Investments In Solar Power And Battery Storage Will Boost Future Operational Stability

Key Takeaways

• Investment in renewable energy and market bidding strategies could enhance revenue, earnings, and operational stability by capitalizing on clean energy and demand for reserves.
  
• Expansion of customer base, improved revenue stability through regulatory processes, and distribution network investments may boost revenue growth and long-term financial performance.
  
• Rising operational costs, peso depreciation, and regulatory changes may challenge revenue growth, while CapEx and market volatility could impact Meralco's earnings and cash flows.

Catalysts

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

• Investment in renewable energy projects, such as the development of solar power plants and battery storage, is expected to enhance operational stability and increase capacity, potentially boosting future revenue and earnings through higher clean energy sales.
  
• Strategic participation in optimized market bidding for energy and ancillary services, particularly in the Visayas Grid, could drive growth in revenue and net margins by capitalizing on the demand for reserves and stabilizing energy capacity.
  
• Completion of regulatory processes, such as power supply agreements and ongoing tariff adjustments, may lead to improved revenue stability and potential cost recovery, positively impacting future earnings.
  
• Expansion of customer base and growth in energy sales volumes, driven by new connections and increased demand in the residential and commercial segments, can bolster revenue growth and enhance overall financial performance.
  
• Ongoing investments in distribution network improvements and advanced metering infrastructure can lead to operational efficiencies, reduced system losses, and enhanced service reliability, which may support improved net margins and profitability in the long term.

Manila Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Manila Electric's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 10.6% in 3 years time.
• Analysts expect earnings to reach ₱59.1 billion (and earnings per share of ₱54.79) by about April 2028, up from ₱45.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 13.3x today. This future PE is greater than the current PE for the PH Electric Utilities industry at 7.0x.
• 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 increase in Meralco's operational expenses, driven by higher manpower, contracted services, and IS/IT-related expenses, could impact net margins as rising costs may outpace revenue growth.
  
• The impact of peso depreciation, with the Philippine peso weakening against the U.S. dollar, might lead to higher imported fuel and equipment costs, affecting earnings negatively.
  
• Regulatory changes and requirements, such as those related to retail competition and open access, may impose additional costs and create uncertainties that could impact revenue projections.
  
• The energy market's reliance on spot market prices and unpredictable fossil fuel costs, such as coal and LNG, could lead to volatile revenues depending on global price fluctuations.
  
• Increased focus on CapEx for smart metering infrastructure and grid improvements, while necessary, poses risks if projected returns and regulatory approvals do not align with the company's financial timelines, potentially affecting cash flows and earnings.

Valuation

• The analysts have a consensus price target of ₱568.85 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 ₱558.2 billion, earnings will come to ₱59.1 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 10.8%.
• Given the current share price of ₱542.0, the analyst price target of ₱568.85 is 4.7% 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.