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Sub-sector: Independent Power Producers
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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
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Fundamental View
AS OF 12 May 2023Perusahaan Listrik Negara (PLN) enjoys extremely strong ties with the Government of Indonesia (GoI) and is assured of extraordinary support in times of distress, given its policy role.
PLN’s FY22 revenues and EBITDA grew resiliently from strong post-pandemic power demand recovery across Indonesia. Credit metrics improved, aided by curtailed capex.
PLN incurs significant capex spending requirements as the GoI has entrusted the company with the responsibility of fully electrifying the country. In turn, we expect FY23 capex to rise YoY.
Being primarily a thermal power producer, PLN may be viewed unfavourably from an ESG perspective.
Business Description
AS OF 12 May 2023- 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 12 May 2023The company provides subsidized electricity to certain households for which it subsequently receives reimbursements from the GoI; though these payments tend to get delayed during the general elections period or other major events (e.g. 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 Metrics
AS OF 12 May 2023| IDR bn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Debt to Book Cap | 29.1% | 32.5% | 32.2% | 29.7% | 28.9% |
| Net Debt to Book Cap | 26.5% | 29.1% | 28.2% | 26.9% | 25.2% |
| Debt/Total Equity | 41.1% | 48.1% | 47.4% | 42.2% | 40.7% |
| Debt/Total Assets | 25.5% | 28.2% | 28.1% | 25.7% | 24.6% |
| Gross Leverage | 5.7x | 5.6x | 5.5x | 5.0x | 4.2x |
| Net Leverage | 5.2x | 5.0x | 4.8x | 4.6x | 3.7x |
| Interest Coverage | 2.3x | 2.6x | 2.5x | 3.2x | 4.3x |
| EBITDA Margin | 24.5% | 27.8% | 29.0% | 28.0% | 30.1% |
CreditSights View
AS OF 12 May 2023We have a Market perform recommendation on PLN. Its bonds trade 27-42 bp wider than Pertamina’s bonds, which we see as fair given PLN’s poorer net leverage and higher ESG concerns. We like PLN’s defensive business model, aided by its strong state support, robust tariff framework that assures an annual predetermined rate of return, and insulation from elevated thermal coal input costs. However, capex needs have historically been high to drive the Government’s long-term intention of fully electrifying the country; we expect FY23 capex to be higher YoY. We expect its credit metrics to remain largely stable in FY23 (FY22: 4.2x/3.7x). ESG-conscious investors may shy away from PLN given it is primarily a thermal coal power producer.
Recommendation Reviewed: May 12, 2023
Recommendation Changed: October 17, 2019
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India