Renewable Projects And Collaborations Will Strengthen Philippine Electricity Sector

Key Takeaways

• Strong growth in sales volume and power generation, including renewable projects, is set to boost future revenues and operational margins.
  
• Strategic collaborations and enhanced credit ratings are expected to improve operational efficiencies and support investment in growth projects, strengthening profitability.
  
• Rising costs, regulatory challenges, and currency risk could negatively impact Manila Electric's net margins and earnings stability.

Catalysts

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

• Meralco's strong growth in sales volume, especially in residential and commercial segments, is expected to boost future revenues, supported by increasing customer connections and the potential expansion of its distribution network.
  
• Enhanced power generation capabilities, including increased capacity from San Buenaventura and contributions from MGreen's renewable projects, are likely to improve earnings and operational margins in future periods.
  
• The development of new gas plants and Terra Solar's progress are anticipated to significantly increase capacity and revenues in the coming years, contributing to higher earnings from the power generation segment.
  
• Strategic collaborations and structural consolidations, such as the merger of Meralco's telco tower business, are expected to improve operational efficiencies and future profitability, positively affecting net margins over time.
  
• Improved credit rating and strong financial performance provide a favorable outlook for capital financing, which can support continued investment in growth projects, positively impacting earnings and financial stability moving forward.

Manila Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Manila Electric's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.4% today to 10.0% in 3 years time.
• Analysts expect earnings to reach ₱52.3 billion (and earnings per share of ₱46.03) by about December 2027, up from ₱43.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₱58.6 billion in earnings, and the most bearish expecting ₱42.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2027 earnings, up from 12.4x today. This future PE is lower than the current PE for the PH Electric Utilities industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.43%, as per the Simply Wall St company report.

Manila Electric Future Earnings Per Share Growth

Risks

• Increased operating expenses due to intensified maintenance and higher software costs might impact net margins adversely.
  
• The deconsolidation of MIDC poses potential revenue risks, impacting the future revenue stream of the telecommunications tower business.
  
• Rising costs, particularly purchased power, which accounts for 82% of total expenses, could compress net margins if not managed effectively.
  
• Challenges in regulatory affairs, especially if the franchise renewal faces hurdles or regulatory decisions are unfavorable, could impact future earnings stability.
  
• Exposure to currency risk due to peso depreciation against the US dollar may lead to financial instability, affecting net income and earnings.
  

Valuation

• The analysts have a consensus price target of ₱495.56 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 ₱575.0, and the most bearish reporting a price target of just ₱380.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₱521.1 billion, earnings will come to ₱52.3 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 10.4%.
• Given the current share price of ₱479.0, the analyst's price target of ₱495.56 is 3.3% 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.