25, after the investment banking firm has factored tax and earnings risks.
According to the report, while SEPLAT made 65 per cent tax provision in 2011 and 63 per cent tax provision in 2012, it reported a tax credit of $93 million in 2013. The exclusion of tax provision consequently boosted the profit recorded in 2013.
SEPLAT in the prospectus indicated that with effect from January 1, 2013, the company was granted the pioneer tax status incentive by the Nigerian Investment Promotion Commission (NIPC) for a five-year period. For the period the incentive applies, the company is exempt from petroleum profits tax on crude oil profits, corporate income tax on natural gas profits and education tax of two per cent.
“We do not see the justification for the NIPC to grant pioneer tax status incentive to SEPLAT for acquiring already existing assets that the previous owners were already paying the Petroleum Profit Tax (PPT) on, before the sale to Seplat, except there is a newly developed ingenious technology for mining crude oil that is yet to be disclosed to the public,” Morgan Group stated.
Analysts noted that if NIPC sets this precedence, it will give rise to similar claims from other companies who have acquired similar assets and the already fast depleting Federation account will bear the brunt of the largesse. The list of potential litigants includes other upstream players who will see this as unfair advantage and even state governments whose allocation will suffer as a result of this leakage.
The report underlined a caveat in the IPO Prospectus which notes that “there can be no assurances that current or future governments will not revoke these tax incentives prior to the end of the five-year period or seek to recover taxes waived under the scheme from the company and or Newton Energy in the future”.
Morgan Capital also cautioned that there is a strong likelihood for potential litigation, considering that SEPLAT was granted a tax waiver which puts them at an advantage among their peers citing the 400 per cent increase in profit after tax rise in 2013.
According to the report, the likelihood that other players who have invested in assets similar to that of SEPLAT and even stakeholders, like state governments whose allocations are dwindling and Nigerian citizens, may contest this waiver is very high.
Analysts said any litigation or possible revocation of the waiver will lead to massive sell down on the shares as most investors will seek to exit their positions even before any ruling is made.
The equity report also noted that while the absence of cash flow and profit forecasts in the SEPLAT prospectus may be within the ambit of waivers by the Securities and Exchange Commission (SEC) and NSE, it may diminish the ability of analysts to project future earnings of the company.
“We have placed a sell rating on the shares of SEPLAT because we consider it over priced, given the inherent tax waiver issue and the uncertainty of the cash flow. We think this is a play on tax which may not be sustainable, since government can always revoke and or recover any previously waived taxes, even as already disclosed in the Prospectus. We however see SEPLAT as a good company and a fair price of N173.25 is in our opinion, achievable on the floor of the NSE in the coming months,” Morgan Capital added.