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Tuesday, May 6, 2014

Aboitiz Power Corporation: Upgrading to BUY on improving earnings outlook

We are raising our earnings forecast on AP by 4.3% to Php15.8 Bil in 2014E and by 4.4% to Php20.2 Bil in 2014E after factoring in the lower than expected steam cost of the Tiwi-Makban plant and the first time earnings contribution of the newly won 246MW Therma Mobile diesel plants. Based on our estimates, the Cebu coal plant coupled with the Therma Mobile diesel plants and the savings from the lower than expected steam cost will boost AP’s FV estimate by 18.8% to Php44.3/sh, warranting an upgrade in our recommendation from a HOLD to a BUY.

Raising estimates for Tiwi-Makban on lower than expected steam cost. We are reducing our average steam pricing assumption for the Tiwi-Makban by 13.8% to Php2.02/kwh due to the continuous weakness in regional coal prices. This led to a 19.8% reduction in our steam cost estimate for the Tiwi-Makban to Php5.8Bil. In light of the new steam cost estimates, we are raising our 2014E and 2015E EBITDA forecast for the Tiwi-Makban by 17.8% to Php6.4Bil.

New Cebu coal plant to boost NAV by Php1.91/sh. AP’s management said that it will push through with the 300MW Cebu coal plant project. Assuming a total project cost of US$2Mil/MW, capacity factor sold of 80%, and gross margin of Php3.1/kwh, we estimate that this project could generate Php2.9Bil in earnings annually, equivalent to 14.4% of AP’s FY13E earnings. The new project would also boost AP’s NAV by Php1.91/sh, representing 4.3% of our current NAV estimate. The new Cebu Coal project, together with other new coal plant projects such as the 300MW Davao coal plant, and the 400MW Pagbilao coal expansion project, will boost the long term earnings growth of AP.

Therma Mobile to boost NAV by Php1.13/sh. AP won the bid for the 246MW Navotas barges (under AP’s wholly owned subsidiary, Therma Mobile) on July 2011. Half of the 246MW capacity began operations in 4Q13 after two years of rehabilitation works, with the remaining half scheduled to start operations in 2Q14. We expect the power barges to generate ~ Php470Mil in earnings annually representing 2.3% of AP’s FY13 net income. Therma Mobile would also boost AP’s NAV by Php1.13/sh, representing 2.5% of our current NAV estimate.

- Col Financial

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