20150707-Maybank_KERPL-Philippines_Power_Sector_Look_for_capacity_growth_and_RE_14页_502kb

Philippines Power Sector Summary

Core Content

The Philippines power sector experienced a respectable $9%$ YoY growth in 1Q15 sector income, although earnings were downgraded due to project delays, transmission issues, and contract re-pricing. WESM prices increased significantly in May and June, providing profit opportunities for companies with exposure to the wholesale electricity market.

Main Viewpoints

• Sector Rating: The sector is rated Neutral due to the HOLD ratings on Aboitiz Power Corp (AP) and Manila Electric Co (MER), the top two companies by market cap.
• Earnings Performance:
  • 1Q15 net income grew by $6.7%$ YoY.
  • Including Semirara Mining & Power Corp (SCC), the growth increased to $9.1%$.
  • Earnings adjustments were mainly downward, with project delays and transmission issues being key factors.
• WESM Price Increase:
  • WESM prices rose from PHP2.65/KWh in April to PHP7.76/KWh in June.
  • This increase is attributed to higher planned and forced outages.
  • Companies with significant exposure to WESM, like SCC, are expected to benefit from the high prices.
• Capacity Growth:
  • The sector is expected to add $ \sim 5,500 $ MW of new baseload and mid-merit capacity to the Luzon grid from 2015-19.
  • Companies with near-term capacity growth, such as FGEN and SCC, are preferred.
• Renewable Energy (RE) Opportunities:
  • The growth of the RE sector is a key theme.
  • Feed-in Tariff (FiT) incentives are available on a first come, first served basis.
  • EDC is well-placed to benefit from RE growth, particularly with its Burgos Wind project, which is expected to contribute fully to earnings in 2016 once transmission issues are resolved.
  • EDC also plans up to 270 MW of geothermal power projects, equivalent to $19%$ of its total capacity.

Key Information

Companies with BUY Ratings

• Energy Development Corp (EDC):

  • Current Price: PHP7.48
  • Target Price: PHP9.20
  • Upside: 23.0%
  • Yield: 3.1%
  • Core EPS: PHP0.56
  • EPS Growth: 14.1%
  • PER: 14.3
  • PBV: 3.1
  • ROE: 23.0%
  • Market Cap: USD3.4b
  • Free Float: 45.3%

• First Gen Corp (FGEN):

  • Current Price: PHP27.00
  • Target Price: PHP31.30
  • Upside: 15.9%
  • Yield: 2.0%
  • Core EPS: PHP3.6
  • EPS Growth: 9.8%
  • PER: 16.7
  • PBV: 1.2
  • ROE: 8.0%
  • Market Cap: USD2.2b
  • Free Float: 32.5%

• Semirara Mining & Power Corp (SCC):

  • Current Price: PHP142.50
  • Target Price: PHP177.79
  • Upside: 24.8%
  • Yield: 2.9%
  • Core EPS: PHP9.40
  • EPS Growth: 46.5%
  • PER: 14.6
  • PBV: 5.2
  • ROE: 39.3%
  • Market Cap: USD3.3b
  • Free Float: 27.4%

• Trans-Asia Oil and Energy Development Corp (TA):

  • Current Price: PHP2.15
  • Target Price: PHP2.58
  • Upside: 20.0%
  • Yield: 1.8%
  • Core EPS: PHP0.10
  • EPS Growth: 169.3%
  • PER: 22.1
  • PBV: 1.5
  • ROE: 6.7%
  • Market Cap: USD0.2b
  • Free Float: 44.8%

Earnings Adjustments

• Aboitiz Power Corp (AP):
  • 10-month delay in commissioning one unit of the Davao Coal power plant.
  • Commercial operation is now set for Feb 2016.
• Energy Development Corp (EDC):
  • Contract re-pricing of Green Core Geothermal.
  • Transmission issues with Burgos Wind.
  • Unplanned outage of Tongonan Unit 2.
• First Gen Corp (FGEN):
  • Forecasts cut due to lower earnings contribution from EDC.
• Trans-Asia Oil and Energy Development Corp (TA):
  • Delay in commissioning South Luzon Thermal Energy Corp's (SLTEC) coal-fired power plant in Batangas.
  • 2016 profit cut due to a lower Feed-in Tariff for the San Lorenzo, Guimaras Wind Farm.
• Manila Electric Co (MER):
  • 2015 net income cut slightly due to the expected implementation of the interim distribution rate.
  • Partly offset by lower provision for probable losses and a PHP799m gain from three ERC decisions.

WESM Price Trends

• WESM prices spiked in June, driven by increased outages and restricted gas supply from Malampaya.
• Companies like SCC, which have significant exposure to WESM, are expected to benefit from the elevated prices.

Capacity Growth Projects

• FGEN:
  • San Gabriel nat-gas power plant (414 MW) commissioned in 2Q16.
  • Avion nat-gas plant (97 MW) commissioned in Aug 2015.
  • Plans to add 900 MW (Sta. Maria I & II) and an LNG regasification terminal.
• SCC:
  • Southwest Luzon Power Generating Corp will commission 2 x 150 MW coal-fired power plants this year.
  • Plans to add 700 MW with St Raphael Power Generating Corp in 2018.

Renewable Energy (RE) Projects

• EDC:
  • Burgos Wind project (150 MW) commissioned in late 2014.
  • One of three projects granted FiT under the first allocation.
  • Expected to contribute fully to earnings in 2016 once transmission issues are resolved.
  • Plans up to 270 MW of geothermal projects, equivalent to $23%$ of total geothermal capacity.
• FiT Rates:
  • Wind: PHP8.53/KWh
  • Biomass: PHP6.63/KWh
  • Solar: PHP9.68/KWh
  • Run-of-river hydro: PHP5.90/KWh
• Total RE Capacity Granted: 304.1 MW as of Jan 2015.

Research Offices

• Regional Head, Research & Economics: Sadiq CURRIMBOHY (65) 6231 5836
• Regional Head of Institutional Research: WONG Chew Hann, CA (603) 2297 8686
• Regional Head of Retail Research: ONG Seng Yeow (65) 6432 1453
• Chief Economist (Singapore/Malaysia): Suhaimi JILIAS (603) 2297 8682
• Philippines Head of Research: Luz LORENZO (63) 28498836
• Thailand Head of Institutional Research: Maria LAPIZ (66) 2257 0250
• Thailand Head of Retail Research: Sukit UDOMSIRIKUL (66) 2658 6300 ext 5090
• Vietnam Head of Retail Research: NGUYEN Thi Ngan Tuyen (84) 844555888×8081
• Vietnam Head of Research: TRINH Thi Ngoc Diep (84) 444555 888 × 8208

Summary

The Philippines power sector is showing signs of growth, particularly in the renewable energy and capacity expansion areas. Despite the overall Neutral rating, companies with near-term capacity growth and exposure to the WESM are highlighted as potential buys. EDC is noted as a key player in the RE sector, with the Burgos Wind project expected to significantly boost its earnings in 2016. The sector's growth is also supported by the addition of new baseload and mid-merit capacity over the next few years, with FGEN and SCC leading in large-cap companies and TA in small-cap. The WESM price increase in May and June presents profit opportunities, especially for companies like SCC, which have substantial exposure to this market.