First Gen Corporation TUE 11 SEP 2018

Increasing estimates on improving

earnings outlook
Due to the ERC’s approval of San Gabriel’s contract with MER and EDC’s final tender offer, we are
increasing our 2019E EPS forecast for FGEN by 14.2% to Php2.69/sh, and our 2020E EPS forecast by BUY
13.5% to Php2.76/sh. We are also raising our FV estimate on FGEN by 8.7% to Php28.8/sh.
TICKER: FGEN
Increasing San Gabriel estimates on ERC’s PSA approval. In June of this year, the ERC FAIR VALUE: 28.80
approved the power supply contract between Meralco and FGEN’s San Gabriel plant. This was CURRENT PRICE: 16.18
a positive surprise as we only expected FGEN to fully contract the San Gabriel’s capacity in 2020 UPSIDE: 77.91
(with smaller contracts through the Retail Electricity Supply market). While the contract price of
Php3.77/kwh is 14% lower than our previous estimate, the earlier than expected approval of the
SHARE PRICE MOVEMENT
contract and higher capacity factor assumption (45% previously) is a net positive for FGEN. We
120
are raising our 2018E and 2019E net income contribution forecast for the San Gabriel by 67.5%
and 23.3% to Php1.5Bil. 110

100
EDC tender offer, delisting to benefit FGEN. We believe that the EDC tender offer will
90
enhance both the value of and investor sentiment towards FGEN. Given that the tender offer
is priced at a 15.6% discount to our FV estimate for EDC (Php8.59/sh), the value of FGEN’s 46.7% 80

stake in EDC post tender offer is US$1.034Bil based on our estimates, 6.3% higher compared 70
to before the tender offer. Assuming the tender offer will likely be partially financed through
60
additional borrowings by EDC, we estimate that this would still increase EDC’s 2019E net income 11-Jun-18 11-Jul-18 11-Aug-18 11-Sep-18
contribution to FGEN by 5.2% to Php4.1Bil. Furthermore, we believe that the tender offer could FGEN PSEi
also trigger a potential re-rating for FGEN as buying FGEN would now be the only way for
investors to own EDC, the lone pure renewable energy producer company in the country and
the largest geothermal power generation company in the world. ABSOLUTE PERFORMANCE

1M 3M YTD
FORECAST SUMMARY
FGEN 0.62 5.06 -4.82
Year to Dec. 31 2015 2016 2017 2018E 2019E 2020E PSEi -2.68 -2.25 -11.24
Sales (US$Mil) 1,846 1,570 1,718 1,941 1,954 1,968
% change y/y -3.3 -14.9 9.4 12.9 0.7 0.7
EBIT (US$Mil) 485 564 446 705 709 714
% change y/y -14.0 16.3 -21.0 58.1 0.7 0.6 MARKET DATA
EBIT Margin (%) 26.3 35.9 25.9 36.3 36.3 36.3
EBITDA (US$Mil) 671 761 658 914 919 923 Market Cap 59,234.06Mil
% change y/y -7.8 13.5 -13.6 39.0 0.5 0.5 Outstanding Shares 3,660.94Mil
EBITDA Margin (%) 36.3 48.5 38.3 47.1 47.0 46.9 52 Wk Range 14.10 - 19.72
Net Profits (US$Mil) 167.3 199.6 134.4 196.7 204.2 208.9
3Mo Ave Daily T/O 45.33Mil
% change y/y -13.4 19.3 -32.6 46.3 3.8 2.3
NPM (%) 9.1 12.7 7.8 10.1 10.5 10.6
EPS (US$) 0.0347 0.0441 0.0276 0.0475 0.0508 0.0521
% change y/y -16.9 27.2 -37.3 72.0 6.9 2.5

RELATIVE VALUE
P/E(X) 8.8 6.9 11.0 6.4 6.0 5.9
P/BV(X) 0.67 0.64 0.52 0.46 0.44 0.42
ROE(%) 8.34 9.55 5.46 7.51 7.41 7.23 GEORGE CHING
Dividend yield(%) 2.16 2.16 2.16 2.16 2.16 2.16 SENIOR RESEARCH MANAGER
*Source: COL estimates 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.
 COMPANY UPDATE I FGEN: INCREASING ESTIMATES ON IMPROVING EARNINGS
OUTLOOK

TUE 11 SEP 2018

Increasing San Gabriel estimates on ERC’s PSA approval

In June of this year, the ERC approved the power supply contract between Meralco and FGEN’s
San Gabriel plant. This was a positive surprise as we only expected FGEN to fully contract the
San Gabriel’s capacity in 2020 (with smaller contracts through the Retail Electricity Supply mar-
ket). Based on previous disclosures, the term of the contract is six years, with fuel pass through
provision, 87.7% capacity factor, and tariff price of Php3.77/kwh.

The San Gabriel power supply contract improved FGEN’s overall earnings outlook as it assures
that the plant will be profitable without having to rely on the wholesale electricity spot market
(WESM) where prices can be volatile. While the contract price of Php3.77/kwh is 14% low-
er than our previous estimate, the earlier than expected approval of the contract and higher
capacity factor assumption (45% previously) is a net positive for FGEN. We are raising our
2018E and 2019E net income contribution forecast for the San Gabriel by 67.5% and 23.3% to
Php1.5Bil.

EDC tender offer, delisting to benefit FGEN

On September 25, EDC will be conducting a final tender offer for the remaining shares held by
minority shareholders equivalent to 10.9% of EDC’s total outstanding shares. Subsequently,
EDC will be delisted from the PSE. We believe that the tender offer will enhance both the val-
ue of and investor sentiment towards FGEN. Given that the tender offer is priced at a 15.6%
discount to our FV estimate for EDC (Php8.59/sh), the value of FGEN’s 46.7% stake in EDC post
tender offer is US$1.034Bil based on our estimates, 6.3% higher compared to before the tender
offer.

Assuming the tender offer will likely be partially financed through additional borrowings by
EDC, we estimate that this would still increase EDC’s 2019E net income contribution to FGEN
by 5.2% to Php4.1Bil. Furthermore, we believe that the tender offer could also trigger a poten-
tial re-rating for FGEN as buying FGEN would now be the only way for investors to own EDC,
the lone pure renewable energy producer company in the country and the largest geothermal
power generation company in the world.

COL Financial Group, Inc. 2

 COMPANY UPDATE I FGEN: INCREASING ESTIMATES ON IMPROVING EARNINGS
OUTLOOK

TUE 11 SEP 2018

Final plans for investment in regasification facility in 2019

The gas sales and purchase agreement between FGEN’s gas plants and Spex (Malampaya gas
seller) will end in 2024. To ensure that FGEN’s existing gas plants would be able to continue
operating beyond 2024, FGEN needs to build an LNG regasification terminal that will allow the
plants to utilize imported LNG as fuel. The estimated construction period for the regasifica-
tion terminal is five years, while the capex requirement ranges from US$250Mil to US$1.2Bil,
depending on the capacity of the facility. In addition to choosing the right capacity for the re-
gasification facility, FGEN is also currently in the process of selecting the most suitable partner
for the project. More than just providing the funding for the project, management said the
ideal partner should be able to enhance other technical aspects of the project (such as ability
to secure gas contracts, or marketing the offtake of the power plants). Management said that
the final decision on the project will have to be made in 2019.

Raising estimates, maintaining BUY rating

Due to the ERC’s approval of San Gabriel’s contract with MER and EDC’s final tender offer, we
are increasing our 2019E EPS forecast for FGEN by 14.2% to Php2.69/sh, and our 2020E EPS
forecast by 13.5% to Php2.76/sh. We are also raising our FV estimate on FGEN by 8.7% to
Php28.8/sh. We believe that the approval of the San Gabriel contract and the delisting of EDC
will improve investor sentiment in the near term. Note that FGEN’s share price has declined
23.3% in the past 12 months, underperforming the PSEi’s performance during the same period
(-7.8%). FGEN is trading at a 2019E P/E of 6X, a discount to the industry average of 12X. Based
on FGEN’s market price of Php16.16/sh, upside to our FV estimate is significant at 78%.

COL Financial Group, Inc. 3

 COMPANY UPDATE I FGEN: INCREASING ESTIMATES ON IMPROVING EARNINGS
OUTLOOK

TUE 11 SEP 2018

First Gen Corporation INCOME STATEMENT (IN PHPMIL)

(FGEN) Revenues
FY15
1,846
FY16
1,570
FY17E
1,718
FY18E
1,941
FY19E
1,954
FY20E
1,968
% Growth -3.3% -14.9% 9.4% 12.9% 0.7% 0.7%
COMPANY BACKGROUND EBIT 485 564 446 705 709 714
FGEN is the power power generation arm % Growth -14.0% 16.3% -21.0% 58.1% 0.7% 0.6%
EBITDA 671 761 658 914 919 923
of the Lopez Group of Companies. It is the
% Growth -7.8% 13.5% -13.6% 39.0% 0.5% 0.5%
3rd largest power generation firm in the Interest Expense (167) (166) (175) (138) (155) (155)
country , and the largest player in natural gas Other Income/Expense 106 41 118 - - -
and geothermal power. It has a total power Pretax Income 318 397 271 384 372 376
generation installed capacity of 3,477MW and Tax Expense (72) (106) (62) (74) (72) (72)
accounts for 19% of Luzon and 27% of Vis- Net Income 167 200 134 197 204 209
% Growth -13.4% 19.3% -32.6% 46.3% 3.8% 2.3%
Min’s total capacity.
EPS 0.03 0.04 0.03 0.05 0.05 0.05
% Growth -16.9% 27.2% -37.3% 72.0% 6.9% 2.5%
REVENUE BREAKDOWN

0.6% BALANCE SHEET (IN PHPMIL)

FY15 FY16 FY17E FY18E FY19E FY20E
Cash & Equivalents 730 498 671 617 546 481
Trade Receivables 317 344 357 357 357 357
Inventories 102 118 93 98 103 108
Other Current Assets 149 152 192 192 192 192
PPE 2,708 2,746 2,760 2,665 2,564 2,457
Other Non-Current Assets 1,512 1,430 1,428 1,431 1,434 1,438
Total Assets 5,519 5,289 5,501 5,359 5,195 5,032
Accounts Payable 388 378 405 405 405 405
ST Debts 286 289 301 301 301 301
99.4% Other Current Liabilities 25 27 24 24 24 24
LT Debts 2,677 2,389 2,212 1,910 1,609 1,308
Electricity Others Other Non-Current Liabilities 137 117 95 98 101 104
Total Liabilities 3,513 3,200 3,037 2,738 2,440 2,143
Total Equity 2,006 2,090 2,464 2,620 2,755 2,889
Total Liabilities & Equity 5,519 5,289 5,501 5,359 5,195 5,032

CASHFLOW STATEMENT (IN PHPMIL)

FY15 FY16 FY17E FY18E FY19E FY20E
Net Income 167 200 134 197 204 209
Depreciation & Amortization 186 198 212 209 209 209
Other Non-Cash Exp (Gains) 110 128 70 (161) (173) (168)
Interest Expense (Income) 167 166 175 138 155 155
Decrease (Increase) in Working Cap 66 (80) 22 5 5 5
Operating Cash Flow 697 612 614 387 400 410
Capex (465) (280) (160) (100) (100) (100)
Other Investments (142) (30) (108) (3) (3) (4)
Investing Cash Flow (607) (310) (269) (103) (103) (104)
Proceeds (Payment) Debts 168 (241) (173) (301) (301) (301)
Payment of Cash Dividends (111) (110) (79) (40) (70) (74)
Others (89) (181) 77 3 3 4
Financing Cash Flow (32) (532) (175) (339) (368) (372)
Change in Cash 57 (231) 170 (54) (71) (66)

COL Financial Group, Inc. 4

 COMPANY UPDATE I FGEN: INCREASING ESTIMATES ON IMPROVING EARNINGS
OUTLOOK

TUE 11 SEP 2018

INVESTMENT THESIS: KEY RATIOS

FY15 FY16 FY17E FY18E FY19E FY20E
Stable core operations
GPM (%) - - - - - -
FGEN is one of the largest power generation EBITDA Margin (%) 36.34 48.49 38.27 47.10 47.01 46.91
companies in the country with a consolidated OPM (%) 26.27 35.90 25.94 36.31 36.29 36.27
capacity of 3,477MW and a beneficial NPM (%) 9.06 12.71 7.82 10.14 10.45 10.62
capacity of 2,766MW. FGEN has very stable Times Interest Earned (X) 3.50 3.50 3.50 3.50 3.50 3.50
Current Ratio (X) 1.90 1.64 1.83 1.77 1.67 1.59
core operations given that its Sta. Rita and
Net D/E Ratio (X) 1.11 1.04 0.75 0.61 0.50 0.39
San Lorenzo gas plants have attached long Days Receivable 62.76 80.06 75.82 67.14 66.67 66.21
term take-or-pay contracts for all of their Asset T/O (%) 33.5% 29.7% 31.2% 36.2% 37.6% 39.1%
generation capacities. More than 80%% of ROAE (%) 3.1% 3.7% 2.5% 3.6% 3.9% 4.1%

EDC’s capacity is also allotted for long-term

take-or-pay contracts.

COL Financial Group, Inc. 5

 COMPANY UPDATE I FGEN: INCREASING ESTIMATES ON IMPROVING EARNINGS
OUTLOOK

TUE 11 SEP 2018

Valuation NAV COMPUTATION

Methodology Sta. Rita and San Lorenzo

Value (PhpMil) Value (Php/Sh) % of GAV % of NAV Valuation Methodology
62,343 17.03 51.5% 59.2% DCF
San Gabriel and Avion 20,332 5.55 16.8% 19.3% DCF
EDC 54,848 14.98 45.3% 52.0% DCF
Future investment on regasification facility -16,430 -4.49 -13.6% -15.6%
Total 121,093 33.08 100.0% 114.9%
Less: Net Debt 15,710 4.29
Equity Value 105,383 28.79
Less: Holding Company Discount 0 0.00
FV Estimate 105,383 28.79
So urce:COL estimates

COL Financial Group, Inc. 6

 COMPANY UPDATE I FGEN: INCREASING ESTIMATES ON IMPROVING EARNINGS
OUTLOOK

TUE 11 SEP 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

ANDY DELA CRUZ JOHN MARTIN LUCIANO FRANCES ROLFA NICOLAS

SENIOR RESEARCH ANALYST SENIOR RESEARCH ANALYST RESEARCH ANALYST
andy.delacruz@colfinancial.com john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com

JUSTIN RICHMOND CHENG ADRIAN ALEXANDER YU

RESEARCH ANALYST RESEARCH ANALYST
justin.cheng@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. 7