ESG Mandates Will Devalue Legacy Coal Assets In Philippines

Key Takeaways

• Decarbonization policies and distributed energy growth threaten earnings, margins, and the long-term viability of existing coal and thermal assets.
  
• Delays or challenges in renewable project execution and rising competition from advanced technologies put future revenue, profitability, and market position at risk.
  
• Strong renewable expansion, stable contracted revenues, robust balance sheet, and market leadership position Aboitiz Power for margin growth and long-term profitability in a decarbonizing market.

Catalysts

Through its subsidiaries, engages in the power generation and distribution, and electricity retail businesses in the Philippines.

• Intensifying global decarbonization policies and new ESG requirements could force Aboitiz Power to accelerate the retirement or early devaluation of its sizeable coal and thermal assets, which currently comprise roughly 40 to 50 percent of the portfolio, leading to potential asset write-downs and a significant drag on both future earnings and book value.
  
• Continued rapid adoption and falling costs of distributed energy solutions such as rooftop solar and private battery storage may shrink the addressable customer base for utility-scale providers, putting sustained downward pressure on long-term revenue growth-especially as grid demand faces increasing competition from these alternatives.
  
• Persistent reliance on coal and thermal generation exposes the firm to mounting stranded asset risk, regulatory penalties, and higher compliance costs, which in turn could compress net margins and raise the company's cost of capital as investors and lenders shift away from carbon-intensive portfolios.
  
• The ambitious pipeline of renewable energy projects presents execution risks: delays, cost overruns, or missed regulatory targets could hinder the company's ability to replace lost legacy revenue streams, reduce margin expansion potential, and negatively affect future cash flows needed to service elevated debt levels.
  
• Accelerating technological innovations in distributed generation, battery storage, and advanced grid management by competitors threaten to erode Aboitiz Power's pricing power and market share, leading to increased competition and a structural decline in both top-line growth and sustainable profitability over the long term.

Aboitiz Power Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Aboitiz Power compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Aboitiz Power's revenue will grow by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.7% today to 20.0% in 3 years time.
• The bearish analysts expect earnings to reach ₱43.1 billion (and earnings per share of ₱5.98) by about July 2028, up from ₱30.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.3x on those 2028 earnings, down from 10.2x today. This future PE is lower than the current PE for the PH Renewable Energy industry at 8.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.57%, as per the Simply Wall St company report.

Aboitiz Power Future Earnings Per Share Growth

Risks

• Accelerated investments and expansion in renewable energy, with multiple solar, wind, and battery projects energized or nearing completion, are likely to drive revenue growth, margin expansion, and position the company favorably in a decarbonizing market.
  
• The company's successful strategy of contracting a high percentage of its capacity into long-term power supply agreements enhances revenue visibility and reduces exposure to spot market volatility, supporting more stable earnings and cash flows.
  
• Aboitiz Power's strong balance sheet, improved net debt to equity ratio, and prudent risk management-including plans to refinance maturing debt with bond issuances at potentially lower interest rates-may lower financing costs and support sustained profitability.
  
• Sustained leadership in the distribution and retail electricity supply segments, with rising market share, growing customer base, and ongoing digital transformation initiatives, could boost revenues and improve net margins through increased operational efficiency.
  
• Long-term secular trends such as rising power demand in the Philippines, favorable government policies promoting renewables, and advances in clean energy technology align with Aboitiz Power's strategic direction and raise the likelihood of higher revenues and improved margins in the long term.

Valuation

• The assumed bearish price target for Aboitiz Power is ₱30.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Aboitiz Power's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₱60.0, and the most bearish reporting a price target of just ₱30.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₱215.5 billion, earnings will come to ₱43.1 billion, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 13.6%.
• Given the current share price of ₱43.5, the bearish analyst price target of ₱30.0 is 45.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.