Electricity Generating

Electricity Generating Plc (EGCO)

March forward with aggressive domestic and international investment to generate growth
According to the analyst meeting yesterday, EGCO’s management gave an aggressive prospect toward its investment expansion plan, both domestic and international, to create profit base. The domestic investment plan can be divided into 4 projects. 1) IPP auction – This project will start in 1Q13 and the result will be announced in mid-2013. In joining this auction, EGCO has planned to use its old land. 2) SPP auction - This project will start after the IPP auction finishes in order to generate power to the system after 2020. 3).Alternative energy business expansion – EGCO has planned to increase power generation capacity of its alternative energy business to 20-25% of its total capacity. 4) Investment in power plants in neighboring countries, particularly for hydro power plants which still have a potential for substantial expansion.For international projects, they will be an expansion of existing power plants, such as Quezon expansion of 500 MW which will reach a conclusion by early 2013 as well as a purchase of new power plants (M&A) in Indonesia and the
Philippines which are now under a feasibility study. Overall, including all projects in hand, EGCO’s power generation capacity will increase 32% from 4,700 MW at present to 6,200 MW by 2019.

4Q12’s norm profit to drop qoq on seasonal effect…but 38%yoy growth still expected in 2012
We project norm profit in 4Q12 to weaken from 3Q12 on seasonal effect as domestic electricity usage 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 availability payment (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. However, norm profit in 2012 tends to thrive by 38%yoy with a continuous growth of 9%yoy in 2013 from the recognition of income from Quezon by 98% for a full year as well as gradual recognition of additional income from SPP and alternative energy power plants despite weakening profit from REGCO and KEGCO which are entering a final period of the PPA contract with EGAT.


Buy on weakness
2013’s fair value (DCF) is B147.57. We reiterate our buy recommendation.The current market price has only 14% 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.