BUY. Manila Electric Company: MON 30 OCT M17 core earnings in line, net distribution revenues beat estimates

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1 Manila Electric Company: 9M17 core earnings in line, net distribution revenues beat estimates 9M17 core earnings in line, net distribution revenues beat estimates. Meralco s 3Q17 core net income rose 14.7% to Php5.25Bil. This brought 9M17 core net income to Php15.4Bil, 2.7% higher y/y, in line with COL (74.4%), but higher than consensus forecast (80.0%). MER s core operating performance as measured by its net distribution revenues rose 4.2% to Php44.7Bil, higher than estimates, representing 77.8% of our full year forecast. 9M17 sales volume grew 4.3% to 31,401 Gwh, representing 76% of our full year forecast, while distribution tariff was flat at Php1.43/kwh, 2.6% higher than our full year forecast. Provisions for the period amounted to Php7.5Bil, 9.4% higher y/y. (see exhibits 1 & 2) Distribution revenues beat estimates on higher than expected tariff. 9M17 sales volume grew 4.3% to 31,401Gwh, in line with estimates, representing 76% of our full year forecast. Sales volume accelerated to 6.5% in 3Q17 (from only 3.6% in 2Q17 and 2.6% in 1Q17) mainly due to a high base effect during 1H16 (+11.1% y/y). Sales volume growth was evenly distributed across all customer classes, with the residential, commercial and industrial segments growing by ~ 4.3% y/y. Growth in the residential segment was driven by new builds for apartments, condominium units and single detached houses, while growth in the commercial segment was driven by the continuous demand for office spaces from the BPO and Philippine Offshore Gaming Operators sectors. Meanwhile, growth in the industrial segment was driven by semiconductor, food and beverage industries. MER s average distribution tariff during 9M17 was flat y/y at Php1.43/kwh, 2.6% above our average tariff forecast of Php1.39/kwh average for the year. Maintain BUY rating. We have a BUY rating on MER with a FV estimate of Php371.6/sh. Fundamentally, we like MER since it will be the main beneficiary of rising power demand in the country brought about by faster GDP growth. Despite the negative impact of a looming distribution tariff cut in the next regulatory period, MER s long term profit outlook remains bright with the expansion of its power generation portfolio. In addition, MER is an attractive dividend play with a projected cash dividend of Php18.225/sh in 2017E, implying a dividend yield of 6.3%. FORECAST SUMMARY Year to Dec E 2018E 2019E Sales 58,498 57,656 59,353 57,643 59,313 43,285 % change y/y 3.3 (1.4) 2.9 (2.9) 2.9 (27.0) EBIT 27,137 24,555 25,956 26,403 26,666 15,114 % change y/y 10.2 (9.5) (43.3) EBIT Margin (%) EBITDA 33,230 31,465 33,268 33,899 34,620 23,287 % change y/y 8.1 (5.3) (32.7) EBITDA Margin (%) Net Profits 18,128 19,099 19,176 20,649 20,872 14,404 % change y/y (31.0) NPM (%) EPS (Php) % change y/y (31.0) RELATIVE VALUE P/E(X) P/BV(X) ROE(%) Dividend yield (%) BVPS(P) *Source: COL estimates TICKER: BUY MER FAIR VALUE: CURRENT PRICE: UPSIDE: SHARE PRICE MOVEMENT Jul Aug Sep-17 MER PSEi ABSOLUTE PERFORMANCE 1M 3M YTD MER PSEi MARKET DATA Market Cap 326,830.00Mil Outstanding Shares 1, Wk Range Mo Ave Daily T/O Mil GEORGE CHING SENIOR RESEARCH MANAGER george.ching@colfinancial.com Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the COL Financial website as these may be subject to tampering or unauthorized alterations.

2 Exhibit 1: MER 3Q17 Results Summary in PhpMil 3Q16 3Q17 % Change 9M17 % of FY COL Forecast Net distribution revenues 14,671 15, , Net Income 4,908 5, ,928 N/A Core net income 4,578 5, , source: MER, COL estimates Exhibit 2: Volume Mix in kwh 3Q16 3Q17 %Change 9M16 9M7 %Change Residential 3,251 3, ,412 9, Commercial 4,112 4, ,861 12, Industrial 3,012 3, ,730 9, Total 10,386 11, ,103 31, source: MER COL Financial Group, Inc. 2

3 Manila Electric Company (MER) COMPANY BACKGROUND The Manila Electric Company (Meralco) is the largest electric distribution utility in the country, serving 5.34Mil residential, commercial and industrial customers in 31 cities and 80 municipalities. It controls a franchise area of 9,337km. The comapny s flagship business involves the distribution and sale of electric energy through its distribution network facilities in its franchise area. In addition, Meralco has diversified into businesses related to information technology and power generation and retail electricty supply. REVENUE BREAKDOWN 0.0% 3.1% 96.9% Sale of electricity Equity earnings in GBP Sale of services INCOME STATEMENT (IN PHPMIL) Revenues 58,498 57,656 59,353 57,643 59,313 43,285 % Growth 3.3% -1.4% 2.9% -2.9% 2.9% -27.0% EBIT 27,137 24,555 25,956 26,403 26,666 15,114 % Growth 10.2% -9.5% 5.7% 1.7% 1.0% -43.3% EBITDA 33,230 31,465 33,268 33,899 34,620 23,287 % Growth 8.1% -5.3% 5.7% 1.9% 2.1% -32.7% Interest Expense 1,439 1,216 1,343 1,343 1,343 1,343 Other Income/Expense (3,384) (5,599) (6,057) (5,802) (5,802) (5,168) Pretax Income 26,468 24,877 26,693 27,140 27,403 15,851 Tax Expense (8,337) (5,687) (7,353) (8,142) (8,221) (4,755) Net Income 18,128 19,099 19,176 20,649 20,872 14,404 % Growth 5.3% 5.4% 0.4% 7.7% 1.1% -31.0% EPS % Growth 5.3% 5.4% 0.4% 7.7% 1.1% -31.0% BALANCE SHEET (IN PHPMIL) Cash & Equivalents 69,469 50,840 46,656 52,584 61,406 28,742 Trade Receivables 30,629 26,761 25,341 32,079 33,084 32,111 Inventories 2,212 2,273 2,792 2,725 2,810 2,727 Other Current Assets 10,302 15,421 13,219 13,219 13,219 13,219 PPE 120, , , , , ,192 Other Non-Current Assets 35,611 62,031 79,215 81,903 84, ,689 Total Assets 269, , , , , ,680 Accounts Payable 73,624 79,557 83,920 95,368 98,354 95,461 ST Debts 2,299 6,225 13,348 13,348 13,348 13,348 Other Current Liabilities 7,605 7,433 7,334 7,451 7,574 7,704 LT Debts 27,743 27,370 26,999 26,999 26,999 26,999 Other Non-Current Liabilities 78,308 80,793 89,290 91,223 98, ,345 Total Liabilities 189, , , , , ,857 Total Equity 79,474 80,861 75,146 79,440 83,778 86,823 Total Liabilities & Equity 269, , , , , ,680 CASHFLOW STATEMENT (IN PHPMIL) Net Income 18,128 19,099 19,176 20,649 20,872 14,404 Depreciation & Amortization 6,093 6,910 7,312 7,496 7,954 8,172 Other Non-Cash Exp (Gains) 10,324 7,583 16,285 11,966 12,104 3,582 Interest Expense (Income) 2,209 2,754 3,423 3,423 3,423 3,423 Decrease (Increase) in Working Cap 741 5,337 (15,753) (11,455) (14,437) (9,672) Operating Cash Flow 37,495 41,683 30,443 32,079 29,915 19,910 Capex (12,062) (10,383) (8,293) (10,000) (10,000) (47,000) Other Investments (554) (32,005) (17,762) (635) (769) (910) Investing Cash Flow (12,616) (42,388) (26,055) (10,635) (10,769) (47,910) Proceeds (Payment) Debts (2,178) (400) (6,883) 4, Payment of Cash Dividends (13,834) (16,926) (15,341) (16,520) (16,698) (11,524) Others 751 (598) 23,395 (3,924) 6,374 6,860 Financing Cash Flow (15,261) (17,924) 1,171 (15,516) (10,323) (4,664) Change in Cash 9,618 (18,629) 5,559 5,928 8,822 (32,665) COL Financial Group, Inc. 3

4 INVESTMENT THESIS: Higher GDP growth to boost power demand We like MER given that it will be the main beneficiary of the country s rising power demand, resulting from the country s accelerating GDP growth Meralco believes that there is a high correlation between the country s GDP growth and power consumption. KEY RATIOS GPM (%) EBITDA Margin (%) 56.8% 54.6% 56.1% 58.8% 58.4% 53.8% OPM (%) 46.4% 42.6% 43.7% 45.8% 45.0% 34.9% NPM (%) 31.0% 33.1% 32.3% 35.8% 35.2% 33.3% Times Interest Earned (X) Current Ratio (X) Net D/E Ratio (X) (0.50) (0.23) (0.24) (0.30) (0.39) 0.00 Days Receivable Asset T/O (%) 21.7% 20.4% 20.0% 18.4% 18.0% 12.9% ROAE (%) 6.8% 6.9% 6.6% 6.8% 6.5% 4.3% Earnings growth driven by entry into power generation Meralco s earnings growth in the coming years will be driven by its entry into power generation. Projects in the pipeline include the 300MW Subic coal and the 460MW Quezon Power coal expansion project, the 70MW Calaca unit 5 and 6, and the 600MW Mariveles coal project. High dividend yield amidst low interest rate environment MER is expected to pay a cash dividend of Php14.60/sh in FY17E, resulting to a dividend yield of 5.2%. This makes MER an attractive dividend yield play amidst a low interest rate environment. COL Financial Group, Inc. 4

5 Valuation Methodology NAV COMPUTATION Value (PhpMil) Value (Php/Sh) % of GAV % of NAV Valuation Methodology Power distribution 290, % 69.4% DCF Power generation 52, % 12.7% DCF RES 37, % 9.0% DCF Total 381, % 91.0% Less: Net Debt -37, Equity Value 418, Less: Holding Company Discount FV Estimate 418, source: COL estimates COL Financial Group, Inc. 5

6 IMPORTANT RATING DEFINITIONS BUY Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to 12 months. HOLD Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve months. SELL We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months. IMPORTANT DISCLAIMER Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be incomplete or condensed. All opinions and estimates constitute the judgment of COL s Equity Research Department as of the date of the report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/ or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade them in ways different from those discussed in this report. COL RESEARCH TEAM APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH april.tan@colfinancial.com CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com KYLE JEMMRIC VELASCO JOHN MARTIN LUCIANO ADRIAN ALEXANDER YU RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST kyle.velasco@colfinancial.com john.luciano@colfinancial.com adrian.yu@colfinancial.com COL FINANCIAL GROUP, INC D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE, EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY PHILIPPINES 1605 TEL NO FAX NO WEBSITE: COL Financial Group, Inc. 6