EDC: Flat revenues, uptick in opex to result to lower earnings for 2017

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THU 19 JAN 2O17 Stocks in Focus: EDC: Flat revenues, uptick in opex to result to lower earnings for 2017 Operating expense lower in 2016, but will likely pick up this year.

1 THU 19 JAN 2O17 Stocks in Focus: EDC: Flat revenues, uptick in opex to result to lower earnings for 2017 Operating expense lower in 2016, but will likely pick up this year. EDC s operating expense (including GAEX) declined 4.6% y/y in 9M16, mainly due to the absence of one-time costs related to plant maintenance (repairs, typhoon proofing, etc). While management expects full year 2016 operating expense to be lower compared to the previous year, it expects expenses to pick up in 2017 (~ 5%) due to the scheduled maintenance program for its Bacman, Nasulo and Unified Leyte plants this year. (as of Jan 18, 2017) INDICES Close Points % YTD% PSEi 7, All Shares 4, Financials 1, Holding Firms 7, Industrial 10, Mining & Oil 12, Property 3, Services 1, Other News: MPI: sets Php60Bil capex in 2017 AGI: Golden Arches ramps up McDonald s store expansion to 45 new stores Economy: MoA signed for MRT-LRT common station Economy: DTI sees tuna & coconut oil exports most vulnerable to loss of GSP+ Economy: Tax reform filed in the House of Representatives Market Summary: The PSEi advanced last Wednesday, gaining points or 0.46% to close at 7, Index gainers led decliners 16 to 9 while 5 issues remained unchanged. Likewise, most sectors advanced with Services (+1.41%) leading the gainers and Industrials (-0.37%) declining alone. Significant index gainers were TEL (+3.47%), JGS (+2.60%), MER (+2.50%), RLC (+2.22%), and DMC (+2.02%). On the other hand, significant index decliners were PCOR (-1.97%), URC (-1.42%) and JFC (-1.36%). Value turnover decreased to Php5.0Bil from Php5.5Bil the previous session. After 3 days of selling, foreigners turned net buyers, accumulating Php28Mil worth of shares. Dow Jones 19, S&P 500 2, Nasdaq 5, INDEX GAINERS Ticker Company Price % TEL PLDT Inc JGS JG Summit Hldgs Inc MER Manila Electric Co RLC Robinsons Land Corp DMC DMCI Hldgs Inc INDEX LOSERS Ticker Company Price % PCOR Petron Corporation URC Universal Robina Corp JFC Jollibee Foods Corp GLO Globe Telecom Inc 1, SM SM Investments Corp TOP 5 MOST ACTIVE STOCKS Ticker Company Turnover GTCAP GT Capital Hldgs Inc 561,492,500 SMPH SM Prime Hldgs Inc 227,676,100 BPI Bank of the Phil Islands 209,458,100 AC Ayala Corporation 186,362,800 BDO BDO Unibank Inc 184,460,800 of the COL Financial website as these may be subject to tampering or unauthorized alterations.

6% y/y in 9M16, mainly due to the absence of onetime costs related to plant maintenance (repairs, typhoon proofing, etc).

2 Stocks in Focus: George Ching Senior Research Manager Stock Data Ticker Rating Target Price EDC BUY Php8.34 EDC: Flat revenues, uptick in opex to result to lower earnings for 2017 Operating expense lower in 2016, but will likely pick up this year. EDC s operating expense (including GAEX) declined 4.6% y/y in 9M16, mainly due to the absence of onetime costs related to plant maintenance (repairs, typhoon proofing, etc). While management expects full year 2016 operating expense to be lower compared to the previous year, it expects expenses to pick up in 2017 (~ 5%) due to the scheduled maintenance program for its Bacman, Nasulo and Unified Leyte plants this year. Revenues growth subdued due to WESM, contract repricing. While sales volume is expected to increase this year as previous rehabilitation works on EDC s geothermal plants begin to bear fruit, management believes that delivering revenue growth this year will be challenging as spot prices in the WESM remain depressed, and that there is a likelihood that the repricing of FG Hydro s (Pantabangan-Masiway hydro plant) supply contracts this year will result to lower average selling price for the hydro plant. We estimate that EDC s 2017E revenues will remain flat at Php34.7Bil as the lower than expected average selling price of Bacman and FG Hydro will likely be offset by upward price adjustments of EDC s other plants, and higher output for the Burgos Wind farm. Reiterate BUY rating. We expect EDC s 2017E earnings to decline by 7.5% to Php8.5Bil. However, despite the projected decline in earnings this year, we are reiterating our BUY rating on EDC with a FV estimate of Php8.34/sh. We like EDC given its stable cash flow with more than 80% of revenues derived from long term contract agreements. At Php5.30, EDC is only trading at 11.6X our 2017 earnings estimate, well below the 13.60X average 2017 P/E of domestic peers. Capital appreciation potential based on our FV estimate of Php8.34 is also significant at 57% while dividend yield is attractive at 4.7%. 2

3 Other News: Research Analysts Frances Rolfa Nicolas Andy Dela Cruz Justin Richmond Cheng Kyle Velasco John Martin Luciano MPI: sets Php60Bil capex in 2017 MPI expects to spend as much as Php60Bil in 2017 to expand its businesses. MPI said that of the Php60B capex, Php15Bil would go to MER, Php12Bil to Php15Bil to Maynilad, Php10Bil to Php12Bil for new roads, Php5Bil to Php6Bil for the rail business, Php3Bil to Php4Bil for hospitals, and Php4Bil for the logistics business. MPI CFO David Nicol said the business had been generally good in 2016 with core profit expected to be better than the Php11.7Bil target. (Source: Philstar) AGI: Golden Arches ramps up McDonald s store expansion to 45 new stores Golden Arches Development Corp. (GADC) said that they are allocating Php2.0Bil to open 45 new McDonald s stores this year, higher than the average of 30 to 40 outlets launched in recent years. Around 80% of the new stores will still be located in Metro Manila and other areas in Luzon but GADC sees opportunities to expand in Visayas and Mindanao. Moreover, GADC remains bullish on the business as they see that the economy is doing well and that the country is in a nice demographic area. (source: BusinessWorld) Economy: MoA signed for MRT-LRT common station The government and some of the country s biggest companies including SMPH Director Hans T. Sy, and AC Chief Executive Officer Jaime Zobel de Ayala among others, finally signed a memorandum of agreement (MoA) for the common station that will link LRT-1, MRT-3, and the planned MRT-7. The common station, which is expected to be completed by 2019, will be located in the middle of SM Annex and near TriNoma mall in Quezon City. The government will shell out Php2.8Bil for the common station s platform and entrance for LRT-1 and MRT- 3 (Area A), while ALI and SMC will finance, built, and operate the two entrances connecting Areas A and C (Area B) and the platform for MRT-7 (Area C) respectively. Moreover, the DPWH will build and finance an underpass along EDSA where the common station will be constructed. (source: Businessworld) Economy: DTI sees tuna & coconut oil exports most vulnerable to loss of GSP+ DTI said that the effect of losing the Generalized System of Preferences Plus (GSP+) status, which offers economic benefits to Philippine trade in exchange for compliance with a set of key international conventions, will mostly affect tuna and coconut oil exports. Should EU choose to remove the GSP+ status of the Philippines, tuna exporters would suffer a 20.5% tariff which would have otherwise been zero. Similarly, coconut oil exporters will be slapped with a 3.5% tariff rate. Nevertheless, it shouldn t be a cause for alarm since except for tuna and coconut oil, other products are not big exports our country has to EU. (source: BusinessWorld) 3

4 Economy: Tax reform filed in the House of Representatives The first package of the proposed Tax Reform for Acceleration and Inclusion Act has been filed in the House of Representatives. Part of the bill seeks to lower personal income tax and reduce estate and donor s tax. The bill is targeting to implement this new tax schedule on July 1, The revised tax reform package of the bill also includes the proposal of increasing the excise tax on oil products which will be implemented on a staggered basis also starting this July. VAT exemption for senior citizens and persons with disabilities will be retained. Similarly, the Php82,000 exemption for the 13th month and other bonuses will also be kept as is. Other reforms within the proposed bill includes the easing of the bank secrecy law and tax administration measures that would improve the collection efficiency of the BIR. When asked regarding a possible timetable for the approval of the bill, Finance Undersecretary Karl Kendrick T. Chua only mentioned that the revised proposal should be easier to pass given the DoF is already retaining exemptions for senior citizens. (source: BusinessWorld) 4

5 Calendar of Events JANUARY S M T W TH F S Key Events Holiday JAN 3 TFC: Ex-date Php0.75 Cash Dividend MAC: Ex-date Php0.08 Cash Dividend JAN 9 PGOLD: Ex-date Php0.30 Cash Dividend COSCO: Ex-date Php0.08 Cash Dividend JAN 13 MBC: Ex-date Php0.15 Cash Dividend POPI: Annual Shareholders Meeting JAN 31 CAT: Annual Shareholders Meeting HOUSE: Annual Shareholders Meeting 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 Velasco Research Analyst kyle.velasco@colfinancial.com Jonh Martin Luciano Research Analyst john.luciano@colfinancial.com Contact COL Financial Group, Inc D East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City 1605 Philippines Tel No Fax No Website: 6

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