Nawarat Patanakarn

Nawarat Patanakarn Plc (NWR)

NWR is set to regain its pre-1997 glamour with an onslaught of new jobs in a
public investment ‘supercycle’ underpinned by the government’s Bt2trn
infrastructure spending bill approved last week. It is undertaking a major
recapitalization to replenish its balance sheet and give it a greater financial
capacity to take on new projects. We expect NWR’s earnings to grow at a
staggering 42% CAGR over the next three years, supported by robust backlog
additions. We initiate coverage as a BUY and target price of Bt6 (before
adjustment for PP, XR and XW).

Thailand’s public investment ‘supercycle’. Thailand has significantly underinvested
in infrastructure development since the ‘Tom Yum Kung’ financial crisis in 1997. Indeed,
in real (constant price) terms, Thailand’s public gross fixed capital formation (a proxy
for public investment) in 2012 was merely two-thirds of the peak in 1997, which
implies a 52% upside (in volume terms). We believe a public investment ‘supercycle’ is
about to unfold following the government’s recent endorsement of a Bt2trn
infrastructure spending bill. Our group’s macroeconomics team forecasts 18% real
growth in public investment in 2013. This would imply 22% growth in nominal terms if
we were to assume price inflation of 3%.
Upcoming recapitalization to replenish its balance sheet. NWR is undergoing a
major recapitalization which includes rights offering (RO), private placement (PP) and
warrant offering. The RO is set at 7 old shares to 1 new at Bt2.6/share and PP at
200mn shares, pricing to be set via a book building process. We estimate potential
proceeds of Bt1.1-1.5bn from the RO and PP based on the minimum price and current
market price. Free warrants will be allocated after the RO and PP at 8 common shares
to 1 warrant. Exercise price (minimum of Bt1/share) and duration of the warrants have
not been finalized but the potential proceeds would be at least Bt254mn.
Backlog and earnings set to hit record highs. We estimate NWR’s backlog will hit a
new record high of Bt15bn by the end of 2014 from Bt8bn at the end of 2012 on strong
backlog addition from the government’s infrastructure projects. Over the next three
years, we expect its revenue and core profit to growth at staggering CAGRs of 24% and
42%, respectively. We have assumed margin improvements (normalization) on the
view that the risk of a sharp spike in construction materials prices is low in the light of
modest global economic growth.
Valuation and risk. We value NWR using sum-of-the-parts (SOTP) methodology. We
assign a fair value (FV) of Bt6/share before PP, XR and XW, but after the 200mn share
PP offering, FV will be diluted to Bt5.62-Bt5.87, depending on the price for the PP. After
the capital increase through RO and PP, the number of shares will increase from
1,553mn to 2,222mn. Fair value is comprised of 85% for core construction, 9% for
directly-owned property development and 6% for 40%-owned property associate CIN.
Our fair value estimations for each segment are based on discounted cash flows,
assuming risk-free rate (RFR) of 4.5%, equity risk premium (ERP) of 6.5%, terminal
growth of 3%.