Equity Analysis /
Vietnam

Pha Lai Thermal Power: Earnings will remain strong for the next five years

    Son Phan
    Son Phan

    Utilities, Natural Rubber

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    Rong Viet
    24 October 2018
    Published byRong Viet

    3Q 2018 performance: lower contract volume hit core earnings but NPAT still grew due to less provision expenses: Like other thermal power plants, PPC had a relatively lower Qc in the third quarter of 2018 at 920 million kWh (-13% YoY). Heavy rainfall in the North during some periods in 3Q 2018 also brought PPC certain difficulties in boosting sales volume. As a result, 3Q 2018 revenue and recurring NPAT of the company were only VND 1,260 billion (-14% YoY) and VND 156 billion (-16% YoY), respectively.

    While less Qc slightly weakened core earnings, non-recurring items played its role to help PPC’s reporting a NPAT of VND 163 billion, corresponding to a growth of 8% YoY. The company booked VND 7 billion net FX gains in 3Q 2018, compared to a net loss in 3Q 2017 of VND 34 billion, primarily from provision expenses for its financial investments.

    The reversal of financial expenses from FX differences in 2016 is expected to be recognized in 4Q 2018, making it a potential catalyst for PPC’s business results: The Ministry of Industry and Trade (MoIT) has made a final decision that, EVN has, this year, to repay the financial expenses from FX differences in 2016 for all power plants including PPC. The repayment process is only expected to be completed in the last quarter of this year. With the reversal amount of up to VND 125 billion, we estimate that 4Q 2018 earnings could increase by 136% YoY to VND 214 billion.

    Valuation and Recommendation: Due to recent changes in capex plans, PPC has significantly reduced uncertainties in its short-term performance, thus eliminating the related risks and enhancing its ability to maintain a stable annual cash dividend of 2,500 VND/share. This dividend level, corresponding to a yield of 14%, is relatively attractive in such a defensive sector.

    Regarding 2018 business results, we estimate that NPAT could rise by 28% YoY to VND 1,093 billion due to the large one-off income from the reversal of the expense from FX differences. However, our projection is that earnings in the coming years would remain at high level even without any extraordinary profits.

    Our target price is VND 23,000 per share. This target price, coupled with a VND 2,500 cash dividend in the next 12 months, would yield a total return of 44% (calculated based on the closing price on 23 October). Therefore, we have a BUY recommendation on PPC.