The Philippines' Sovereign Wealth Fund and Power Grid Operator Finalize Investment Deal: Key Details on Shares, Ownership, Dividend Yield, Projected Return on Investment, and Valuation
In collaboration with Rappler’s Vantage Point, this article explores the Maharlika Investment Corporation (MIC), the Philippines’ sovereign wealth fund, and its first strategic ₱19.75 billion investment in power grid operator Synergy Grid & Development Phils. Inc. (SGP). MIC secures a 6.5% dividend yield, positioning itself for strong long-term returns. With SGP’s 4.4% annual earnings growth, MIC can expect a 10.9% annual return, rising to 12.4% if it converts its preferred shares to common stock. Analysts from BofA Global Research and J.P. Morgan are bullish, projecting a 30.4% increase in SGP’s stock price to ₱15.00 within a year. Will this move unlock significant value for MIC and SGP investors?
Overview
On January 27, 2025, Philippine power grid operator Synergy Grid & Development Phils., Inc. (SGP), together with its majority stockholders, Henry T. Sy, Jr. and Robert G. Coyiuto, Jr., executed a binding term sheet with Philippine sovereign wealth fund Maharlika Investment Corporation (MIC) for a significant equity investment in SGP. The agreement entails MIC subscribing to newly issued convertible preferred shares, which will ultimately give it a 20% stake in the company and the right to elect two out of nine board directors.
This investment will be subject to various conditions, including due diligence, execution of definitive agreements, corporate approvals, and compliance with regulatory requirements such as the Securities Regulation Code and the Philippine Stock Exchange rules.
Investment Breakdown and Share Issuance
Before MIC’s investment, SGP had 5,265,866,000 common shares outstanding, valued at ₱60.56 billion, or ₱11.50 per share, as of January 31, 2025. MIC has agreed to subscribe to convertible preferred shares at ₱15.00 per share.
To achieve its target 20% ownership in SGP, MIC will acquire 1,316,466,500 convertible preferred shares. This will bring the total number of shares (common + preferred) to 6,582,332,500.
Convertible Preferred Shares and Dividend Yield
The convertible preferred shares will have a dividend yield of 6.5% over the next three years, post-investment. If MIC decides to convert their preferred shares to common shares, the dividend yield will increase to 8%. This structure provides MIC with a financial incentive while also allowing flexibility in future ownership decisions.
Based on the 6.5% dividend yield, MIC will earn ₱1.28 billion per year from its investment of ₱19.75 billion in convertible preferred shares. If MIC later converts these shares to common shares and the dividend yield increases to 8%, its annual earnings will rise to ₱1.58 billion.
Projected Return on Investment
If SGP’s earnings continue to grow by its 5-year historic annual growth rate of 4.4% over the next five years and its convertible preferred shares maintain a dividend yield of 6.5%, then MIC can expect a return on its investment of 10.9% per year over the next three to five years (annual earnings growth + dividend yield). If MIC decides to convert its preferred shares to common shares, it can expect a higher return of 12.4% per year, factoring in the higher 8% dividend yield alongside projected earnings growth.
Analyst Expectations for SGP’s Stock Price
Analysts from BofA Global Research and J.P. Morgan have expressed bullish sentiments on SGP’s stock. They expect SGP’s common share price to rise by 30.4% to ₱15.00 within the next 12 months, matching the price of MIC’s convertible preferred shares. This projection reflects strong investor confidence in SGP’s future growth and financial stability following MIC’s investment.
SGP’s Valuation Compared to Industry Peers
SGP is considered to have good value based on its Price-to-Earnings (P/E) Ratio of 6.3x, which is significantly lower than the Asian Electric Utilities Industry average of 14.8x (based on 13 comparable companies). This suggests that SGP is currently undervalued relative to its peers, making it an attractive investment opportunity.
Financial Health and Debt Concerns
While SGP’s historic annual operating cash flows have been sufficient to cover annual dividend payments, they have not been sufficient to cover their annual capital expenditure requirements, which have been larger than operating cash flow. This has resulted in a net debt to equity ratio (total debt - cash) rising to 125.3% as of September 30, 2024, a level considered high (above the 40% threshold). Additionally, SGP’s debt is not well covered by operating cash flow, with only 16% coverage, whereas a minimum of 20% coverage is generally preferred. These financial constraints highlight the importance of MIC’s investment in strengthening SGP’s capital position and long-term financial stability.
New Ownership Structure
After MIC’s investment, the equity distribution in SGP will be as follows:
Henry T. Sy, Jr.: 31.12%
Robert G. Coyiuto, Jr.: 31.12%
Maharlika Investment Corporation (MIC): 20%
Other Shareholders: 17.76%
Previously, Sy and Coyiuto each held 38.9% of the company, but with the expanded share capital, their respective stakes have adjusted proportionally.
Financial Implications and Valuation
MIC’s investment injects ₱19.75 billion into SGP, increasing the total company valuation post-investment to ₱80.31 billion. Based on this, the ownership values are estimated as follows:
Henry T. Sy, Jr.: ₱24.99 billion
Robert G. Coyiuto, Jr.: ₱24.99 billion
MIC: ₱19.75 billion (based on its investment)
Potential Risks and Uncertainties
Are there any risks that the expected catalysts won’t play out as anticipated?
Yes, several factors could prevent the projected stock price increase and return on investment from materializing. These include macroeconomic headwinds such as rising interest rates, inflation, or weaker-than-expected electricity demand, which could impact SGP’s revenue and profitability. Additionally, execution risks related to MIC’s investment, including delays in regulatory approvals or shareholder pushback, could alter expected outcomes.
Are there any regulatory or competitor risks that could change the outcomes?
Regulatory risks remain a concern, as government policies and oversight over the National Grid Corporation of the Philippines (NGCP) could impact SGP’s earnings potential. Stricter regulations on energy tariffs or capital expenditure requirements might also strain financial performance. Furthermore, increasing competition from renewable energy providers and independent power producers could affect market positioning and revenue growth.
Strategic Significance
This transaction marks a significant development for SGP, strengthening its capital structure and potentially enhancing its influence over the National Grid Corporation of the Philippines (NGCP), where it holds an indirect equity stake. The entry of MIC as a strategic investor is expected to bolster corporate governance, financial stability, and operational capabilities.
As the deal progresses through due diligence and regulatory approvals, market observers will be closely monitoring its impact on SGP’s financial standing and long-term strategic direction.
Conclusion
MIC’s investment in SGP represents a high-yield opportunity with promising growth potential. The 10.9% to 12.4% expected annual return — a combination of dividend yields and projected earnings growth — makes this a strategic move for the Philippines’ sovereign wealth fund. However, risks remain, including regulatory changes, competition, and SGP’s debt challenges. Analysts remain optimistic, forecasting a 30.4% increase in SGP’s stock price, further validating MIC’s investment. As the deal undergoes due diligence and regulatory approvals, the market will closely watch how this partnership shapes SGP’s financial trajectory and long-term stability.