Electricity Generating

Electricity Generatiing Plc (EGCO)

3Q12’s net profit falls 66.9%qoq, but norm profit drops only 2.1%qoq, better than expected
EGCO’s net profit in 3Q12 stood at B2.07bn, falling significantly by
66.9%qoq because in 3Q12 there was not an extraordinary profit of
B4.31bn from revaluation of fair value of Quezon power plant in the
Philippines like it had been in 2Q12. However, norm profit in 3Q12
decreased only 2.1%qoq due mainly to a decrease in Availability
Payment (AP) income from a 30-day major maintenance shutdown of
Rayong power plant (REGCO) and a 15-day usual maintenance
shutdown of Khanom power plant (KEGCO) which have made
maintenance expense increase from 2Q12. 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 equated to B10bn, growing 122.4% from the same period last
year and comprising 100% of our FY2012’s forecast.

Revise up 2012-2013’s forecast to reflect SPPs
We revise up our net profit forecast for 2012-2013 to reflect the betterthan-
expected profit in 3Q12. At the same time, we 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. Consequently,
2012-2013’s net profit forecast is revised up by 5.5% and 6.1% from
previously as showed in the table. 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 decrease significantly from 3Q12 due to a 1-month
annual maintenance shutdown.

2013’s fair value is B147. Buy on weakness

We change to use 2013’s fair value (DCF) at B147.57. Our buy
recommendation is confirmed. The current market share has only 13%
upside left, so in the short term we recommend buying on price
weakness. The stock still has supporting factors in the long term from its
new investment such 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.