GLOW Energy

GLOW Energy Plc
Investment thesis
Meeting with management last Friday confirmed our positive view on GLOW’s profit growth outlook. The stock remains our preferred pick within Thai Utilities space. As recent Thai Utilities share prices have squeezed the mean dividend yield to only 4% and new IPP capacity auction winners won’t be known till 2H13, we doubt that the outperformance will prevail. That said, GLOW looks well placed—scope for earnings and dividend upside next year. In order to reflect our recent profit forecast upgrade, we have revised up our DCF YE13 target price to Bt79 from Bt75.      
4Q12 will be peak for the year …
Despite higher gas costs, management guides for stronger earnings in 4Q12. Using the Sept number as a yardstick, normalized net profit would be at least Bt1.8bn versus 3Q12’s Bt1.5bn. We forecast Bt2.1bn for 4Q12, boosted by a production ramp-up at the Phase-5 unit with the start-ups of industrial customers’ (ICs) new projects and better run rates at other cogeneration units with the resumption of ICs’ plants in Nov following shutdowns during Sept-Oct. A higher gas cost is, in turn, positive for GLOW’s steam business, as it can charge higher prices.   
…2013 outlook is even better—forecast raised
We have raised our FY13 profit forecast by 4% to Bt8,623m—exceptional growth of 54% YoY. Our revised model reflects cheaper coal contracts of US$85/t for FY13 (we had earlier assumed $105/t). Phase-5’s utilization has consistently improved; it currently operates >70% and GLOW now targets an average of 85% next year (our earlier estimate was 80%). Also, we have incorporated the start-up of a 110-MW gas-fired SPP12, which is currently undergoing reliability testing; COD by early Dec. The project is forecast to add Bt200m/year to GLOW’s bottom-line.  
Scope for earnings upside
A further Ft rise is very likely in 2013 in tandem with a forecast flat gas price environment, we believe. The next adjustment is due in Jan—every Bt0.01/unit increase would boost GLOW’s profit by Bt40m/year. The firm can still claim compensation for Gheco-One’s start-up delay from its Korean contractor, Doosan; the remaining amount is US$120m. Also, the current high water level (following a drought) in the reservoir of its HHPC hydro-power station in Laos should be a boon—the firm currently targets only 440GWh versus 2012’s 540GWh. Every 1GWh increase in production would add about Bt1m to GLOW’s annual profit.      
Gearing peaked out and yield surprise ahead
The firm’s gearing has already peaked and is trending downward. With scheduled debt repayments, insignificant future CAPEX and profit realization at all new projects, we anticipate that the net debt/equity ratio will dive to 1.2x by YE13 from 2.0x at YE11. And we still see scope for upside to the dividend payout for FY13. Conservatively pegged to a minimum payout of 50%, we assumed an FY13 DPS of Bt2.9.