Unemployment, Energy Sector, Ethanol Plant, Stock Thoughts: MER

Unemployment

Social Weather Stations (SWS) estimates unemployment rate at 24.6% .

I don’t get it. If that would be the unemployment rate then should we be at a recession?

National Statistical Coordination Board (NSCB) estimates unemployment rate this January at 7.2%.

http://www.nscb.gov.ph/secstat/d_labor.asp

I prefer to rely on NSCB data.

I am open for any alternative thoughts.

 

Energy Sector

Few take the energy security seriously. In the coming years, assuming the Philippine economy continues to grow; there will be an electricity shortage.

 

How will an individual investor play this opportunity? Invest long-term on stocks that are into electricity trading and electricity generation.

My opinion only.

Ethanol Plant

Gokongwei plans more power and ethanol projects in Negros:

http://business.inquirer.net/108007/gokongwei-plans-more-power-ethanol-projects-in-negros

Gokongwei is planning to do what ROX is already doing. Lol

More on ROX:

https://fundamentalenthusiast.wordpress.com/2013/02/03/roxas-holdings-inc-pse-rox/

MER

MER is seeking for more power?

http://business.inquirer.net/108021/meralco-turns-to-psalm-for-additional-power

Increase in electricity volume sold by MER means an increase in the revenue of MER.

More on MER:

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

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Energy Development Corporation (PSE: EDC)

Energy Development Corporation (EDC, the Company) has a portfolio of renewable energy generating assets that rely on indigenous fuels. The Company has 305 MW of geothermal (Palinpinon and Tongonan) and 132 MW hydro (Pantabangan and Masiway) installed capacity that is operating commercially which generates 6,847.4 GWh electricity sales or P24 billion revenue for 2011. The Company still has 825 MW installed geothermal capacity not yet in commercial operations. In addition to high potential geothermal portfolio, EDC is developing an 86 MW wind farm in northern Luzon. Below is the location of EDC’s power generation projects:

EDC map

Below is EDC corporate structure:

EDC3

EGC is a holding company for EDC’s geothermal operations. Below are EGC’s subsidiaries:

EDC4

GCGI was incorporated on June 22, 2009 with primary activities on power generation, transmission, distribution, and other energy related businesses. GCGI currently operates 192.5 MW Palinpinon and 112.5 MW Tongonan 1 geothermal power plants in Negros Oriental and Leyte respectively.

FG Hydro operates the 120 MW Pantabangan and 12 MW Masiway Hydroelectric Power Plants locates in Pantabangan, Nueva Ecija Province, Central Luzon.

EDC Drillco provides drilling services to Lihir gold Limited in Papua New Guinea which contributed P710 million of revenues for the Company in 2011.

 

Comments:

EDC revenue performance for 2012 had much improved due to new contract prices agreed mid 2011 and power supply agreements signed in December 2011. Revenues had increase by 21% year-on-year in September 2012 translating to an EPS of 0.38. I project EDC’s EPS to reach 0.49 by the end of 2012.

Based on EDC’s annual report in 2011, the Company expects to put in commercial operations their 130 MW Bacman geothermal power plant by 2012. This is expected to contribute P4.2 billion additional revenues for the year 2013. I project the Company’s EPS for 2013 to at 0.58.

 

Valuation:

Assuming a 13x PE ratio multiple, EDC’s value should be 6.37 [0.49 x 13] by the end of 2012 and 7.54 [0.59 x 13] by 2013.

Other data:

EDC2

EDC1

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

Manila Electric Company (PSE: MER)

Business Profile

Manila Electric Company (MER, the Company) is the largest electricity distributor in the country providing power for over 5 million customers in 31 cities and 80 municipalities. The Company was awarded with the 25-year franchise covering an area of 9,337 km2 in 2003. To illustrate MER’s business:

The Company buys electricity from the Whole Sale Electricity Spot Market and power plants. MER then sells it to customers with no profit but just enough to cover the costs. The cost of electricity in the said process is called pass-through charges. Pass-through charges are revenue neutral or in other words, it does not add to profit nor does it cause losses to the Company. MER generates revenues through the collection of distribution charges. It is the costs paid by customers for using MER’s transmission lines and its services.

MER’s Strategy for Growth

The Company intends to source future growth through participation in the Open Access and Retail Competition (OARC) as a Retail Electricity Supplier (RES), entry to power generation, and franchise expansion.

Open Access and Retail Competition (OARC) is one of the reforms in the Philippine electricity industry which gives electricity end-users the right to choose their electricity service provider. The reform will be initiated in three phases. First, only end-users that have an average consumption of one megawatt (MW) and above in one year will have the right to choose their electricity service provider. The second phase will occur two years after the first phase, end-users that have an average consumption of 750 kilowatt (Kw) will also be able to choose. Subsequently, the Energy Regulatory Commission (ERC) will evaluate the market and gradually reduce the threshold until it reaches household consumption level. The intention of such reform is to lower electricity costs through competition. [1]

MER expects the implementation of OARC in the 2nd half of 2013. MER through its wholly owned subsidiary MERALCO Retail Electricity Supply (MERALCO RES) responded to the challenge by negotiating supply contracts with independent power producers and independent power producer administrator (IPPA), IPPA are private firms granted by the government to operate and maintain government owned power plants.[2]

MER ventures in to power generation through its wholly owned subsidiary Meralco PowerGen Corporation (MGEN). On June 27, 2011, the Company disclosed on a press release that they are to invest for a majority stake in Redondo Peninsula Energy, Inc. (RP Energy). RP Energy has the development rights and assets to a 2 x 300 Mw coal-fired power plant in the Subic Bay Freeport Zone. [3] On July 25, 2011, the Company disclosed that MGEN together with Meralco Pension Fund bought 50% + 3 shares in RP Energy. [4] MER expects the power plant to be operational in 2015. MGEN is also working in a broad range of pre-development studies in other power generating assets with an intention to reach an aggregate of 2,000 megawatts generation capacity. [5] The Company expressed their interest to invest in power generation in Vietnam through participation as a minority interest. [6]

 

Comments:

MER’s franchise generates a stable cash flow for the Company. As of December 31, 2011, MER’s free cash flow (FCF) stands at 25 billion. Assuming a 4.5% growth in the FCF for the remaining life of MER’s franchise and using the current weighted average cost of capital (WACC) of MER of 3%, we can value MER’s franchise at P380.31/sh (see Appendix).

The upcoming OACR which was designed to increase competition for MER actually presents an opportunity for MER. There is a high demand of electricity in the Luzon area but with tight electricity supply. In the next 2 years, I expect MER’s wholly owned subsidiary MERALCO RES to add in the Company’s revenues through electricity trading gains.

MER’s entry in power generation is a rational business move as this will provide additional cash flow for MER and add value to MER’s customers through lower electricity prices and stable electricity supply. Lower electricity costs will serve as MER’s competitive advantage in the future of the electricity industry where consumers will have the power to choose their electricity provider.

Other data:

Appendix

Weaknesses of assumptions:

  1. Even though the principle of conservatism is observed, long-term FCF growth rate might unfavorably deviate from conservative assumptions.
  2. Unexpected regulatory developments might affect calculations.

Sources:

  1. R.A. 9136, Electric Power Industry Reform Act of 2001, Section 31, http://www.lawphil.net/statutes/repacts/ra2001/ra_9136_2001.html
  2. Grant of Authority to enter into Contract for Supply of Electricity; Press Release re: Financial and Operating Results for 1st Quarter 2012, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-3159_MER.pdf
  3. Board approcale of investment in RP Energy; cash dividend declaration on preferred shares; Press Release: “Meralco invests in 600 MW Coal-Fired Plant,” http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-4783_MER.pdf
  4. Clarification of news article: “Meralco acquires 52% shares of subic coal plant,” http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-5497_MER.pdf
  5. Clarification of news article: “Meralco plans to build additional power plants,” http://www.pse.com.ph/resource/disclosures/2011/pdf/dc2011-7832_MER.pdf
  6. Clarification of news articles, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-7899_MER.pdf
  7. Power Development Plan 2009-2030, http://www.doe.gov.ph/EP/EP%20Update%2007272010/PDP%202009-2030.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.