MTerra Solar And Chromite Gas Will Modernize Energy Infrastructure

Key Takeaways

• Strategic investments and projects in advanced metering, renewable energy, and LNG could drive future growth, efficiency, and diversification of revenue.
  
• Regulatory renewals and international expansions are poised to stabilize revenue, diversify income streams, and bolster long-term performance.
  
• Regulatory scrutiny, rising costs, and high debt from acquisitions could hinder Manila Electric's revenue growth and margin resilience.

Catalysts

Manila Electric Company holds a congressional franchise to construct, operate, and maintain an electric distribution system in the Philippines.

• Meralco's planned major capital expenditure projects, including increased investment in advanced metering infrastructure (AMI) and the development of the MTerra Solar project, which could drive future revenue growth from enhanced grid efficiency and expanded capacity.
  
• The integration of Chromite Gas Holdings and its substantial contribution to capacity and energy sales, with its LNG terminal and regasification facility, potentially boosting future earnings through diversification of energy sources and increased generation capacity.
  
• MGen's renewable energy initiatives and significant project milestones, such as the Terra Solar project, are expected to contribute to future revenue through expanded capacity and support from international investors like Actis.
  
• Regulatory developments, including the renewal of Meralco's franchise and progress on energy supply contracts, may stabilize revenue and influence operational metrics positively, given the focus on sustainable power supply and energy auctions.
  
• Strategic international expansions, such as the additional CCGT capacity in Singapore and the anticipated commissioning of advanced energy storage systems, could offer diversification of revenue streams and support steady future earnings growth.

Manila Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Manila Electric's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 11.4% in 3 years time.
• Analysts expect earnings to reach ₱65.9 billion (and earnings per share of ₱55.07) by about May 2028, up from ₱46.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 13.8x today. This future PE is greater than the current PE for the PH Electric Utilities industry at 7.7x.
• 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 10.85%, as per the Simply Wall St company report.

Manila Electric Future Earnings Per Share Growth

Risks

• The company faces significant regulatory scrutiny, potentially impacting its ability to implement rate changes or expansion plans, which could negatively affect revenue and margin forecasts.
  
• There is uncertainty in the regulatory approval of new projects, like delays in the 5th regulatory period (RP) and changes in energy procurement plans, which could affect future earnings and capital expenditure recovery.
  
• Rising costs due to higher natural gas prices and transmission charges could pressure net margins, despite revenue increases from higher energy sales volumes.
  
• The large debt associated with recent acquisitions, such as Chromite Gas Holdings, increases financial risk and may affect future earnings depending on the successful push down of debt to operating companies.
  
• The economic environment shows signs of sluggish growth, which could result in lower-than-expected energy demand growth and affect revenue projections.

Valuation

• The analysts have a consensus price target of ₱572.475 for Manila Electric based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₱620.0, and the most bearish reporting a price target of just ₱488.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱578.1 billion, earnings will come to ₱65.9 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of ₱570.0, the analyst price target of ₱572.48 is 0.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.