GLOW Energy

GLOW Energy Plc

Investment thesis: We attended GLOW’s analyst meeting yesterday. The feedback was negative; we anticipate a consensus earnings forecast downgrade. While rising concerns about the firm’s power sales and forward profitability might build negative sentiment toward the stock in the near-term, we remain optimistic about its mid-term outlook. We still anticipate a strong bounce in 2Q12 as power sales stabilize and gas costs ebb. In order to factor in our recent earnings downgrade, we have cut our YE12 target price to Bt64 from Bt67.
Forecast cuts—a tale of two halves: Based on the firm's negative guidance for power sales, we have cut our FY11-12 profit projections by 13% and 12% to Bt3,615m and Bt6,901m, respectively. Our current estimates have yet to include US$500,000/day compensation from contractors for delays to an original Nov 9 schedule under the “Delay Liquidated Damage (DLD)” obligation. Our revised modeling indicates a tale of two halves for its earnings outlook—4Q11 disappointment will be followed by a strong bounce in 2Q12 with the start-up of Gheco-One, stabilized power sales and easing gas costs.
Power sales dip—a short-term hiccup: The 4Q11 retreat in power sales caused by maintenance shutdowns among industrial customers’ (ICs) plants reduced dispatching from EGAT, while the flooding raised concerns about the power sales outlook. GLOW cited that it's still too early to assess the impact of the flooding on its power sales, as the shutdowns of ICs' plants will end by late Nov. Yet, historical evidence from the 2008-09 era indicates that the trough-to-resumption of pre-crash level sales took only five months and the impact was less than 10% of total IC sales on an annualized basis.
Operating margin under pressure, but will ease in 1Q12: GLOW also guided for squeeze in Cogen’s operating margin of Bt0.30/unit from Bt2/unit in 3Q11, due to a 10% QoQ rise in gas costs. The Ft charge was frozen and will remain so until at least April 2012 (the govt is likely to maintain the cap to YE12). But we still anticipate a gradual recovery in the firm's operating margin—MS expects crude prices to decline over the next 6-8 months, in which case, gas prices have already peaked and will fall by early next year, when indigenous gas prices are scheduled for adjustment.
Start-up of Gheco-One and resumption of HHPC: GLOW has completed the public hearing process for its Gheco-One plant and expects it to obtain an operating permit by early 2012—COD by no later than end-March. Moreover, the Laotian hydropower HHPC project will resume a full capacity run next year, given a sufficient water level in its reservoir.