Ratchaburi Electricity Generating Holding

Ratchaburi Electricity Generating Holding Plc (RATCH)

- 4Q13 profit to contract on seasonal effect, but growth foreseen in 2014
We estimate 4Q13 net profit at B886m, dropping 58.3%qoq because of the following
reasons. 1) Availability Payment income (AP) of major power plants would decline
3.2%qoq. The forth quarter is a cold season in which an electricity demand is usually
low, while most power plants of RATCH have already produced power to the limit of the
contract since the first eleven months of 2013, so the company could not fully run its
power plants in the last month of 4Q13. 2) Shared profit from the subsidiary is
projected to decrease 64.0%qoq as a result of decreasing AP income on seasonal effect
and the limited power generation in 4Q13 as mentioned above. Moreover, due to
4.7%qoq depreciation of the Baht, the company would have to book a Fx loss from
Hongsa, RPCL, and Nam Ngeum 2’s debts. On the other hand, there would be a Fx gain
of around B360m from Yen and Singapore Dollar loans of RH Inter (functional currency
is US Dollar). Overall, FY2013 net profit is estimated at B6.7bn or a decrease of
13.2%yoy. However, we project the normalized profit in 2014 to grow continuously by
16%qoq because RATCH has only one major overhaul this year, versus an overhaul of
three units last year. Furthermore, a 210-megawatt SSP and a 9.9-megawatt VSPP
(RATCH holds 40% stake) are starting their commercial runs this year.
- Insignificant impact from new financial reporting standards
RATCH is changing its accounting record procedure to be consistent with the IFRS:
IFRIC 4/12 for an earnings report since 2014 onward. According to the new standard, a
power plant that sells power to a sole purchaser throughout its entire operation will be
booked as an asset of the power purchaser, while the seller will book the transaction as
a financial lease under ‘interest income from financial lease contract’ item in its income
statement and ‘trade receivable’ item in the balance sheet. The change in the record
procedure is an attempt to reduce fluctuation of income generated that usually
happens throughout the power purchase agreement period. Previously, most power
purchase agreements usually book high income in the first five years and then the
income declines significantly until, in some cases, resulting in a loss during the end of
the contract. However, an effect from the new financial reporting standards on RATCH
would be insignificant as three major power plants of the company at present have
different period of contracts, thus a negative factor will be negated by a positive factor,
as shown in the table on the next page. However, we will report about the actual effect
again after the auditor reports the clear calculation method.
- Buy. Dividend yield is 4.7% p.a. on average
We adjust the WACC assumption from 9% to 10% to reflect the current risk, resulting
in new 2014 fair value of B60 (previously B64). We recommend buying RATCH for its
upside of 26% and dividend yield of 4.7% p.a. on average.