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Fundamental View
AS OF 21 Sep 2022SMC GP is a leading power generation company in the Philippines that is backed by Philippines conglomerate San Miguel Corporation.
SMC GP benefits from high EBITDA margins (~35%), positive free cash flow generation, and strong liquidity over the past few years. Revenue visibility is also fairly high owing to its long-term power supply agreements with distribution utilities and other industrial firms.
However, only ~35% of SMC GP’s off-take contracts benefit from a cost pass-through mechanism. In turn, its remaining ~65% of generation is exposed to a rise in input costs that could squeeze its EBITDA margins.
SMC GP incurs sizable capex that has led to additional debt incurrence and elevated credit metrics.
Its thermal power generation business may be viewed unfavorably from an ESG perspective.
Business Description
AS OF 21 Sep 2022- 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 21 Sep 2022A 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 input costs that could squeeze its EBITDA margins. This is the case now, where Newcastle thermal coal prices have reached an unprecedented high of ~$430/metric tonne, hugely hurting the company’s profitability margins.
Operating in a capital intensive business, SMC GP incurs sizable capex that has spurred additional debt incurrence. Consequently, its credit metrics remain elevated.
A majority of SMC GP’s power generation is from thermal plants, which could be viewed unfavorably from an ESG perspective.
Key Metrics
AS OF 21 Sep 2022| PHP bn | LTM 1H22 | FY21 | FY20 | FY19 | FY18 |
|---|---|---|---|---|---|
| Debt to Book Cap | 68.4% | 66.7% | 68.8% | 75.2% | 81.3% |
| Net Debt to Book Cap | 63.4% | 57.7% | 53.6% | 62.3% | 75.8% |
| Debt/Total Equity | 216.1% | 199.9% | 220.7% | 303.6% | 435.8% |
| Debt/Total Assets | 78.6% | 79.2% | 81.9% | 83.6% | 84.5% |
| Gross Leverage | 13.3x | 11.6x | 10.5x | 10.2x | 9.8x |
| Net Leverage | 12.3x | 10.1x | 8.2x | 8.4x | 9.1x |
| Interest Coverage | 2.1x | 2.2x | 2.4x | 2.1x | 2.2x |
| EBITDA Margin | 22.3% | 32.4% | 41.3% | 34.0% | 35.4% |
CreditSights View
AS OF 21 Sep 2022SMC GP is a leading power generation company in the Philippines and is wholly-owned by conglomerate SMC. Through long-term contracts which provide revenue visibility, it sells electricity to credible off-takers which usually pay on time. However, only ~35% of SMC GP’s off-take contracts benefit from a pass-through mechanism, thereby exposing ~65% of its generation to a rise in input costs (though this mix has temporarily reduced to 50-50% owing to the renegotiation of the 670 MW PSA with Meralco). Elevated input costs at present are significantly hurting SMC GP’s credit profile. Since it operates in a heavy capex business, its credit metrics remain elevated. Owing to weakening profitability, elevated leverage and a chunky call maturity of its perps, we maintain our U/P reco on SMC GP.
Recommendation Reviewed: February 06, 2023
Recommendation Changed: February 06, 2023
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