Energy Absolute

Energy Absolute Plc

Initiating coverage as BUY. After years of slim profit from the low-margin biodiesel
business, we expect EA’s earnings to leap from 2014F after operational startup of its
first 90MW solar farm in Dec 2013. The success of developing the first and largest solar
farm in a single location is expected to be a share price catalyst. More upside is ahead
from planned investment in wind farm projects. We initiate our coverage of the stock
with BUY rating and 12-month target of Bt9/share.
Thailand’s green powerhouse. EA has its feet firmly planted in the area of green
energy, beginning with biodiesel and now expanding to solar power, where it can
obtain government incentives. By 2015F, it will have 278MW solar power capacity
already operating under Power Purchase Agreements. This places it in top place in
Thailand, based on announced capacity to date, and will be pivotal to earnings growth.
Meanwhile, its biodiesel business will continue to step up, but slowly, given the current
intense level of competition due to oversupply.
Competitive investment cost, strategic locations ensure favorable return. The
fall in development cost of solar power projects will be a boon for EA. At a competitive
investment cost of only Bt75.6mn/MW, thanks to ever-decreasing solar panel prices,
we estimate project IRR could be above 20% with equity IRR of >50%. Its locations are
strategic, enabling it to deliver more to the national grid than others.
Wind power project is an upside. EA plans to expand its renewable energy ventures
into wind power projects in three provinces, Nakhon Si Thammarat, Songkhla and
Chaiyaphum, with a combined capacity of 404MW. These wind power projects will be
subsidized by the government via an adder of Bt3.5/KWh for ten years after their
commencement date in 2015-17F.
5-year core earnings CAGR of 133% expected. We forecast EA’s net profit will grow
at a CAGR of 133% in 2012 to 2016F, primarily from greater profit contribution from its
solar power business. We estimate renewable power profit to comprise more than
90% of total net profit by 2016F from zero in 2011. Note that we did not include
revenue from the wind power business in our projection.
Valuation & risks. We value the stock using sum-of-the-parts valuation methodology
given the differing nature of its two core businesses, biodiesel and renewable power.
This comprises a DCF-based value of the solar power business at Bt8.4/share and PBVbased
value of the biodiesel business at Bt0.6/share. Note that we did not include
potential upside from the wind power business in our valuation. Key risks are higher
investment cost and lower than expected return from the solar business. Other risks
include delayed startup of its solar power projects and a weaker margin from the
biodiesel business.