Aboitiz Power Corporation WED 14 FEB 2018

Reducing estimates on potential delays in

operation of power projects
Commercial operation of power projects pushed back due to regulatory issues. The start
of the commercial operation of the 68MW Manolo Fortich Hydroelectric plant and the 400MW
Pagbilao Coal Expansion Project could be slightly pushed back due to potential delays in securing
BUY
the necessary regulatory permits. The Manolo Fortich is expected to begin commissioning
works at the end of the month, but it is still waiting for the Certificate of Endorsement (COE) TICKER: AP
from the Department of Energy in order to be able to begin commercial operation. Meanwhile,
the Pagbilao Coal Expansion project is already in the commissioning stage, but it is still waiting FAIR VALUE: 51.60
for the Certificate of Compliance (COC) from the Energy Regulatory Commission. However, the CURRENT PRICE: 39.75
issuance of permits from the government could be delayed. In December 2017, The Office of
the Ombudsman suspended all four commissioners of the ERC for one year. (for allegedly giving UPSIDE: 29.81
due preference to Meralco and its power supply agreements with affiliated power generation
companies by extending the deadline for their compliance with the competitive selection
process). This put to a halt all activities pertaining to the approval of Power Supply Agreements SHARE PRICE MOVEMENT
and the issuance of COCs. While the Court of Appeals issued a 60 day Temporary Restraining
Order in early February to stop the suspension of the four ERC commissioners, we believe that 110
the 2 month suspension of the ERC commissioners will likely delay the issuance of the COC
needed by AP to begin the operation of its power projects.
100
We previously assumed that both the Manolo Fortich and the Pagbilao Expansion Project would
begin commercial operation at the start of 1Q18. Our new forecast now assumes that both of
these projects will begin operating in 3Q18, around six months later than our previous forecast.
90
Reducing estimates, but maintaining BUY rating. After factoring in the delay in the operation
of Manolo Fortich and the Pagbilao Coal Expansion Project, we are reducing our earnings
forecast for AP by 7.2% to Php25.4Bil for 2018E. We are also reducing our FV estimate on AP
by 0.8% to Php51.6/sh after factoring in the changes in our earnings forecast. Despite this, we 80
are maintaining our BUY rating on AP. We continue to like AP given its vertically integrated 14-Nov-17 14-Dec-17 14-Jan-18 14-Feb-18
structure which will allow it to expand its power generation portfolio despite concerns of AP PSEi
oversupply in the market. Furthermore, valuations have become increasingly attractive after
the stock’s recent sell-off. Note that AP’s share price is down 8.5% in the past twelve months,
significantly underperforming the PSEi which is up 18.9% during the same period. Moreover,
AP is now trading at only 11.5X 2018E P/E, a discount relative to the 12X average P/E of industry ABSOLUTE PERFORMANCE
peers. While AP’s dividend yield is expected to dip to 2.9% in 2018 (as a result of the lower 2017E
earnings), we expect this to improve to 4.3% in 2019 due to the improvement in earnings next 1M 3M YTD
year. Based on AP’s current market price of Php39.75/sh, upside to our FV estimate of Php51.6/ AP -0.63 -3.28 -4.33
sh is significant at 29.7%.
PSEi -2.77 2.88 0.14
FORECAST SUMMARY
Year to Dec. 31 2014 2015 2016 2017E 2018E 2019E
Sales 86,759.4 85,174.0 89,163.3 107,998.4 120,177.7 129,609.5
% change y/y 20.4 (1.8) 4.7 21.1 11.3 7.8 MARKET DATA
EBIT 22,350.8 24,686.6 26,310.3 31,712.6 36,409.1 40,782.3
% change y/y 14.8 10.5 6.6 20.5 14.8 12.0 Market Cap 292,504.00Mil
EBIT Margin (%) 25.8 29.0 29.5 29.4 30.3 31.5 Outstanding Shares 7,359.00Mil
EBITDA 33,648.0 32,940.8 38,512.7 39,021.7 45,560.5 49,952.4 52 Wk Range 38.10 - 44.30
% change y/y 3.5 (2.1) 16.9 1.3 16.8 9.6
3Mo Ave Daily T/O 99.39Mil
EBITDA Margin (%) 38.8 38.7 43.2 36.1 37.9 38.5
Net Profits 16,705.2 17,603.8 20,002.6 17,025.3 25,363.7 31,153.9
% change y/y (10.1) 5.4 13.6 (14.9) 49.0 22.8
NPM (%) 19.3 20.7 22.4 15.8 21.1 24.0
EPS (Php) 2.27 2.39 2.72 2.31 3.45 4.23
% change y/y (10.1) 5.4 13.6 (14.9) 49.0 22.8

RELATIVE VALUE
P/E(X) 17.5 16.6 14.6 17.2 11.5 9.4 GEORGE CHING
P/BV(X) 3.0 2.9 2.6 2.4 2.1 1.8 SENIOR RESEARCH MANAGER
ROE(%) 17.4 17.3 17.9 14.1 18.2 19.5 george.ching@colfinancial.com
Dividend yield (%) 3.3 4.7 4.2 3.4 2.9 4.3
*So urce: COL estimates

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.
 COMPANY UPDATE I AP: REDUCING ESTIMATES ON POTENTIAL DELAYS IN OPERATION OF POWER PROJECTS

WED 14 FEB 2018

Aboitiz Power INCOME STATEMENT (IN PHPMIL)

Corporation (AP) Revenues

FY14
86,759
FY15
85,174
FY16
89,163
FY17E
107,998
FY18E
120,178
FY19E
129,610
% Growth 20.4% -1.8% 4.7% 21.1% 11.3% 7.8%
COMPANY BACKGROUND EBIT 22,351 24,687 26,310 31,713 36,409 40,782
Aboitiz Power Corporation (AP) is the holding % Growth 14.8% 10.5% 6.6% 20.5% 14.8% 12.0%
EBITDA 33,648 32,941 38,513 39,022 45,560 49,952
company of the Aboitiz Group’s investments
% Growth 3.5% -2.1% 16.9% 1.3% 16.8% 9.6%
in power generation and distribution. Interest Expense (5,522) (5,788) (6,620) (10,392) (11,671) (11,671)
The company is the second largest power Other Income/Expense 4,601 3,643 5,310 5,065 6,276 7,489
generation firm in the country. It has interest Pretax Income 21,430 22,542 25,000 21,785 31,014 36,600
in hydroelectric, geothermal and thermal Tax Expense (3,424) (3,590) (3,496) (2,820) (3,406) (3,478)
power generation plants with a total power Net Income 16,705 17,604 20,003 17,025 25,364 31,154
% Growth -10.1% 5.4% 13.6% -14.9% 49.0% 22.8%
generation capacity of 3,947MW (beneficial
EPS 2.27 2.39 2.72 2.31 3.45 4.23
capacity of 2,968MW), representing ~ 13%
% Growth -10.1% 5.4% 13.6% -14.9% 49.0% 22.8%
of the country’s total capacity. It is also
the second largest electricity distributor BALANCE SHEET (IN PHPMIL)
in the country with interest in eight power FY14 FY15 FY16 FY17E FY18E FY19E
distribution utilities in Central Luzon, Visayas Cash & Equivalents 40,232 51,098 47,095 11,806 9,984 27,141
Trade Receivables 12,333 13,692 15,465 17,564 19,544 21,078
and Mindanao.
Inventories 2,169 2,041 4,453 2,929 3,259 3,515
Other Current Assets 1,993 3,578 6,637 7,300 8,030 8,833
REVENUE BREAKDOWN PPE 119,647 134,811 192,634 201,325 193,074 184,804
Other Non-Current Assets 40,388 37,270 88,494 122,044 142,622 146,229
Total Assets 216,761 242,489 354,776 362,968 376,514 391,601
10.0% Accounts Payable 12,778 14,141 17,398 23,401 24,558 25,836
0.0% ST Debts 103 2,568 4,156 4,156 4,156 4,156
Other Current Liabilities 40,388 37,270 88,494 122,044 142,622 146,229
10.0% LT Debts 41,394 56,007 150,263 142,805 135,347 127,888
0.0%
Other Non-Current Liabilities 62,401 62,316 60,081 60,764 61,516 62,342
50.0% Total Liabilities 120,681 140,876 243,147 242,374 236,824 231,471
40.0% 50.0% Total Equity 96,080 101,614 111,629 120,593 139,689 160,130
40.0%
Total Liabilities & Equity 216,761 242,489 354,776 362,968 376,514 391,601

CASHFLOW STATEMENT (IN PHPMIL)

FY14 FY15 FY16 FY17E FY18E FY19E
Net Income 16,705 17,604 20,003 17,025 25,364 31,154
Distribution Generation Services Others Depreciation & Amortization 4,643 4,322 6,044 7,309 9,151 9,170
Distribution Generation Services Others
Other Non-Cash Exp (Gains) (1,583) (1,174) (1,224) (10,392) (11,671) (11,671)
Interest Expense (Income) 5,522 5,788 6,620 10,392 11,671 11,671
Decrease (Increase) in Working Cap (1,850) (1,339) (1,554) 4,764 (1,884) (1,314)
Operating Cash Flow 23,438 25,200 29,888 29,099 32,631 39,010
Capex (15,004) (15,701) (28,203) (16,000) (900) (900)
Other Investments 2,024 6,799 (53,177) (33,551) (20,578) (3,607)
Investing Cash Flow (12,980) (8,903) (81,380) (49,551) (21,478) (4,507)
Proceeds (Payment) Debts 12,913 10,425 64,459 (7,458) (7,458) (7,458)
Payment of Cash Dividends (12,218) (12,218) (12,215) (10,001) (8,513) (12,682)
Others (2,314) (3,656) (4,760) 2,623 2,996 2,795
Financing Cash Flow (1,619) (5,449) 47,483 (14,837) (12,975) (17,345)
Change in Cash 8,839 10,849 (4,009) (35,289) (1,822) 17,157

COL Financial Group, Inc. 2

 COMPANY UPDATE I AP: REDUCING ESTIMATES ON POTENTIAL DELAYS IN OPERATION OF POWER PROJECTS

WED 14 FEB 2018

INVESTMENT THESIS: KEY RATIOS

FY14 FY15 FY16 FY17E FY18E FY19E
Vertically integrated structure will allow AP
GPM (%) - - - - - -
to thrive despite oversupply situation
EBITDA Margin (%) 38.8% 38.7% 43.2% 36.1% 38.4% 28.5%
We believe that AP is in a good position to thrive
OPM (%) 25.8% 29.0% 29.5% 29.4% 30.9% 31.5%
despite the oversupply situation primarily
NPM (%) 19.3% 20.7% 22.4% 15.8% 22.6% 23.9%
due to its vertically integrated structure. AP
Times Interest Earned (X) 4.05 4.27 3.97 3.05 3.15 3.43
owns subsidiaries engaged in both power
Current Ratio (X) 3.36 3.12 2.25 1.02 1.07 1.49
generation and power distribution. AP’s
distribution subsidiaries provide a ready Net D/E Ratio (X) 0.01 0.07 0.96 1.12 0.90 0.65
market for its power generation subsidiaries. Days Receivable 51.9 58.7 63.3 59.4 59.4 59.4
This gives AP a huge advantage in terms of Asset T/O (%) 40.0% 35.1% 25.1% 29.8% 32.0% 33.0%
being able to continuously expand its power ROAE (%) 17.8% 17.8% 18.8% 14.7% 20.9% 20.4%
generation portfolio without being overly
exposed to the WESM. Furthermore, AP has MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
a diversified and well-balanced portfolio of
power generation assets (91% contracted, AP acquires G Power assets from Blackstone for US$1.2Bil 10/5/2016
remaining capacity through the WESM) that
gives AP a steady stream of cash flow while at
the same time allow the company to maximize
revenues when power supply is tight.

Expansion of RES operation to minimize

long term merchant risk
AP’s distribution business enhances its ability
to participate in the Retail Electricity Supply
market under the Open Access Regime as
the company is already familiar with the
requirement and the usage pattern of its
contestable customers, while its diversified
power generation portfolio allows it to
offer the most cost effective power solution
package to these customers. Going forward,
AP plans to utilize RES to allow it to continue
expand its power generation portfolio without
incurring too much merchant risk in added
capacity. Going forward, AP plans to boost its
participation in RES from the current 313MW
to 800MW by 155% by 2020, representing 27%
of its current attributable power generation
capacity.

Excellent growth story

AP is expanding its power generation
portfolio with the target of reaching beneficial
power generation capacity of 4,000MW by
2019 (representing 35% increase of its existing
capacity). In 2018E, three new major power
projects will begin commercial operation,
namely the 68MW Manolo Fortich run-of-river
hydroelectric plant, the 400MW Pagbilao coal
power expansion project and the 300MW Cebu
Coal Project. Together, these three power
projects will boost AP’s attributable power
generation capacity by 508MW, representing
17% of its power generation capacity. We
also expect these projects to boost AP’s 2018E
earnings by 40% to Php29.1Bil.

COL Financial Group, Inc. 3

 COMPANY UPDATE I AP: REDUCING ESTIMATES ON POTENTIAL DELAYS IN OPERATION OF POWER PROJECTS

WED 14 FEB 2018

Valuation RELATIVE VALUATION

Valuation
Methodology Value (PhpMil) Value (Php/Sh) % of GAV % of NAV Methodology
Distribution 51,314 7.0 13.2% 13.5% DCF
Generation
Oil 25,643 3.5 6.6% 6.8% DCF
Hydro 61,955 8.4 15.9% 16.3% DCF
Coal 197,225 26.8 50.6% 52.0% DCF
Geothermal 53,449 7.3 13.7% 14.1% DCF
Generation total 338,271 46.0 86.8% 89.2%
Total 389,585 52.9 100.0% 102.7%
Less: Net Debt 10,136 1.4
Equity Value 379,450 51.6
Less: Holding Company Discount 0 0.0
FV Estimate 379,450 51.6

COL Financial Group, Inc. 4

 COMPANY UPDATE I AP: REDUCING ESTIMATES ON POTENTIAL DELAYS IN OPERATION OF POWER PROJECTS

WED 14 FEB 2018

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

JOHN MARTIN LUCIANO ADRIAN ALEXANDER YU

RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 5