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Fundamental View
AS OF 17 May 2023We remain highly concerned about refinancing and extension risk for SMC GP’s $3.3 bn of perps that have their first call dates in 2024-2026.
SMC GP enjoys strong parental backing from San Miguel Corporation (SMC) and enjoys high revenue visibility (most of its contracts entail long-term power supply agreements with distribution utilities and other industrial firms).
But only ~35% of SMC GP’s off-take contracts benefit from a cost pass-through mechanism, meaning ~65% of power generation is exposed to a rise in thermal coal input costs that could squeeze its EBITDA margins.
SMC GP incurs sizable capex that has led to additional debt incurrence and elevated credit metrics.
Over 88% of its power generation capacity is coal or gas-fired, which may be viewed unfavorably from an ESG perspective.
Business Description
AS OF 17 May 2023- 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 17 May 2023We remain highly concerned about refinancing and extension risk for SMC GP’s $3.3 bn of perps that have their first call dates in 2024-2026. While domestic loan and bond markets could remain open, we are uncertain if adequate funds can be raised at acceptable costs. While parental support from SMC should be forthcoming, it would be difficult to rely on this funding route indefinitely without straining SMC’s own credit health.
A sizable portion of SMC GP’s off-take contracts (~65%) 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.
SMC GP incurs sizable capex that has spurred additional debt incurrence. Consequently, its credit metrics remain elevated.
Over 88% of SMC GP’s power generation capacity is thermal coal or gas-fired, which may be viewed unfavorably from an ESG perspective.
Key Metrics
AS OF 17 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 68.8% | 66.7% | 69.2% | 66.8% | 65.9% |
| Net Debt to Book Cap | 53.6% | 57.7% | 66.4% | 59.1% | 63.8% |
| Debt/Total Equity | 220.7% | 199.9% | 224.6% | 201.6% | 193.2% |
| Debt/Total Assets | 81.9% | 79.2% | 79.0% | 78.6% | 76.1% |
| Gross Leverage | 10.5x | 10.5x | 19.4x | 10.9x | 18.2x |
| Net Leverage | 8.2x | 9.1x | 18.6x | 9.7x | 17.7x |
| Interest Coverage | 2.4x | 2.5x | 1.4x | 2.4x | 1.5x |
| EBITDA Margin | 41.3% | 35.9% | 13.2% | 22.5% | 25.6% |
CreditSights View
AS OF 17 May 2023We have an Underperform recommendation on SMC GP. We remain highly concerned of its frail credit profile and perp call uncertainties. High thermal coal input costs have kept its leverage metrics extremely elevated (FY22: 19.4x/18.6x) and free cash flows in negative territory. We are also concerned of refinancing/extension risk for SMC GP’s chunky wall of perps totalling $3.3 bn from FY24-FY26. We think SMC GP could tap the domestic loan and bond markets to refinance a part of the perps outstanding and has other funding alternatives, but we are uncertain if it can access the debt markets or raise the quantum of funds needed at acceptable costs. Parental support from holdco SMC could be counted on, but it will be difficult to rely on this funding route indefinitely.
Recommendation Reviewed: May 17, 2023
Recommendation Changed: February 06, 2023
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
