Electricity Generating

New IPP bidding could potentially catalyze share price HOLD (maintained) Target Price: Bt97.00 Price (22/02/12): Bt94.00

Electricity Generating Plc (EGCO)

Investment thesis: We attended EGCO's analyst meeting yesterday. We remain neutral about the firm's outlook. Profitability fears have ebbed—the current declining earnings profile will normalize this year. We see a greater likelihood of new IPP tenders, possibly in 2H12. REGCO and KEGCO would be much better placed to win new capacity than greenfield projects. Yet, we think it's too early to rush in now, as the new PDP remains a work in progress. Our HOLD rating stands for the moment.

Declining earnings profile will stabilize in FY12: The FY11 earnings contraction should be followed by stabilization this year. EGCO posted a 27% YoY fall in net profit last year. Management guided for more stable per-unit AP rates for REGCO and KEGCO till the expiries of their respective PPA contracts (2014 and 2016). The Availability Payment (AP) for the KK 2 plant (50% stake) will decline by a modest Bt100-200m/year. BLCP's AP profile (also 50% stake) will diminish only slightly—by about Bt100m/year.

Revised PDP is still a work in progress—greater likeli-hood of new IPP tenders: EGCO declined to comment on the pending new Power Development Plan (PDP), as it isn't yet clear whether EGAT will issue a new version or a revision to its existing PDP. A new PDP would be time-consuming, as it would require public hearings.

A revised PDP would be shorter—EGAT would simply review and realign previously approved power projects. That said, we think a revised PDP would increase the likelihood of new IPP tenders, which would simply make up for some projects that never started—for instance, a 540MW coal-fired IPP (awarded in 2007; COD in 2014) has not progressed. There could also be IPP tenders in the southern provinces, as specified in the existing PDP.

Proposed REGCO PPA extension to be concluded soon: Management is optimistic that REGCO's PPA will be extended (it is due to expire in 2014). EGAT has forwarded a proposal to the Electricity Regulator for consideration. Yet, EGCO played down speculation over the new tariff. Also REGCO's proposed role would be as a back-up rather than a base-load plant.

Given that, we doubt that the extension would be worth much, as REGCO would obtain an AP only when EGAT asked for dispatching. In contrast, winning a tender for new capacity would generate a much higher return. REGCO and KEGCO have substantial cost advantages over any greenfield proposal, due to the two plants' strategic locations in the vicinity of existing gas pipelines and transmission lines and the fact that they already have EIA licenses.