GLOW Energy

GLOW Energy Plc (GLOW)

Investment thesis: As the market has been migrating to high-yield defensive stocks, we believe GLOW is the best fit within Thai Utilities space, due to its strong growth profile and expanding yield characteristics. Its dividend yield is anticipated to rise to 4.5% for FY13 and 4.7% for FY14 from only for 3.1% this year. That said, the stock currently trades at an exceptionally wide yield gap to EGCO. If the historical yield gap between EGCO and GLOW were to manifest again, there would be at least 10% upside to GLOW’s share price. In order to factor in our recent earnings upgrade and because we have rolled over our investment horizon to YE13, our new target price is Bt75, up from Bt69 for YE12.

Forecast upped on Ft rise: Because of the latest Ft charge increase, we have revised up our FY13 profit forecast by 4.5% to Bt8,567m (up 48% YoY). The variables in our projection lean toward upside, as we conservatively assume that the remaining EGAT subsidy won’t be passed onto next year’s Ft adjustments. According to the Energy regulator, the current Ft has yet to reflect the full EGAT subsidy—it still subsidies fuel costs by Bt0.20/unit.

Concerns on Ft cap have ebbed—rising trend underway … The new rate will be subject to a public hearing; the result of which will be known by Sept 13. The question whether history will repeat itself—the govt delayed the implementation of the last Ft rise by a month. In our view, that won’t happen this time—general inflationary pressure has eased and EGAT needs to mobilize funds for its investment program.
Indeed, we expect the Ft rate to rise further, given the fact that EGAT still subsidies power generation by Bt0.20/unit. The most spectacular example of this was when the price of oil rallied in 2008. EGAT tended to smooth out the effect of the spike in fuel source prices by holding down the Ft rate, then increasing the rate once fuel source prices declined.

Risk to rising gas costs mitigated: While GLOW’s gas costs will rise HoH in 2H12, we anticipate that future increases will be modest. Indigenous gas prices have changed structurally with upward adjustments to gas prices for some major fields, the start-ups of more expensive gas projects and, more importantly, the oil price rally. But Morgan Stanley forecasts that in 2013 that the price of Brent crude will average US$115/bbl, equal to the current spot price. Meanwhile, the use of expensive imported LNG will be limited by the modest capacity at PTT’s LNG receiving terminal.

Outlook
A catch-up Utility play on rising yield and solid growth profile: As the market has been migrating to high-yield defensive stocks, we believe GLOW is the best fit within Thai Utilities space, due to its strong growth profile and expanding yield characteristics. The commercial start-up of the Gheco-One project and the full capacity run of the Phase-5 unit led us to forecast exception FY13 profit growth of 48% YoY, which implies that the dividend yield will rise to 4.5% from only 3.1% for this year. That said, the stock currently trades at an exceptionally wide yield gap to EGCO (whose stock price has outperformed YTD). If the historical yield gap between EGCO and GLOW were to manifest again, there would be at least 10% upside to GLOW’s share price.  

Forecast upped on Ft hike: Despite the latest upward revision to Ft charge, we maintain our FY12 profit forecast unchanged, as we expect the effect of the Ft rate increase to be offset by higher gas costs than we previously assumed, particularly in 2H12. But we anticipate only a modest rise in the average gas cost in FY13 (from Bt310/mmbtu for FY12 to Bt320/mmbtu). The rate increase has positively impacted on our FY13 profit forecast, which we have revised up by 4.5% to Bt8,567m, growth of 48% YoY. The variables in our projection lean toward upside rather than downside, as we conservatively assume that the remaining EGAT subsidy won’t be passed through to next year’s Ft adjustments. According to the Energy regulator, the current Ft has yet to reflect the full subsidy—it still subsidies fuel costs by Bt0.20/unit.

Concern on Ft cap ebbed—rising trend underway… The Energy regulator yesterday approved a Bt0.18/unit increase to the Ft charge, which will boost the country’s retail electricity tariff during the Sept-Dec period by 5% to Bt3.71/unit. The new rate will be subject to a public hearing, the result of which will be known by Sept 13. The question whether history will repeat itself—the govt delayed the implementation of the last Ft rise by a month. In our view, that won’t happen this time—general inflationary pressure has eased and low income demographics received pay rises earlier this year while EGAT needs to mobilize funds for its investment program.
Indeed, we expect the Ft rate to rise further, given the fact that EGAT still subsidies power generation by Bt0.20/unit. The most spectacular example of this was when the price of oil (and the prices of gas and coal) rallied in 2008. EGAT tended to smooth out the effect of the spike in fuel source prices by holding down the Ft rate, then increasing the rate once fuel source prices declined (see Figure 2).

Risk to rising gas costs also removed somewhat: While GLOW’s reported gas costs will rise to Bt317/mmbtu for 3Q12 and further to Bt320-330/mmbtu for 4Q12 from about Bt310/mmbtu in 2Q12, we anticipate that future increases will be modest. Indigenous gas prices have changed structurally this year with upward adjustments to gas prices for some major fields, the start-ups of more expensive gas projects and, more importantly, the oil price rally. But Morgan Stanley forecasts that in 2013 that the price of Brent crude will average US$115/bbl, equal to the current spot price. Meanwhile, the use of expensive imported LNG will be limited by the modest capacity at PTT’s LNG receiving terminal. Note that LNG usage comprises only 15% of total gas consumption in Thailand. GLOW’s operating margin will rebound to almost a normal level of Bt0.50-0.55/unit in 4Q12 from Bt0.32/unit in August and the Bt0.08/unit trough posted for May.     

Recommendation and valuation
Maintain BUY with revised DCF target price of Bt75: GLOW is now our preferred pick within Thai Utility space. As defensive high-yield characteristics are becoming increasingly popular with investors, we believe that the firm’s rising dividend profile, driven by superior earnings growth in FY13, will prompt further share price appreciation. The latest increase to the Ft charge also leads us to anticipate a further rise around the corner (based on the experience of the 2008 oil price rally and the months that followed). That would mean scope for upside to GLOW’s forward earnings in excess of our current forecast. In order to factor in our recent earnings upgrade and because we have rolled over our investment horizon to YE13, our new DCF-derived target price is Bt75, up from Bt69 for YE12.