Electricity Generating

Electricity Generating Plc (EGCO)

Marching forward with new investment projects to boost long-term growth
EGCO has been marching forward with new investment projects in order to
compensate for decreasing income from REGCO and KEGCO since the power
purchase agreements (PPA) are going to expire in 2014 and 2016, respectively, and
to generate profit growth in the long run. New projects that would start commercial
operations in 2013 are mostly renewable power generation projects like the 6.9 MW
Theppana wind power project or TWF (EGCO holds 90% stake) and the 57 MW
Solarco solar power project (EGCO holds 51% stake). The projects that are believed
to generate significant value added for EGCO are those starting commercial runs in
2016. Regarding the new Khanom power plant (900 MW) that has been approved by
the Ministry of Energy to start the construction in the same area of the old plant, it is
currently in a negotiation process for the PPA. For 3 projects of SPP with the total
power generating capacity of 375 MW, the construction would be gradually finished
during 2016-2017. In addition, the 500 MW Quezon expansion project in the
Philippines in 2018 is now under a process of negotiation (EGCO would hold around
50% stake), which would be followed by the 1,280 MW water power project Xayaburi
(EGCO holds 12.5% stake) in 2019. Other than that, if EGCO wins a bid for the new
IPP (with total capacity 1,800 MW), the project would start generating income for
EGCO since 2021. EGCO has high potential to win the auction due to its low cost
because it can use the old land of RECGO in the construction. We have still not
included the Quezon expansion and the Xayaburi projects in our current forecast.
Furthermore, EGCO is now negotiation for acquiring many power plant businesses
overseas.
- Q2 2013’s norm profit to grow qoq on seasonal effect and solar power plant
We project 2Q13’s norm profit to grow continuously from 1Q13 due to the high
season (summer) in which every power plants is ordered to operate at a full capacity
to serve increasing demands. At the same time, EGCO would start recognizing
income from the 6.5 MW solar power project GSP Phase 2 for the first full quarter
and the 8 MW solar power project NED Expansion that has commenced a commercial
run in May 2013. Overall norm profit in FY2013 is projected to thrive continuously by
16.3%yoy since the company will recognize income from Quezon by 98% for the full
year in 2013 as well as gradually book additional income from SPPs and renewable
power projects although profit sharing from REGCO and KEGCO would weaken
because they are entering a final period of the PPA contract with the EGAT.
- Buy. Quezon expansion and Xayaburi to enhance FV by 18%
The fair value at end-2013, using DCF, is B147.57/share. We reiterate our
recommendation of BUY for EGCO. The current market price is already close to
2013’s fair value, so in the short term we recommend buying on the price weakness.
For the long term, there is a positive factor from the investment expansion
(especially the IPP bid). Under the replacement cost method, EGCO’s fair value is
projected to increase by around B15-20/share for every power plant for which it wins
the bid. If the additional value from the Quezon expansion and Xayaburi (projected
at B7/share and B4/share, respectively) is included, EGCO’s new fair value would
have 18.4% upside from the current fair value.