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Electricity Generating

Top power pick

Electricity Generating Plc (EGAT)

Investment thesis

The deteriorating macro-economy could further slow the release of the long-awaited Power Development Plan (PDP) and possibly lower the amount of new generating capacity from that stated in the current PDP. That makes us suspect that there won't be any new capacity tenders within the next two years. Given the sector’s uninspiring outlook, EGCO remains our preference among Thai Utilities. Apart from offering the higher dividend yield (4.5% versus a peer's 4.2%), the possibility of a PPA extension for REGCO and a PPA for Quezon's expansion should sustain its relative share price outperformance. A new acquisition would catalyze the share price, in our view.

Eyes on REGCO PPA extension

EGCO has proposed to EGAT that REGCO's PPA be extended for another five years (it will expire at YE14). The proposal is currently under the ERC's consideration. Go-ahead also needs the final approval of the NEPC (chaired by the PM). Regardless, we think it should be approved by October. REGCO is due to go off-line on Dec 9 under its PPA with EGAT. If it were to shut down ahead of PPA extension approval, it would take several months to restart.

Quezon expansion's PPA close to being finalized

A dispute with Meralco (stated-owned Manila Electric Co) over the shareholding structure of the 500MW Quezon (Philippines) expansion has been resolved and EGCO expects to sign a PPA with Meralco by June. The plan will then be filed with the Philippine energy regulator for final approval before construction starts. The process is expected to be completed by 4Q14; COD is then delayed further to 2019 from 1Q18 previously. Based on EGCO guidance, we expect the project to add about Bt1bn to its yearly profit and Bt6/share to our DCF target price.

Earnings accretion from Boco Rock’s start up

A raft of EGCO’s projects will start operating in FY16-17 with aggregate equity capacity of 1,371MW (up 30percent from existing generating capacity). In the interim, the 113MW Boco Rock wind farm (Australia) will add to capacity; COD in February 2015. Boco Rock will add only 2.5% to capacity, but we anticipate a greater impact on earnings accretion. The project has a 15-year PPA with Energy Australia. EGCO declined to offer details, but guides that the wind farm will yield a project IRR of 10%. As such, we roughly anticipate an earnings accretion of Bt300-400m/year (a 4-6% addition to our yearly NPAT projections).

New acquisition necessary, but greenfield fields not in scope

EGCO is actively pursuing acquisitions. The effort is aimed at boosting its slim profit growth outlook for FY14-15. Management reiterates that it will focus on operating assets with long-term PPAs, mainly in Indonesia and Philippines—where there are clear electricity regulatory infrastructures. The firm is now short-listed to bid for a plant in the Philippines. Management declined to offer details, but guides that the result of the tender should be known within 1-2 weeks.

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