Investment thesis
Outlook
The year 2007 saw the government successfully resurrect its power privatization program. It
auctioned off the national grid monopoly (Transco), a controlling interest in the geothermal
operator PNOC EDC and over 1,300MW of generating assets.
Events in 2008 have the potential to be just as significant. Over the next twelve months, we
see the key underlying themes for the industry:
Continued rise in electricity prices
Implementation (after much delay) of the new regulatory scheme for distribution utilities
Scramble for control of the government’s remaining generating assets, including a
number of choice gencos and IPP contracts
The last could well shape the future of the industry – its direction and key players – over the
long-term.
Valuations
We believe Aboitiz Power (AP.PS, P5.00, Buy) is in the best position to capitalize on the
significant changes occurring in the industry given its strong financial position and integrated
operations. Our PT of P6.70/share for AP, derived using a sum-of-the-parts (SOTP) valuation,
offers +31% upside.
Our other key pick is Meralco (MER.PS, P81.50, Buy). We await two catalysts that could
benefit the share price: one is the implementation of the new regulatory scheme and the
other is a possible takeover battle.
We are cautious on First Gen (FGEN.PS, P39.00, Hold), First Philippine Holdings (FPH.PS,
P44.00, Hold) and PNOC EDC (EDC.PS, P5.50, Hold) despite the apparently attractive
valuations given the specific risks each faces as well as group-wide refinancing issues that
could hamper their ability to make value-accretive investments/acquisitions.
Our underlying valuations for the companies and their individual parts were derived using
DCF analysis. For those with PHP-based revenue, we’ve employed a COE of 15.5% (revised
from 14%) to conform with DB’s regional COE estimate for the Philippines. For those with
USD-based operations, we’ve used a COE of 13% (revised from 12%)
Risks
We believe the key risk for the industry is regulatory in nature. Rising energy prices could
tempt the government to backtrack on the current pace and direction of reforms.
A detailed discussion of risks for each listed counter is presented within the individual
company write-ups.
Table of Contents
Investment thesis .............................................................................. 3
Outlook ....................................................................................................................................3
Valuations.................................................................................................................................3
Risks ........................................................................................................................................3
Selling spree ...................................................................................... 4
A banner year...........................................................................................................................4
Privatization of IPP contracts: The next big thing ......................................................................4
Price risk on the upside..................................................................... 7
Shortage in smaller grids ..........................................................................................................7
Thoughts on the spot market....................................................................................................7
Regulatory reform: delayed not denied......................................... 10
Performance-Based Regulation...............................................................................................10
Open Access and Retail Competition .....................................................................................10
Risks.................................................................................................. 11
Regulatory risk ........................................................................................................................11
Acquisition risks ......................................................................................................................11
Appendix A....................................................................................... 12
Genco sales proceeding apace ...............................................................................................12
Transco Concession: Finally! ..................................................................................................13
Premium price for PNOC EDC ................................................................................................13
Aboitiz Power .................................................................................. 14
PNOC Energy Dev Corp................................................................... 18
First Gen Corp.................................................................................. 21
First Philippine Holdings................................................................. 25
Manila Electric Company ................................................................ 28 |
