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Energy Development Corp (EDC PM) Summary

Core Content

Energy Development Corp (EDC PM) is a Philippine-based energy company with a current share price of PHP6.42 and a target price of PHP7.35, representing a 14% increase. The company's market capitalization is PHP120.4B, and its average daily trading volume is USD2.6M. The stock is currently trading at a 20% NAV discount, which has been widened from 10% to account for operational and execution risks.

Main Points

• Financial Performance: EDC reported a decline in net income and target price due to weak performance in 2Q15, primarily caused by a 17% reduction in billed volumes from Unified Leyte and significant "typhoon proofing" expenses, which were expensed rather than capitalized.

• Recurring Net Income Reduction: The 2015-17 recurring net income is reduced by 19-24% due to higher operating expenses and lower billed volume assumptions. The reduction in billed volume is attributed to plant outages and the impact of typhoon-related costs.

• Transmission Issues: The company is addressing transmission issues, which are expected to be resolved by the end of 2015. The Laoag-San Esteban transmission line is progressing and is expected to be completed by 4Q15, which could positively impact forecasts.

• Renewable Energy Focus: EDC is positioned to benefit from the government's push for renewable energy through policies like the Feed-in Tariff (FiT). The Burgos Wind Power Project (150 MW) is one of the key projects under the FiT program and is expected to contribute -PHP1b in profit in 2016 once transmission is resolved.

• Future Projects: The Tongonan Rehabilitation Phase II and the Bac-Man 3 greenfield project are expected to incrementally increase revenue. Tongonan's reliability is projected to improve to 90-95%, and its capacity will increase by 10.5 MW. The Bac-Man 3 project is expected to start commercial operations in 4Q17.

• Financial Metrics:

  • Revenue: Expected to grow from PHP25,656.3M in FY13A to PHP36,665.0M in FY17E.
  • EBITDA: Projected to increase from PHP15,458.1M in FY13A to PHP22,627.8M in FY17E.
  • Core Net Profit: Estimated to grow from PHP6,565.2M in FY13A to PHP10,410.7M in FY17E.
  • Core EPS: Projected to increase from PHP0.35 in FY13A to PHP0.56 in FY17E.
  • Net Dividend Yield: Expected to rise from 2.5% in FY13A to 4.2% in FY17E.
  • ROAE & ROAA: Both are expected to decrease slightly over the forecast period.

• NAV & Target Price: The Net Asset Value (NAV) per share has been reduced to PHP9.2 from PHP10.2, and the target price is set at PHP7.35, reflecting a 20% discount.

• Peso Depreciation Impact: EDC faces a net impact of PHP280M in forex translation losses for every PHP1 depreciation of the peso against the USD, due to its USD-denominated debt and USD-linked revenue.

Key Information

• Major Shareholders:

  • Firstgen Corp. (50.2%)
  • Government of Singapore (5.0%)
  • T Rowe Price Hong Kong Ltd. (2.5%)

• Shareholder Structure:

  • Issued shares: 18,750M
  • Free float: 45.3%

• Forecast Changes:

  • Billed Volume: Reduced by 5% due to the 17% decline in Unified Leyte volumes.
  • Operating Expenses: Increased by 11% in 2015 due to "typhoon proofing" costs.
  • EBITDA: Reduced by 10% in 2015, but expected to increase by 4% in 2016 and 6% in 2017.
  • Net Income: Reduced by 29% in 2015, with a 19% reduction in 2016 and 19% in 2017.

• Performance Against Index:

  • 1 Month: -13.8%
  • 3 Months: -20.1%
  • 12 Months: -2.7%

• Market Recommendations:

  • Positive: 10
  • Neutral: 2
  • Negative: 0

• Maybank Consensus:

  • Target Price: PHP7.35
  • 2015 PATMI: PHP8,033M
  • 2016 PATMI: PHP10,262M

Conclusion

Despite short-term challenges, EDC is strategically positioned to benefit from the long-term growth in renewable energy. The company is making progress on its transmission line and other projects, which could lead to improved performance in 2016. However, the current forecast assumes continued operational risks, leading to a 10% reduction in NAV and a 20% discount on the target price. The company's financial metrics show a mixed outlook, with some improvements expected in the coming years.