Ratchaburi Electricity

Ratchaburi Electricity Plc (RATCH) 

Ratchuburi’s Loy Yang A power plant sale and its frontrunner status for the next round of IPP bids in Thailand in 2013 not only eliminate the overhang on its spending plan but should also provide strong growth of up to 30%. We are positive on the Loy Yang sale as this is a small earnings contributor and the proceeds will be used to repay debt. We also think that Ratchaburi is well-placed to clinch Thai IPP projects during the next round which must be held next year. Maintain Outperform and DCF target price (WACC 6.8%). 
What Happened
80%-owned RATCH-Australia has
sold its 14% stake in the Loy Yang A
coal-fired power plant in Australia to
AGL Energy for A$120m, comprising
A$20m cash and a 15-year tenure
scheduled payment option agreement
at an NPV of A$100m. The A$20m
cash will be booked in 3Q12. The
company indicated that it could
renegotiate the timing of the
instalments to less than 15 years.
What We Think
We take a positive view of this sale.
First, the A$120m price tag
represents 41% of its total acquisition
cost of A$290m for RAC (A$160m
loan note and A$130m for 80% equity)
and this project contributes only 1%
of the group’s earnings in the form of
dividend income and 4% of
Ratchaburi’s capacity. RAC has an
effective interest of 308MW in Loy
Yang A’s capacity and this, in turn,
account for 27% of RAC’s capacity.
Second, this 25-year-old coal-fired
power plant is exposed to the risk of a
carbon tax which Australia
introduced recently. Sale of this asset
will reduce the risk of a future carbon
tax burden.
What You Should Do
We recommend that investors buy the
stock given the likelihood of more
M&A transactions as Ratchaburi is
expanding and restructuring its
portfolio in preparation for IPP round
III which we think will happen in 2013.