Papa Securities Corp. (Company Notes - 2Q17 Power Earnings Preview)

Papa Securities Corp. (Company Notes - 2Q17 Power Earnings Preview)

2Q17 Power Earnings Preview Initiating Coverage

 

MER: Likely in line, with slight bias towards outperformance •       According to management, volume growth in 1H averaged 3%, in line with our forecast. Considering 1Q volume growth was just at 2.6%, this means 2Q volume growth may have accelerated to ~3.4. •       We saw some margin compression in 1Q; MER's EBITDA margin was down by 165bps due to expenses related to the construction of its power assets (ie. settling of property taxes and costs from project delays). This will likely persist moving forward, so lower margins may now be the new normal (EBITDA at 12%, core income at 7%). •       We have a fair value of PhP319.00/sh for MER; BUY. Earnings release scheduled on July 31, 3PM.     SCC: Earnings may outperform on better plant capacity factor •       We spoke to SCC and learned that their plant's capacity factor from all units have been exceeding that of 1Q. In part, Unit 1's maintenance shutdown in the first quarter may have aided this. •       We expect 2Q's coal ASP and output to be similar to 1Q. But there may be some downside in 3Q coal ASP as China has tightened document requirements in its importing sites late in June. This has lengthened delivery times, causing consumers to demand a corresponding discount in coal price (management estimates a US$2.0-3.0 reduction, or about 4.4% of SCC's 2017E coal ASP). While the government did not provide reason for stricter regulation, this may be in line with its initiative to reduce smog in the area. If so, we can assume that the stricter requirements are here to stay. •       We have a fair value of PhP180.00/sh for SCC; BUY. Earnings briefing scheduled on August 14, 3PM, but results may be released by August 9.     EDC:  Expecting performance similar to 1Q •       EDC's primary earnings driver in 2Q will likely still be lower GAE expenses following its organizational restructuring. Recall that this led to a 34.5% decline in personnel costs in 1Q after ~350 heads were retrenched. •       The drag from spot exposure during 1Q is likely to persist; getting capacity contracted from FG Hydro (60MW), Panlinpinon (30MW), and Nasulo (20MW) is still ongoing and will likely be finalized by 4Q17. •       Damage from the Leyte quake will materialize in 3Q figures. According to management, repairs are progressing on schedule and are now ~30% complete. We expect foregone revenue to amount to PhP1.5bn (4.2% of 2017E sales forecast). Under our worst case scenario where repairs take an extra month to finish, foregone revenue may amount to 2017E sales. •       We have a fair value of PhP6.74/sh for EDC; BUY. Earnings call tentatively scheduled on August 11.