Electricity Generating

Electricity Generating Plc (EGCO)

Event:
We maintain an Outperform rating on EGCO and raise our target price to Bt137 from Bt132 as we roll forward our TP. EGCO remains fundamentally attractive from a valuation point of view and we see the stock as the best way to play IPP bidding in 2013E.
Impact:
Fundamentally attractive: We reiterate our view that EGCO deserves to trade on at least 1x P/BV (our target multiple) vs 0.9x currently. Our view is based on: 1) the company’s ability to gear up its balance sheet through more borrowing and higher dividend payouts; and 2) growth potential offered by the Thai market and in the region where power shortage remains a key challenge. Putting these together, EGCO is likely to maintain its ROE above our assumed cost of equity of 9.6% with moderate long-term growth.

Key catalysts over next 6-12 months:
We expect EGCO to finalize its plan for a 500MW expansion of Quezon Power (QPI) over the next 3-6 months. Given the profitability of power assets in the Philippines, we expect EGCO to generate equity IRR of mid-to-high teens for this investment. A bigger catalyst, however, is likely to be IPP bidding in Thailand, which we expect over the next 12 months. Six projects totalling 5.4GW are up for grabs and we believe EGCO makes for a highly competitive bidder. Based on previous rounds of IPP and SPP biddings, we believe the stock could re-rate to 1.2x forward P/BV or higher.

Too much focus on Indonesian coal acquisition:
We believe too much focus has been placed on EGCO’s recent acquisition of a coal mine in Indonesia. Any impact to total valuation is likely to be immaterial, however: 1) the purchase price already includes future capex and the target has no debt; 2) the company is not focusing on growing its coal portfolio and as such the transaction is likely to be a one-off, not the first of many; and 3) total equity injection assuming D/E of 1/1 still makes up less than 5% of total valuation.

Earnings and target price revision
2012E EPS increased by 74% due to asset revaluation gain from the QPI acquisition.

Price catalyst:
12-month price target: Bt137 based on a DCF methodology.
Catalyst: Quezon expansion, IPP bidding

Action and recommendation:
EGCO is now the last OP-rated Thai utilities stock under our coverage, trading on just 0.9x 2013E P/BV compared to sector peers’ 1.7x average. With a defensive earnings profile, strong cash flow, low leverage and attractive yield, EGCO remains our top pick among Thai defensive names. Maintain Outperform rating, with TP raised to Bt137.