Forecasting FGEN Earnings and Valuation

In my first post on FGEN, I used my own calculation of economic interest in forecasting FGEN earnings. I find it confusing why FGEN’s annual reports would say that they have 49.50%[1] economic interest in EDC while you would arrive at different percentages when you calculate the economic interest based on the corporate structure provided in their SEC filings.[2] Below is my calculation on how the Company arrive at their figures:

FGEN1

The major difference between the calculation above and my calculation is the assigning of 100% economic interest in Prime Terracota Holdings Corp. As shown below, FGEN has only 45% economic interest in Prime Terracota Holdings Corp. 

Probably the economic interests in the corporate structure provided in the SEC filings were not updated. We will use what the Company provided.

Below is the breakdown of FGEN’s earnings in 2012: (in thousands)

FGEN2

Below is the breakdown of FGEN’s earnings in September 2013:FGEN2.1

The part that made computing for FGEN’s forecasted earnings difficult is the “Others” column since the details are not disclosed and we will have no idea what drives profit and losses of “Others” column.

Another issue for the “Others” column is the economic interest of FGEN the companies included in the “Others” column. I get through this hurdle by assigning 30% economic interest which yields close to actual figures in 2010 and 2011. I did not work back earnings in 2012 because it’s complicated by changes in percentage ownerships. Below is the chart comparing approximate earnings using 30% economic interest and actual profit:

FGEN3

As shown in the chart above, approximate earnings never go beyond actual earnings. The approximation may not be accurate but it does provide a valid margin of safety in forecasting FGEN earnings.

Estimating for the “Others” column profit or loss for 2014 and beyond is the weakness of the FGEN earnings forecast. To make matters worse, figures prior to 2012 could not be used for trending because of accounting treatment changes which leaves us with 2012 and 2013 quarters available for analysis. Sadly, the two years quarterly data does not give much insight without the full year figures.

FGEN4

To provide margin of safety in the forecast, doubling the losses in September 2013 may be a safe estimation of losses for 2014. Therefore, surprises will present itself should losses in the “Others” column exceed $240 million. Would losses exceed $240 million? Probably not, probably yes but with the public information available to us we can only assign a value pessimistic enough to provide margin of safety in our analysis.

With the hard part in the forecasting out, let’s focus on the more predictable business segments of FGEN: First Gas Philippine Corporation (FGPC), FGP Corporation (FGP), EDC, and FG Hyrdo. Below is a presentation of the profit or losses of FGEN’s business segments from 2008 to 2012: (in thousands)

FGEN5

At first glance, obtaining the average profit or loss figures on each business segments would make sense however there are events to be considered between 2008 and 2012 where we can conclude that assigning a profit or loss on the business segment to be assumed for the next 10 years is more reasonable than averaging the profit or loss in the past five years.

Profit or loss figures to be assumed in the next 10 years are as follows:

FGEN6

Putting all together the information presented above, computation of forecasted annual earnings will be the following:

FGEN7

Comments:

With forecasted annual earnings  of $129,320 when FGEN’s business operations normalize or P1.538 earnings per shares (EPS) (using a forex rate of P40/$ and assuming that FGEN outstanding shares remains at 3.3 billion) FGEN should be valued at P15.38 using a PE multiple of 10x. What if “Others” column of FGEN will report a breakeven operations or no profit nor any losses? Then FGEN’s EPS will jump to P2.394 or a valuation for FGEN of P23.94.

Among all the power companies, FGEN is the cheapest in terms of Book Value multiple:

FGEN8

Assuming that FGEN will trade at a multiple similar to GTCAP, FGEN should be valued at P36.02 (P18.98 x 1.90).

 

Source/Note:

  1. FGEN 2012 Annual Report, p. 3, http://www.firstgen.com.ph/uploads/files/blurb-39_file-855_fgen2012ar_051513.pdf
  2. FGEN SEC 17-Q September 2013 filings, p. 30 – 31, https://www.pse.com.ph/resource/corpt/2013/FGEN_17Q_Sep2013.pdf
  3. FGEN SEC 17-A 2012 filings, p. 9, https://www.pse.com.ph/resource/corpt/2013/FGEN_17A_Dec2012.pdf
  4. FGEN SEC 17-A 2012 filings, p. 126, https://www.pse.com.ph/resource/corpt/2013/FGEN_17A_Dec2012.pdf
  5. Computation of approximate earnings:

FGEN9 FGEN10 FGEN11 FGEN12

FGEN13

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 FGEN shares

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Is FGEN a Victim of Market Folly?

First Gen Corporation (the Company, FGEN) is one of the Companies that have a corporate structure that is hard to understand:

FGEN1 FGEN2

FGEN derives significant revenues from the following subsidiaries:

FGEN3

Calculation of FGEN’s EDC and FG Hydro effective interests are presented below:

FGEN4

Below is the simplified ownership structure of FGEN on significant subsidiaries:FGEN5

Four significant negative events happened to FGEN during the year 2013. First, commercial operations of Bacman Geothermal Project of FGEN’s subsidiary, EDC, were delayed due to technical problems.[1] Second, a fire incident happened at the San Lorenzo Power Plant which burnt their 250MW transformer.[2] Third is the Malampaya maintenance shutdown[3] which forced FGEN to minimize electricity sales for a month. And lastly, the significant damage that typhoon Yolanda had brought to FGEN’s subsidiary, EDC.[4]

The most significant blow for FGEN is the damage of that the super typhoon had brought to its subsidiary, EDC. Super typhoon Yolanda had damaged EDC’s whole Leyte operations (Tongonan and Unified Leyte). In order to have an idea of the damage, below is the 2012 revenue contribution of each of EDC’s power generation operations:FGEN6

The whole Leyte operation contributed P14.47 billion or 51% of 2012 revenues which is significant. The cooling towers of the Leyte operations are damaged and will take a year to fully restore typhoon-damaged equipments.[5]

What do the above events mean to FGEN?

A new 250 MW transformer will probably be installed this December as the installation of new transformer was expedited based on a disclosure on November 12, 2013.[6] We may now expect San Lorenzo natural gas power plant to contribute higher revenues in 2014.

EDC’s accounting policy expenses outright any costs incurred on restoring and rehabilitating facilities.[7] Thus, we may expect EDC’s earnings to recognize losses from the damages from typhoon Yolanda confirming a statement on an article that Yolanda damage will wipe out P4.2 billion first half profit of EDC.[8]

In my opinion, EDC facilities are covered by insurance although the details of the coverage were not disclosed in the financial statements. Therefore, we may expect insurance gains on 2014.

Putting It All Together

For the months of July – September, EDC reported earnings of P1.9 billion and P5.3 billion earnings for January to September of 2013. Assuming that EDC first half-earnings were indeed wiped out, it would then be conservative to estimate EDC to recognize earnings of P1.5 billion for 2013. Computation below assumes earnings of other subsidiaries for 2013 will be the same as September 2013 earnings.

FGEN7

Assuming that 2013 earnings will be at $0.031 or P1.364 (0.031 x P44) at a PE ratio of 10x we can value FGEN at P13.64. FGEN’s 2014 prospects remains promising regardless of EDC’s earnings on a slump. FGPC was in major maintenance shutdown from January-May 2013 and will contribute for the full year of 2014. FGP will operate at full capacity in 2014 as the burnt transformer will be replaced. FGPC and FGP’s “normal” annual earnings do not go below US$80,000 and US$45,000.

Currently FGEN is valued as though earning power of the Company is permanently impaired.

 

Sources:

  1. Statement by EDC re: temporary suspension of operations of Bacman
    Geothermal Project, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-1875_FGEN.pdf
  2. Fire incident at San Lorenzo power plant owned by FGP Corp., http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-4361_FGEN.pdf
  3. Malampaya opts to delay maintenance shutdown, http://www.businessmirror.com.ph/index.php/en/business/companies/22448-malampaya-opts-to-delay-maintenance-shutdown
  4. Findings from assessment of the Unified Leyte facilities due to Super
    Typhoon Yolanda, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-8352_EDC.pdf
  5. Yolanda-hit Unified Leyte geothermal plant to be restored in a year – EDC official, http://www.gmanetwork.com/news/story/338121/economy/companies/yolanda-hit-unified-leyte-goethermal-plant-to-be-restored-in-a-year-edc-official
  6. Press Release: “FGP Corp. expedites manufacture and delivery of replacement transformer; arrives in Cebu aboard world’s biggest aircraft”, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-8197_FGEN.pdf
  7. Amended 2012 Annual Report, Note 23, p. 173, http://www.pse.com.ph/resource/corpt/2013/EDC_A17A_Dec2012.pdf
  8. EDC loses ‘billions’ in Leyte devastation; Yolanda damage may wipe out 2013 profit, http://www.interaksyon.com/article/76299/cocktales–edc-loses-billions-in-leyte-devastation–yolanda-damage-may-wipe-out-2013-profit

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.

Airline industry, Rice, Stock thoughts: EDC, FGEN

Airline Industry

Good news for Philippine airline companies:

http://www.interaksyon.com/business/56325/good-news–philippines-successfully-addressed-aviation-safety-concerns–icao

They can now fly directly to US and Europe. 🙂

 

Rice

This sounds so good:

http://www.interaksyon.com/business/55809/philippines-aims-to-export-300000-mt-of-rice-by-2016

More investments in the Agricultural sector can drive our country’s GDP higher.

More on interpreting the GDP:

https://fundamentalenthusiast.wordpress.com/2013/02/13/my-common-sense-approach-in-interpreting-the-gdp/

 

EDC

EDC’s series of bad news made EDC’s price plunge.

Suspension of operations of BACMAN:

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-1871_EDC.pdf

Landslide:

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-1908_EDC.pdf

Assuming that BACMAN would not resume operations, the worst EPS that EDC could report is P.49. The market overreacted today, even reaching 6.03 lows.

Bought EDC for my hypothetical conservative portfolio @ 6.72 last Friday

 

FGEN

I completely understand why EDC should go down much but I do not comprehend why FGEN too.

EDC contribution to FGEN is only 20%. My forecasted EPS for FGEN excluding BACMAN’s possible contribution would be P1.97 at 13x PE we can have an intrinsic value of P25.

Learning from Tycoons, Mike Ferrer, Stock thoughts: EDC, AT, MER, VITA

Learning from Tycoons

A good On the Money Episode:

http://www.youtube.com/watch?v=tCUqC766xIM

 

Mike Ferrer

A new column written by Mike Ferrer:

Invisible hand

If there is somebody worth the trouble of subscribing to Businessworld online, it would be Mike Ferrer. He is the president and managing director of ATR KimEng Asset Management.  🙂

http://www.bworldonline.com/assets/subscribe.php?id_subs=digit

P. 2/S3 or p. 22 of the .pdf file.

 

EDC

EDC 2012 core net income* increased by 89%.

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-1742_EDC.pdf

The reported net income of 9.89 B is only 6% higher than my estimated earnings. EPS to be reported will more likely to be at the same level as presented in the stock report below.

More on EDC:

https://fundamentalenthusiast.wordpress.com/2012/12/01/energy-development-corporation-pse-edc/

*Core net income means net income excluding one-time gains or losses.

 

AT

AT core income up by 46%.

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-1744_AT.pdf

P2.5B reported income is close to my projected earnings of P2.6B. EPS to be reported will more likely to be at the same level as presented in the stock report below.

More on AT:

https://fundamentalenthusiast.wordpress.com/2012/12/17/atlas-cons-mining-and-devt-corp-pse-at/

 

MER

MER reported consolidated core net income of 17B 7% lower of my projected 18B net income.

http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-1768_MER.pdf

See stock report:

https://fundamentalenthusiast.wordpress.com/2012/11/10/manila-electric-company-pse-mer/

 

MER’s dividend policy should come as no surprise. MPI, the majority shareholder, is in need of cash flows. Where do you think they should source additional cash?

 

VITA

You might be interested in this case study:

https://fundamentalenthusiast.wordpress.com/2013/02/25/playing-with-vitas-par/

 

Investment Video for Kids, Funny, Social Proof, Stock Thoughts: Strengthening Peso Follow Up, BDO vs BPI

Investment Video for Kids

Will your kids be interested about investing if he/she will be able to watch this 3 min video?

http://www.youtube.com/watch?v=foaYpoH0Fnk&feature=player_detailpage

 

Funny

A BABY doing his own trade!!!!

http://www.youtube.com/watch?feature=player_detailpage&v=l_R4bPGjDTc

Not to mention he’s talking.lol

 

Social Proof

Did you notice social proof in stock investing?

“Oh, Mr. X a super rich guy, is investing in the same stock I am invested in, I should be on the right stock.”

“Mr. A is investing in stock x, mr. B my friend is also in stock x, ms. Y is ALSO in stock x. There should be something wrong with me.”

Be aware on that psychological pitfall. 🙂

Think independently; invest only on stocks that YOU understand.
social proof

Even the angel fell on social proof! lol

Strengthening Peso Follow Up

A follow-up on my Jan 22 post:

https://fundamentalenthusiast.wordpress.com/2013/01/22/funny-stock-thoughts-ore-strengthened-peso/

Strengthening peso will benefit the following importing companies:

PCOR

PNX

SGI

 

Strengthening peso will benefit the following company with large foreign denominated debt:

EDC

 

BDO vs BPI

Is it just here in Bacolod that BPI service is ‘not so good’?

You got to know somebody or you should be what they consider as VIP for you to be accommodated well.

In contrast, BDO employees are very professional. They work fast and respect the time of their clients regardless of their net worth. They seem to be well trained in terms of client relationship. Idle employees had the initiative to accommodate waiting clients if the queue is already too long.

I like BDO’s service much better.
Tell me what you think about BDO or BPI’s service.

Can anyone tell me about china Bank? I only like their valuations, dividend yield, and balance sheet but I have no firsthand experience with their services.

Stock Thoughts: GREEN, FGEN, EDC, LPZ, TA

GREEN

More idea on how GREEN can generate additional revenues from its renewable energy projects:

http://www.bworldonline.com/content.php?section=Economy&title=Sale-of-carbon-credits-urged&id=63972

More on RE2Grid:

http://www.climatebusiness.net/carbonergy/re2g_press_release_1__rev.pdf

 

FGEN and EDC

I expect FGEN and EDC to go higher should Bacman geothermal power plant go online.

 

LPZ

No news but LPZ’s stock price reached P7.  I’m waiting for GLO’s move.

 

TA

I have this weird feeling that TA’s price will go down on Monday next week.

Just a feeling.

Weird things I often hear, Stock Thoughts: FGEN, EDC, MER

Weird Things I Often Hear

“You told me X stock’s real value is XXX how come it’s still at XXX?”

“How can I buy now? PSE index are so expensive. I’ll buy in the correction.”

“How can I buy now? PSE index are trending downward. I’ll buy at the bottom.”

I find these statements weird. For statement one, a stock’s intrinsic value is not realized instantaneously right after you buy.

For statements two and three, you are not buying the whole PSE, but a company. If the company is trading at reasonably cheap PE ratio what would hold you back?

My opinion only.

 

FGEN, EDC

FGEN and EDC is a pair. Nice to see them inching higher. 🙂

More here:

https://fundamentalenthusiast.wordpress.com/2012/12/01/energy-development-corporation-pse-edc/

 

MER

I am waiting for the regulatory development in June 2013 that would boost MER’s earnings.  🙂

https://fundamentalenthusiast.wordpress.com/2012/11/10/manila-electric-company-pse-mer/