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Tuesday, April 29, 2014

MER: 1Q14 results missed forecast as sales volume growth disappoints

Sales volume growth disappoints. Meralco’s 1Q14 core net profit rose marginally by 1.6% to Php4.088Bil, representing only 19.3% of COL and 21% of consensus full year forecasts. Earnings disappointed as net distribution revenues grew by 1.3% to Php12.8Bil, representing only 23.1% of our full year forecast. This was mainly due to the lower than expected sales volume growth of 1.7%. In our forecast, we assumed that sales volume would grow by 4.0%. Average tariff for the period declined 0.7% to Php1.63/kwh, but still exceeded our forecast of Php1.58/kwh. Costs were also higher than expected as operating and maintenance expenses excluding pass-on purchased power cost amounted to Php4.3Bil, representing 29% of our full year forecast

Sales volume growth disappoints on cooler temperature. As discussed earlier, 1Q14 sales volume grew only 1.7% to 7,908GWh. Sales volume growth of the industrial segment reached 5.7%, while that of the commercial segment reached 2.2%. The biggest disappointment was the residential segment which saw sales volume decline by 3.3%. Management attributed the weak residential sales volume growth to the cooler temperature this year (temperature was -1 C lower compared to 1Q13) and the negative impact of a potential price spike in electricity on consumers. However, management believes that volume growth should rebound in the second quarter given the warmer temperature.

Maintain HOLD rating with FV estimate of Php252/sh. We reiterate our HOLD rating on MER with a FV estimate of Php252/sh. Although the near term earnings growth outlook remains positive, we are concerned with the expected drop in earnings beginning in July 2015 once tariffs are reduced in the next regulatory period. Furthermore, the stock’s valuation is no longer attractive as the stock is trading at a slight premium to our fair value estimate of Php252/sh.

- COL Financial

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