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Fundamental View
AS OF 18 Apr 2024We see lower non-call risk for SMC GP’s c.2024 and c.2025 perps, supported by a proposed $800 mn perp issuance and forthcoming near-term parental support.
We remain concerned about non-call risk for SMC GP’s c.2026 perps owing to expectations of constrained parental support and SMC GP’s firmly negative free cash flows.
While SMC GP improved its cost passthrough contractual mix in 2023, the company still remains exposed to high thermal coal input costs (~45-50% of contracts).
SMC GP incurs sizable capex that has led to additional debt incurrence and elevated credit metrics.
Business Description
AS OF 18 Apr 2024- SMC GP is a leading power generation and distribution company in the Philippines. As at 31 December 2021, its total generation capacity stood at 4.7 GW, accounting for ~20% of the national grid.
- The bulk of its revenues is derived from power generation (~82%), with the remainder from electricity distribution and retailing (~18%).
- It operates 7 power generating plants across diversified energy sources, comprising coal (~62%), natural gas (~25%), hydro (~12%) and battery energy storage (~1%).
- Through long-term power supply agreements and retail supply contracts, SMC GP either sells electricity directly to customers (including large Philippines power distribution company Manila Electric Company, distribution utilities and other industrial customers), or through the Philippine Wholesale Electricity Spot Market.
- SMC GP acts as the Independent Power Producer Administrator (IPPA) for three power plants (~54% of total capacity), where it has the right to sell electricity generated by the IPPs without having to bear large upfront capital expenditures for plant construction and maintenance.
- SMC GP also distributes and retails electricity services through its wholly-owned subsidiary Albay Power and Energy, which distributes power in the province of Albay, Luzon.
- SMC GP is a wholly-owned unlisted subsidiary of San Miguel Corporation, one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets.
Risk & Catalysts
AS OF 18 Apr 2024We remain concerned about non-call risk for SMC GP’s c.2026 perps owing to expectations of constrained parental support and SMC GP’s firmly negative free cash flows.
A moderate portion of SMC GP’s off-take contracts (~45-50%) do not contain cost pass-through mechanisms. This exposes the company to a rise in thermal coal input costs that could squeeze its EBITDA margins.
We are watchful of a failure to extend its 480 MW and 330 MW emergency power supply agreements (EPSAs) by mid-2024.
SMC GP incurs sizable capex that has spurred additional debt incurrence. Consequently, its credit metrics remain elevated.
Over 88% of SMC GP’s installed capacity is thermal coal or gas-fired, which may be viewed unfavorably from an ESG perspective.
Key Metrics
AS OF 18 Apr 2024PHP bn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Debt to Book Cap | 75.2% | 68.8% | 66.7% | 69.2% | 62.8% |
Net Debt to Book Cap | 62.3% | 53.6% | 57.7% | 66.4% | 59.4% |
Debt/Total Equity | 303.6% | 220.7% | 199.9% | 224.6% | 168.7% |
Debt/Total Assets | 83.6% | 81.9% | 79.2% | 79.0% | 73.8% |
Gross Leverage | 10.2x | 10.5x | 10.5x | 19.4x | 13.0x |
Net Leverage | 8.4x | 8.2x | 9.1x | 18.6x | 12.2x |
Interest Coverage | 2.1x | 2.4x | 2.5x | 1.4x | 2.2x |
EBITDA Margin | 34.0% | 41.3% | 35.9% | 13.2% | 26.4% |
CreditSights View
AS OF 18 Apr 2024We upgrade SMC GP to Market perform from Underperform, and prefer its c.2024 and both the c.2025 perps. We acknowledge SMC GP’s healthier FY24 credit outlook aided by an improved cost pass-through, contribution from new capacities, and lower capex. The tie-up of an $800 mn perp issuance to Azure Ventures meaningfully improves the company’s refinancing prospects. Coupled with parental funding support from SMC, we expect SMC GP could cover its perp redemptions to end-2025. We remain concerned about non-call/extension risks on the c.2026 $ perps amid firmly negative free cash flows, potentially constrained parental funding support ahead (due to SMC’s own sizable airport and infra capex), and an unclear net cash flow impact of its proposed $3.3 bn LNG project.
Recommendation Reviewed: April 18, 2024
Recommendation Changed: April 17, 2024