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Electricity Generating

Stepping up investments in the Philippines BUY - Huge new value-accretive investment in the Philippines - Adds 8% to 2015 forecast, Bt5.4 to target price - Raise TP to Bt157 and continue to BUY

Electricity Generating Plc (EGCO)

What's new. EGCO announced an investment in another coal-fired power plant in the

Philippines, Masinloc Power (MPPCL). It will pay US$453mn to take a 40.95% interest in

this 630MW coal-fired power plant. MPPCL has three major customer groups: Manila

Electric Co (Meralco), electric cooperatives and some industrial users with long-term

PPAs lasting 6-16 years. The PPA with Meralco (~70% of electricity sales) expires in 2019

with an optional 3-year extension. Completion of the deal is expected in 3Q14.

Masinloc Power Plant. Starting up in 1998, it was a government power plant until

privatization in 2008, when it was sold to AES for US$930mn. AES had held 92% with IFC

holding the remainder. The plant is sited on 137 hectares in the town of Masinloc,

province of Zambales, about 250kms northwest of Manila. It faces the South China Sea

on the west and the Lawis River in the north, the National Highway No. 3 at the east

and lies along the coastline of Oyon Bay in the south.

Our view. This is the largest investment by EGCO in the Philippines after it lifted its

holding in Quezon in 2012. We believe this investment will be accretive to EGCO and

that it will lead to more investment opportunities in the Philippines where PPA terms

are similar to Thailand's. MPPCL plans to expand the power plant by 660MW, divided

into two phases. The expansion will commence operations in 2019.

Acquisition price is equivalent to US$1.8mn/MW, similar to what it paid for its

additional stake in Quezon in 2012. Coupled with MPPCL current debt of US$460mn

(EGCO's portion is US$188mn) implies EV/MW of US$2.5/MW. This is higher than EGCO's

current EV/MW of US$0.8mn but is due to the higher cost of a coal-fired plant.

Financing. We expect the ~Bt15bn cost to be financed largely by debt since cash on

hand at end1Q14 was only Bt6bn. A discussion with EGCO reveals it can fund only 90%

with debt. This would increase EGCO-only D/E from 0.4x at the end of 1Q14 to 0.6x and

consolidated D/E would rise to 1X from 0.85x, still under the 1.5x ceiling. While the IRR

of the investment could be ~10%, the large portion of debt to finance the purchase

could boost Equity IRR of the investment to >20%, assuming cost of debt of ~5%.

Earnings contribution and incremental value. We estimate full-year contribution

of ~Bt540mn p.a. from this investment, including the higher interest expense. This is

equivalent to 8% of our earnings forecast for 2015. The contribution to EGCO's DCFbased

valuation is ~Bt5.4/share.

BUY maintained with TP lifted to Bt157. We raise our TP to Bt157 from Bt145 to

reflect the incremental value of this investment and also roll over to mid-2015. We

maintain our BUY rating based on a steady growth in power assets of 25% over the

next six years. It is studying several potential investments to build installed capacity

that could be announced gradually over the next few years, acting as price catalysts.


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