Electricity Generating

Electricity Generating Plc (EGCO)

Investment thesis: Our meeting with EGCO yesterday left us unclear about the prospects for its recently-acquired coal assets and the structural shift toward a riskier power-cum-coal position. But a de-rating is very unlikely at this stage, as the coal contribution is still small and there is IPP capacity to go to tender. As the market has already priced in the govt awarding EGCO a new PPA to KEGCO and it may be a year before new IPP tenders are awarded, we don’t see any obvious catalyst in the foreseeable future, so have down-graded our rating to HOLD from BUY. Within Thai Utilities space, we prefer GLOW.
Acquisition is cheap—but raises concerns about structural shift? EGCO will spend US$197m to buy a 40% stake in the Indonesian coal mine, Manambang Muara Enim (MME). With its reported reserve of 140mt, the purchase price translates into $3.5/t—cheap, given that deals during the last two years for similar coal quality have ranged $5-6/t. According to EGCO, the move will enable it to enter Indonesia’s power market, as its Indonesian majority partner (60%) owns a 140MW power station and is an EPC contractor to power plants. Management said it remains open to further coal acquisitions as opportunities arise.
MME contribution small … MME targets sales tonnages of 1.2mt in 2012, mostly to neighboring power stations, ramping up to 3mt in 2013. But we think it would be premature to price in the YoY sales jump, as the firm has yet to contract its additional volumes. EGCO guides for EBIT margin of 15% (which seems low when compared with BANPU’s Indonesian [ITMG] mines’ EBIT of 25%). MME outsources to contractors, so its OPEX is higher. Given its small production capacity, we doubt that it could easily secure sales volumes, so may need to have sales brokered through coal traders, making for further margin squeeze.         
…and interest costs might wipe out profit: According to management, the acquisition will be financed entirely by debt. Together with our flat tonnage sales assumptions of 1.2mtpa, we anticipate losses of Bt40m for this year and Bt170m in 2013. On the flipside, if MME achieves its 2013 target, the profit contribution would be only Bt50m (~1% of total profit). EGCO’s balance sheet, however, remains healthy—gearing will rise modestly to 0.67x (from 0.56x), far below its 1.5x creditor covenant.
REGCO up for bidding, but result a year out: EGCO plans to submit two blocks at the REGCO site and another two blocks (900MW each) for IPP tenders. With in-place gas pipeline and transmission lines, management says the investment cost would be 20% lower than for a greenfield project. But it’s too early to assume that the firm will win the bids, as foreign investors may be able to obtain cheaper financing (a key variable in the 2007 tender round). Besides, it may be 2H13 before the winning tenders are determined (5,400MW of IPP will open to tender by YE12 or early 2013).