Electricity Generating

Electricity Generating Plc (EGCO) 

 

Investment Thesis

We previewed EGCO’s 3Q15 results with group CFO Piya Jetasanon. Both the top line and core net profits are expected to be higher than those of the first two quarters this year. However, as we cautioned on 28 August (Most visible long-term growth profile), unrealized FX losses may put the overall bottom line in the red as the USD/THB pair moved from 33.8 to 36.3 during the quarter. Nonetheless, we will experience an upside to its IPPs’ revenue as their AP tariffs are reset to a higher FX base. Plus, the FX loss is unrealized loss, so group cash flow is unaffected, which keeps its long-term earnings growth and dividend payout capability intact. If we are to see the market react negatively to this news, we view it as a perfect opportunity to buy into this fact. The stock remains our conventional utilities top pick and we reiterate our BUY rating with a target of Bt179.

Preview for 3Q15

As EGCO’s coal-fired BLCP plant had unplanned shutdowns on top of its scheduled maintenance during 1Q15 and 2Q15, the firm’s 3Q15 revenue and core net profit will improve QoQ to Bt4.5bn and Bt2.1bn respectively, beating 1Q15 and 2Q15 results. The Bt952m gain from EGCOM Tara have been booked during 3Q15, however total FX loss of ~Bt3bn was also incurred as a result of revaluation of the group’s US debt portion. We now expect EGCO’s 3Q15 bottom line to dip to a loss of Bt73m.

Long-term growth and dividend remain intact

From the FX loss, there is an immediate upside to EGCO’s long-term earnings growth as the AP tariff for its IPPs will be rebased to the higher USD/THB rate throughout their remaining PPA lives. Some loss reversal is also expected in 4Q15—the USD/THB rate has dropped 0.7 QTD thus far. The 974MW secured capacity growth during 2016-19 remains intact, giving a 26% growth in capacity by 2019 and core net profit CAGR of 13%, surpassing Bt10bn by 2018. Additionally, we now expect a 2015 DPS maintained at Bt6.25, on par with 2014’s absolute payout. 

New projects are lining up

On top of the secured PPAs projects under development, there is scope for a capacity top-up beyond 2019. An EIA study is being conducted for BLCP’s expansion, in preparation for any new IPP biddings. There are also a few brownfield projects within Asia that are currently under due diligence. Additionally, it has two further greenfield projects (SCOD 2015-20) under negotiation at present.

What’s game?

We expect the consensus to continue the flow of ratings upgrades for EGCO as the street can appreciate the firm’s most resilient earnings growth profile will linger at least until 2019, and this comes on top of what seems an unmistakably cheap valuation. The large unrealized FX loss for 3Q15 will take a toll on overall net profit (possibly into the red) and may surprise the market in the short term. We believe that this will present a great opportunity to buy the stock at a truly bargain price.