Electricity Generating
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Up forecast and fair value to reflect investment in coal business BUY
Current price (B) 116.00
Fair Value (B) 127.32
Market cap (B bn) 61.07
Investing to recover profit growth in next 5 years
Up 2012-2013’s fair value to reflect investment in coal
business
Buy on weakness. More upside expected from IPP auction
CGR
Estimate Adjust & Fair Value in 2012-13
New Old %chg. New Old %chg.
Net Profit (Bm) 1 0,839 1 0,709 1.2% 7 ,037 6 ,702 5.0%
EPS (B/share) 2 0.45 2 0.21 1.2% 1 3.28 1 2.65 5.0%
Fair Value (B/share) 127.32 119.57 6.5%
Assumption
2012F 2013F
Source : ASP Research
Investing to recover profit growth in next 5 years
According to the analyst meeting yesterday, EGCO’s management said that
the company is now investing in new projects, especially joint-venture in
projects that are now operating and can generate profit for the company
immediately, such as a purchase of additional shares in Quezon power plant
in the Philippines by 45.875% (to 98%) in June 2012 and a acquisition of
40% share of Mannambang Muara Enim (MME) coal mine in order to extend
to power plant business in Indonesia. Moreover, in 2H12 the company also
has a plan to increase its investment for the Quezon power plant (capacity
expansion of 500 MW); it is now during a negotiation for a long-term power
purchase agreement (PPA) with the Philippines electricity authority, as well as
to join in the new round of IPP bidding in will be held in late 2012. EGCO is
ready in terms of location, electricity pipeline, and gas pipeline in REGCO and
Pluak Daeng district. Accordingly, total capacity of EGCO would increase
continuously (current capacity is 4,700 MW). Included with the projection in
hand at 1,480 MW, in 2019 total capacity of EGCO would rise to 6,190 MW or
the growth of 31.5%.
Up 2012-2013’s fair value to reflect investment in coal business
We revise up our 2012-2013’s net profit forecast as shown in the table in
order to reflect the investment in the coal business mentioned above. Profit
from the coal business in the next 1-2 years might not be significant because
it is still in an early step. Coal production capacity would increase
continuously to 7 million tons per year in the next 5 years from only 1.2
million tons per year in 2012. Considering the buying price of the coal
business in this round, it is quite cheap because it equates to only
US$3.5/reserve tons, which is lower than the market price of around US$5-
10/reserve tons. Consequently, this investment is considered as a positive
factor in the long run. However, norm profit in 2H12 tends to weaken from
1H12 as it is pressured by profit in 4Q12 which is projected to hit the year’s
low on seasonal effect as in this quarter the power plant will not operate for
the full quarter since most power plants have already been demanded by the
EGAT to fully operate to complete the contract capacity since the first 9-11
months of the year. Accordingly, there will not be an income from availability
payment in the last 1-2 months of 2012. In addition, BLCP (EGCO possesses
50% shareholding) normally has one month of maintenance shutdown in the
4th quarters, pushing profit sharing from joint venture to drop in 4Q12.
Nevertheless, there is still a positive factor to prevent profit in 2H12 from
substantially falling, which is the recognition of profit from its 98% stake in
Quezon power plant for the first time in 3Q12.
Buy on weakness. More upside expected from IPP auction
Under the new forecast, fair value, using DCF, at end-2012 is B127.32/share
(from B119.57/share). The current market price has only 10% upside from
2012’s fair value, so we recommend buying on weakness. The stock still has
a long-term supporting factor from its new investment such as new round of
IPP auction. In case EGCO wins the auction for 1 power plant, fair value will
increase by approx B10.18/share, preliminary evaluated by a method of
replacement cost under an assumption that the cost of power plant building
stands at US$850,000/megawatt (cost of facilities not included) and D/E ratio
at 3:1.
