Electricity Generating

Electricity Generating Plc (EGCO)

3Q12’s net profit to plunge 74.4%qoq, norm profit to decrease 7.8%qoq

We project net profit in 3Q12 at B1.609bn, a significant fall of 74.4%qoq
since in 3Q12 there are not an extraordinary profit of B4.31bn from
revaluation of fair value of Quezon power plant in the Philippines and a FX
gain of B271m like in 2Q12. On the contrary, an extraordinary item foreseen
in this quarter is a slight FX loss of around B5bn. However, norm profit in
3Q12 is anticipated to decrease 7.8%qoq due mainly to a decrease in
Availability Payment (AP) income after the peak season has passed in 2Q12
as well as a 30-day major maintenance shutdown of Rayong power plant
(REGCO) and a 15-day maintenance shutdown of Khanom power plant
(KEGCO) which have made maintenance expense increase from 2Q12.
Moreover, cost of interest expense in 3Q12 is projected to rise by 57.0%qoq
from the full recognition of US$364m in debt from Quezon (EGCO holds 98%
stake) for the first quarter. However, there is still supporting factor to boost
overall profit of EGCO in 3Q12, which is the recognition of income from small
power producers (SPPs) such as SPP 2-5 and GPS (1-3) for the first full
quarter. Consequently, overall net profit in 9M12 is estimated at B9.57bn,
growing 112.0% from from the same period last year and comprising 88.3% of our
FY2012’s forecast.

Likely to revise up 2012-2013’s forecast to reflect SSPs
We are likely to revise up our net profit forecast for 2012-2013 after the
company announces its earnings result in 3Q12 in order to reflect a likely
better-than-expected profit. At the same time, we would also raise our
assumption for income from SPPs, such as SPP 2-5 with total capacity of 30
MW and GPS (1-3) with total capacity of 12 MW (according to EGCO’s
shareholding), which has been gradually recognized since 1H12. Moreover,
there would be income from other projects that will start commercial runs in
2013, such as NED (expansion), GPS (4), TWF, and YEH, which we have still
not included in our forecast. We project profit in 4Q12 to soften from 3Q12
on seasonal effect as domestic electricity using usually decreases in winter
(low season). In addition, operating hour of majority of the power plants has
already reached the contract limit in the first 9-11 months of the year, so the
operation in the 4Q12 would decrease, making the AP income hit the year’s
low. Furthermore, there would be pressure from share of profit from the
company’s investment in BLCP (50% stake) that will fall significantly from
3Q12 due to a 1-month annual maintenance shutdown.

Raising fair value…Buy on weakness
We are revising up our fair value according to the factors above. Current fair
value at end-2012 (DCF) is B127.32/share. We reiterate our recommendation
to buy. However, as the current share price has already exceeded 2012’s fair
value, in the short term we recommend buying on price weakness. The stock
still has supporting factors in the long run from its new investment as a new
round of IPP auction winning. 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.