Electricity Generating

Electricity Generating Plc (EGCO) 

 

Investment thesis

EGCO’s past share price outperformance is unsustainable and its forward share price performance may disappoint, we believe. A recent big-bang acquisition and expectations that REGCO’s PPA will be extended and tenders will open for new coal-fired PPA’s are already priced in. But management turned pessimistic on the contract renewal and we don’t think new coal-fired tenders will open soon, as the market currently envisages. New M&As are on-track—but the capacity additions will be only small in the foreseeable future. Incorporating value accretion from the recently-acquired MPPCL and the start-up of the Bocco Rock project, we have raised our DCF target price to Bt164 from Bt148, but downgraded our rating to HOLD from BUY.   

Eyes on new coal-fired bidding …  

EGCO is positive over new coal-fired tenders, as the NCPO wants fuel diversification; and the firm expects an upward revision to new generating capacity in the upcoming PDP. The minimum reserve margin will be raised to 20% from 15%, implying a 1,000-1,500MW addition to that of the current plan. But we are skeptical that capacity plans will rise. A year of weak GDP has squeezed power demand growth—this year’s peak demand of 26,598MW was flat YoY and was 9% short of the projection in the current PDP. So there isn’t any pressing need for new bidding. Also, coal-fired projects entail major execution risk—stringent EHIA requirements and difficulties finding sites free from civic resistance.        

… but diminished expectation over REGCO PPA extension  

Management seemed to play down on likelihood of REGCO’s PPA being extended, citing that the recently-appointed ERC committees are now reviewing all projects (which are close to retirement), not REGCO in particular. That raises uncertainty over its PPA extension proposal. Regardless, we think it should be approved by Oct. REGCO is due to go off-line on Dec 9 under its PPA with EGAT. If it were to shut down ahead of PPA extension approval, it would take several months to re-start.

Further acquisitions, but only small additions

After the recent acquisition of 40.95% of the 630MW coal fired MPPCL plant in the Philippines, EGCO is close to closing another deal. The firm guides only that it will spend US$215m for a 20% stake in an overseas operating power asset. Based on our ballpark estimate, the aforesaid cost implies equity capacity to EGCO of 100MW (~2% of its total) and less than a Bt100m profit accretion a year.   

Earnings accretion from recent acquisition and BRWF's start up

We have incorporated profit accretion from EGCO’s recent acquisition of MPPCL in mid-July and the start-up of the 113MW Boco Rock wind farm (Australia) in Feb 2015, so have raised our profit forecasts by 8% for FY14 to Bt7,328m and by 26% to Bt7,713m for FY15. The scope for upside depends on new acquisitions and REGCO’s PPA extension (as we have already factored in the contributions of all the firm’s projects). Management guides that MPPCL may double the current capacity at the site, but there is no specific plan as yet. If a clear plan were to take form, we think the start-up would be at least five years from then.