Forecasting ACR’s 2013 and 2014 Earnings

Alsons Consolidated Resources, Inc. (PSE: ACR, the “Company”) is different from stocks which I consider cheap, at P1.40 ACR is trading at 17.5x PE ratio using 2012 earnings. A purchase of stock with high PE ratio is justified if there is substantial growth in expected future earnings. For example, stock A trades at P40 with earnings per share (EPS) of P1 or a PE ratio of 40x (P40 / P1). Assuming that by next year stock A’s EPS will jump to P30, then stock A is a bargain even at P40 because by next year stock A will be trading at 1.33x PE ratio (purchase price of P40 / EPS next year of P30).

ACR’s attraction is its move to concentrate its earnings source to power generation in Mindanao. ACR currently have 100 MW and 55 MW capacities through Western Mindanao Power Corporation (WMPC) and Southern Philippines Power Corporation (SPPC). ACR announced in a press release on March 22, 2013 the takeover of 98 MW Illigan Diesel Power Plant. [1] On July 9, 2013, ACR announced the buyout of the remainder 40% interest in Conal[2] hiking its effective interest in WMPC and SPPC to 55% from 37.40%. ACR expects phase one (105 MW) of its 75%-owned coal-fired power plant in Maasim, Sarangani, Sarangani Energy Corporation (SEC) to operate commercially in September 2015 and phase two (105 MW) to operate in 2016. [3] Other than SEC, ACR is in the advance stages of development for the 105 MW San Ramon Power, Inc. (SRPI) in Zamboanga. The completion of the construction is expected to be delayed for 6 to 12 months or a push back of the completion from 2016 to 2017-2018. [4] All in all, ACR expects a surge of its power capacity from 155 MW to 463 MW by 2016-2018 which is 25% of Mindanao’s projected peak demand of 1,829 in 2016. [5]

However, what matters most to investors are: how much will it contribute to ACR’s earnings and what should be the valuation?

For 2013, we should consider the following events:

  1. Increase of ACR’s interest in Conal to 100% from 60%.
  2. Takeover of 98 MW Illigan Diesel Power Plant.

Illigan Diesel Power Plant is 100% owned by ACR through Mapalad Power Corporation (MPC) while WMPC and SPPC initially contributes 37.40% earnings and was later increased to 55% with the 100% control of Conal in July. For conservatism, let’s assume that the increase of interest in Conal will have no effect in ACR’s earnings. In order to calculate for the estimated earnings contribution of MPC, 1) revenue contribution must be calculated and 2) applied with applicable profit margin.

Below is the calculation of MPC’s actual and estimated revenue contribution:

ACR1

Note that MPC rehabilitated the 98 MW diesel power plant in Illigan. The power plant started operating at 10M-26MW for March to June which explains the small revenues it generated in the second quarter. It gradually increased capacity and was finally fully rehabilitated at 98MW capacity in September 2013. Thus, it is very conservative to assume that MPC will generate only P591 million revenues in the fourth quarter given that MPC will operate at 98MW capacity in the last three months of 2013.

In determining the applicable profit margin, looking at historical profit margin will be helpful in in order to determine the appropriate figure:

ACR2 ACR3

The sudden dip of ACR’s profit margin in the 3rd quarter of 2013 is alarming. It may mean inefficiency in operating the Illigan power plant which is likely because the power plant is already old. However, according to the management, the surge in cost of goods and services was caused by the increase in fuel usage of MPC but was pass-on to its customers. [6] However, should the fuel costs be “pass-on” ACR’s profit margin should have not declined from 40% in the 2nd quarter to only 16% in the 3rd quarter. Therefore, we can say that costs incurred in rehabilitating MPC’s Illigan power plant were also included in the cost of goods and services. For conservatism, let’s assume a profit margin of 20% for Illigan power plant.

Below is the calculation of estimated earnings of ACR’s in 2013:

ACR4

Based on our calculation above, we can expect ACR to report earnings attributable to parent of P582 million which is a little higher than P508 million reported in 2012.

How about for 2014? For 2014, let’s consider the increase in ownership in Conal.

 ACR5

For 2014, we can expect earnings attributable to parent of P930 million or an EPS of .148. With an estimated EPS of .148 for 2014, ACR is trading at 9.45x PE ratio.

One more thing to consider

ACR’s sale of 60% interest in Lima Land, Inc. for 1.36 billion [7] appears to be at a huge gain. Below is my calculation based on the figures provided in the 3rd quarter of 2013:

ACR6

Considering one-time gain, we can expect ACR to report earnings in 2013 attributable to parents of P1,081 million. (Warning: Make sure not to use PE multiple valuation on earnings that includes one-time gains.)

Using conservative assumptions in estimating forecasted earnings, in my opinion, ACR is an attractive investment for those willing to hold for 2-5 years.

Sources:

  1. Press Release: “Alsons Consolidated 2012 Profit up 12%, as it takes over Iligan Diesel Power Plant”; Board approval of cash dividend declaration, Annual Stockholders’ Meeting on May 24, 2013 with record date of April 15, 2013, http://goo.gl/r2vhM0
  2. Press Statement: “Alsons Consolidated Resources, Inc. Acquires EGCO stake in Conal Holdings Corporation”, http://goo.gl/4bk66r
  3. Press Release: “Alsons Power’s 13 Billion Peso Sarangani Energy Plant to Operate First 105 Mega Watt Phase by 2015”, http://goo.gl/lnwKYT
  4. Clarification of news article: “Alson’s Zamboanga City power plant faces delay”, http://goo.gl/piKaDV
  5. Press Statement: “Alsons Power current capacity to more than double in 3 years – will supply over 1/4 of Projected Mindanao Peak Demand by 2016”,http://goo.gl/7Y4bHK
  6. SEC 17-Q September 2013, Management’s Discussion and Analysis of Results of Operations and Financial Condition, p.29
  7. Signing of Share Purchase Agreement by Aboitiz Land, Inc. with Alsons Land Corporation re: acquisition of 60% interest in Lima Land Inc.,http://goo.gl/t9Syy3

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

Disclosure: I own ACR shares

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