Share analysis: Aboitiz Power – Power generation

THE COMPANY: Incorporated in 1998, Aboitiz Power Corporation (AP) operates as the power unit of the Aboitiz Group. As a publicly listed firm, AP is considered to be one of the leading local players in the power industry, with interests in a variety of privately owned power generation companies and distribution utilities throughout the country. AP’s power generation business accounts for the bulk of the company’s earnings, contributing some 82% of its total income in 2013. AP operates 39 generation facilities across the Philippines, with an aggregate capacity of over 2300 MW. The company also runs seven distribution companies – including the second and third largest in the country – that service over 800,000 customers.

PERFORMANCE: Consolidated net income amounted to P8.95bn ($201.4m) for the first half of 2014, down 6% year-on-year (y-o-y). Excluding non-recurring gains and losses, net income came to P8.6bn ($193.5m), 21% lower than during the same period in 2013. While income from AP’s power generation business declined, it remained the largest contributor, accounting for 84% of the company’s bottom line. The weaker performance of the generation business was due to lower spot market sales, down 13% y-o-y, and low water levels at two of the company’s hydropower plants, which constrained operations.

As 88% of AP’s overall generation capacity is contracted, the company is working to shift its supply portfolio to capacity-based contractors and bilateral contracts for more stable and predictable cash flows. The performance of AP’s distribution segment was down 11% y-o-y, from P1.63bn ($36.7m) to P1.45bn ($32.6m) during the first half of 2014.

AP’s net income has been lagging since 2012, primarily due to the expiration of income tax holidays, pricing structure changes and lower income contribution from power distribution. This has occurred against the backdrop of insufficient power supply in Mindanao and a lag in recovery of power costs in the Visayas region. However, the completion of new projects should improve performance going forward.

GROWTH DRIVERS: Based on the country’s 2012 Power Development Plan, peak demand for electricity is projected to rise by an average of 4.13% per year in Luzon, 4.52% in Visayas and 4.75% in Mindanao, in line with positive economic growth in the country. Rising income of Filipinos, mainly brought about by the business process outsourcing industry and overseas Filipino remittances, will also drive residential consumption. On the commercial and industrial side, at least a 10% rise in investment projects, to P443bn ($9.97bn), was estimated for 2014, with more business activities from both domestic and foreign companies expected going forward.

AP is investing P80bn ($1.8bn) in greenfield and brownfield projects across the country that will increase its power generation capacity by about 2000 MW over the next five years. The company recognises that demand for power will continue to grow as the country’s economy accelerates, and is prepared to seize the opportunity to meet this demand. AP is well positioned to address the expected tightness in power supply in the country given its large generating capacities, and its track record and experience in the industry.

LOOKING AHEAD: AP has to contend with volatile electricity spot prices, as it sells 12-13% of its capacity to the Wholesale Electricity Spot Market. Price swings create uncertainty in the company’s margins and overall financial results. Additionally, price escalations for coal and oil could negatively affect income from coal-fired and diesel-powered plants.

While AP’s new power ventures are not guaranteed to produce the expected returns, the group has a strong track record over the past decade for taking over old facilities and establishing new plants. AP also ties up with key operating partners to provide relevant technical expertise and mitigate risks associated with investing in new power ventures.

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The Report: The Philippines 2015

Capital Markets chapter from The Report: The Philippines 2015

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