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Sub-sector: Independent Power Producers
SMC Global Power
- Sector: Energy
- Sub Sector: Independent Power Producers
- Country: Philippines
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Fundamental View
AS OF 14 Nov 2024We see lower non-call risk for SMC GP’s c.2025 and c.2026 perps owing to strong near-term parental funding support, its recent c.2024 perp refinancing, and recent bond exchange/tender with a new $900 mn c.2029 perp issuance.
We see an improving credit outlook for SMC GP aided by lower thermal coal input costs, new contracts, and capacity additions, but are wary of net cash flow uncertainties from a planned $3.3 bn LNG project.
While SMC GP improved its cost passthrough contractual mix from end-FY23 onwards, 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 14 Nov 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 14 Nov 2024SMC GP still has $527 mn/$1.3 bn of c.2025 and c.2026 perps outstanding to be addressed, though we see low non-call risks.
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.
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 Metric
AS OF 14 Nov 2024| PHP bn | FY21 | FY22 | FY23 | 9M23 | 9M24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 66.7% | 69.2% | 62.8% | 62.5% | 62.4% |
| Net Debt to Book Cap | 57.7% | 66.4% | 59.4% | 59.4% | 58.8% |
| Debt/Total Equity | 199.9% | 224.6% | 168.7% | 166.6% | 165.6% |
| Debt/Total Assets | 79.2% | 79.0% | 73.8% | 75.8% | 71.3% |
| Gross Leverage | 10.5x | 19.4x | 13.0x | 15.2x | 10.5x |
| Net Leverage | 9.1x | 18.6x | 12.2x | 14.4x | 9.9x |
| Interest Coverage | 2.5x | 1.4x | 2.2x | 1.9x | 2.4x |
| EBITDA Margin | 35.9% | 13.2% | 26.4% | 28.8% | 25.7% |
CreditSight View Comment
AS OF 19 Nov 2024We have an Outperform recommendation on SMC GP. We think refinancing risk on the c.2025–2026 perps has meaningfully decreased with the completion of its bond exchange and tender offer. Coupled with an improving credit outlook, potential for near-term parental support, and management’s willingness and ability to repay the perps, we view the perps’ 7%-9% yields as attractive in the S&SEA corporate space. We continue to see low non-call risk for the c.2025 perps, and grow more comfortable with the c.2026 perps that could be refi-ed with new $ perps. Key risks we are still watchful of include constrained parental funding support (due to SMC’s own sizable infra capex) and an unclear net cash flow impact of its proposed $3.3 bn LNG project.
Recommendation Reviewed: November 19, 2024
Recommendation Changed: September 09, 2024
Who We Recommend
BMO Financial
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Fundamental View
AS OF 31 Jul 2024PLN enjoys extremely strong ties with the Government of Indonesia (GoI) given its critical policy role of electrifying the nation.
We see a modestly poorer FY24 credit outlook as resilient domestic power demand, flattish power tariffs and insulation from input cost volatility are offset by sizable capex for coal and renewable capacity additions.
President Prabowo’s plans to tamp down on PLN’s monopoly could induce longer-term regulatory uncertainties.
Business Description
AS OF 31 Jul 2024- PLN is involved in the entire electricity value-chain, from power generation, to transmission, distribution and retail.
- It alone accounts for 76% (~47 GW) of Indonesia's generation capacity (of which 8 GW is renewable capacity), while IPPs provide the remainder.
- The company controls and operates the entire transmission and distribution network in the country. It is the sole buyer of electricity produced by IPPs, through power purchase agreements (PPAs).
- It sells electricity to well-diversified off-takers – 41% to households, 25% to industrial customers, 21% to businesses and 12% to others.
- Since 2015, the GoI has gradually implemented monthly tariff adjustments for 13 customer groups, so that rates charged to customers are better matched with production costs.
- However, under the Public Service Obligation (PSO), the company will continue to sell electricity at subsidized rates of 50% to 450-volt amperes (VA) power households and 25% to 900 VA power households. The GoI subsequently reimburses the company for the difference between the subsidized tariff rate and production cost, typically within 2-3 months.
Risk & Catalysts
AS OF 31 Jul 2024The company provides subsidized electricity to certain households for which it subsequently receives reimbursements from the GoI; though these payments tend to get delayed during major events such as COVID-19 pandemic.
In order to increase the country’s electrification ratio to 97%, the company had been mandated by the GoI to develop large electricity capacities through the Fast Track II and 35,000 MW Programs. Implementation of such complex programs has required significant capital expenditure, which has led PLN’s FCF to fall deep into the red in recent years and created a funding gap.
The success of the above programs is also contingent on the company’s ability to source coal cheaply, select quality contractors, acquire land rights and receive adequate subsidy reimbursements from the GoI.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Key Metric
AS OF 31 Jul 2024| IDR bn | FY21 | FY22 | FY23 | 1H23 | 1H24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 29.7% | 28.9% | 27.8% | 26.9% | 27.5% |
| Net Debt to Book Cap | 26.9% | 25.2% | 23.7% | 24.6% | 25.4% |
| Debt/Total Equity | 42.2% | 40.7% | 38.5% | 36.7% | 38.0% |
| Debt/Total Assets | 25.7% | 24.6% | 23.4% | 22.6% | 22.9% |
| Gross Leverage | 5.0x | 4.2x | 4.3x | 4.0x | 4.3x |
| Net Leverage | 4.6x | 3.7x | 3.7x | 3.6x | 4.0x |
| Interest Coverage | 3.2x | 4.3x | 3.6x | 3.9x | 3.2x |
| EBITDA Margin | 28.0% | 30.1% | 26.4% | 33.4% | 29.5% |
CreditSight View Comment
AS OF 06 Dec 2024We shift our recommendation on PLN to Market perform from Underperform. While we acknowledge PLN’s higher coal-related ESG risk and potential long-term regulatory concern, we remain comfortable with PLN’s resilient credit profile supported by healthy domestic power demand, good insulation from input cost volatility and strong state-ownership. We see fair spread differential of 20 bp wider than Pertamina; we think PLN’s shorter-dated trade close to fair. Against its own curve, PLN’s 2047-2050 trade ~55 bp-60 bp wider than its 2030s; similarly rated Indonesian state-owned O&G Pertamina on the other hand sees spread differential of 30 bp on average across its longer-dated versus its own 2030. We thus see scope for PLN’s long-end to tighten another ~25-30 bp and prefer its 2047-2050.
Recommendation Reviewed: December 06, 2024
Recommendation Changed: December 06, 2024
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BMO Financial
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