Philippine Power Generator Deserves to be Undervalued

First Gen Corp. exhibited slowdown in business

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Jul 26, 2017
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First Gen Corp. (PHS:FGEN, Financial), the 75.2 billion Philippine pesos ($1.482 billion) independent power producer, reported 1.9% year-over-year revenue growth to $428.4 million and a contrasting profit drop of 29.5% to $41.3 million in the first quarter (9.6% margin vs. 13.9% year over year).

Despite the meager 0.07% increase in general and administrative expenses, the company recorded $3.86 million in foreign exchange losses resulting in lower profitability in the quarter.

“Electricity prices in the spot market are normally lower in the first quarter due to cooler weather conditions. First Gen is optimistic that the company will catch up in the following quarters, especially during the scorching summer months. The natural gas plants provide a reliable backup to the many aging baseload coal plants operating in the grid.” –Â First Gen President and Chief Operating Officer Francis Giles B. Puno

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Valuations

First Gen is undervalued compared to its peers and its own book value. According to Reuters data, the company had a trailing price-earnings (P/E) ratio of 8.8 times vs. the industry figure of 13.3 times, a price-book (P/B) ratio of 0.78 times vs. 1.43 times and a price-sales (P/S) ratio of 0.95 times vs. 2.05 times.

The company also had a trailing dividend yield 1.9% with 0% payout ratio.

Average fiscal year 2017 sales and earnings-per-share estimates indicated forward multiples of 0.8 times and 7.4 times.

Total returns

First Gen has underperformed the broader local Philippine index, iShares MSCI Philippines ETF (EPHE, Financial), in the past five years and so far this year with 2.84% (annualized) and (-)15% vs. the index’s 11.34% and 4.4%.

First Gen

According to filings, First Gen was incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission on Dec. 22, 1998.

As of December, First Gen was 66.2% owned by First Philippine Holdings Corp. (PHS:FPH, Financial). First Philippine Holdings, meanwhile, is 46.50% owned by Lopez Holdings Corp. (PHS:LPZ, Financial), a publicly listed Philippine-based entity. The majority of Lopez Holdings is owned by Lopez Inc., the ultimate parent of First Gen.

First Gen is the largest clean and renewable Independent Power Producer in the Philippines, with installed capacity of 3,468 MW as of Dec. 31, 2016.

All of the company’s power generation plants are operational and are majority-owned and controlled by First Gen through its subsidiaries.

First Gen has six operating segments: First Gas Power Corporation, FGP, EDC, FG Hydro, FNPC and Prime Meridian.

First Gas Power Corporation

First Gas Power Corporation operates the 1,000 MW combined cycle, natural gas-fired Santa Rita power plant, and where First Gen now has a 100% equity interest.

In the recent quarter, revenue in this segment fell 3% year over year to $143.4 million (32.9% of total unadjusted sales) and had a profit margin of 15% vs. 16.9% in the same period last year.

FGP

FGP operates the 500 MW combined cycle, natural gas-fired San Lorenzo power plant, and where First Gen now has a 100% equity interest.

In the quarter, revenue in FGP grew 1.6% year over year to $82 million (18.8% of total unadjusted sales) and had a profit margin of 13% vs. 15% in the same period last year.

EDC

EDC and Subsidiaries hold service contracts with the Philippines' Department of Energy corresponding to 15 geothermal contract areas each granting EDC exclusive rights to explore, develop and utilize the corresponding resources in the relevant contract area. EDC conducts commercial operations in four (4) out of its 15 geothermal contract areas. Further, EDC owns the 150 MW Burgos Wind Power Plant (Burgos Wind) and the 6.82 MW Burgos Solar Power Plant Phase 1 and Phase 2 (Burgos Solar) both situated in Burgos, Ilocos Norte.

According to filings, First Gen has 50.55% effective economic interest in EDC.

In the recent quarter, revenue in this segment grew 3.6% year over year to $176.5 million (40.5% of total sales – largest revenue generator) and had margins of 30.9% vs. 31.9% in the same period last year.

FG Hydro

FG Hydro operates the 132 MW Pantabangan-Masiway Hydroelectric Plant and where First Gen had a 40% direct economic interest in December 2016.

Revenue in the segment fell 23.5% year over year to $16.3 million (3.7% of sales) and registered a margin of 52.7% (most profitable among all segments) vs. 59.4% the year prior.

According to filings, the significant drop in revenue was mainly because of FG Hydro’s Ancillary Services Procurement Agreement (ASPA) contract expired in February. FG Hydro, meanwhile, is now in negotiation with National Grid Corporation of the Philippines for a new ASPA.

FNPC

FNPC owns and operates the 420 MW natural gas-fired San Gabriel power plant, where First Gen has a 100% equity interest. The San Gabriel power plant went into commercial operations in November 2016.

As of the recent quarter, FNPC generated revenues of $4.23 million and delivered significant losses of (-)$11.4 million.

The significant losses were due to the "full contribution of operating expenses in the period as San Gabriel enters its first full year of operation in 2017."

Prime Meridian

Prime Meridian owns and operates the 100 MW Avion open-cycle natural gas-fired power plant, where First Gen has a 100% equity interest. The Avion plant has been in commercial operations since September 2016.

Revenue for Prime Meridian was $3.24 million in the quarter while having generated total losses of (-)$910 million.

Others

First Gen did not elaborate on this segment in recent filings or as can be found on the company’s segment information.

Nonetheless, revenue for "others" climbed 404.9% year over year in the quarter to $9.9 million (2.3% of total unadjusted sales) and registered losses of (-)$13 million compared to (-)$14.7 million in the same period last year.

Sales and profits

In the past three years, First Gen recorded average revenue decline of 6.4%, profit growth of 19% and profit margin average of 9%.

Cash, debt and book value

As of March, First Gen had $617.5 million in cash and cash equivalents and $2.66 billion in debt with debt-equity ratio 1.58 times vs. 1.76 times in the year prior period. Equity has risen by $446,000 while overall debt dropped by $312.7 million.

Of First Gen’s $5.3 billion assets 19.6%Â were identified as goodwill and intangible elements while book value has stayed relatively flat, 0.2%, year over year to $2.11 billion.

Cash flow

In the recent quarter, First Gen’s cash flow from operations rose by 21% year over year to $207.1 million. Despite the lower profits, the company generated more cash flow in its receivables and inventories.

Capital expenditures were $31.9 million leaving First Gen with $175.2 million in free cash flow compared to $117.7 million in the same period last year. The company also allocated 11.3% of its free cash flow in preferred share buybacks and dividends in the quarter.

First Gen also paid out $36.1 million in debt net any issuance.

In review, the company generated $527 million in free cash flow, paid out (including buybacks) $280 million to its shareholders and reduced overall debt (net any issuances) by $562 million in the past three fiscal years.

Conclusion

First Gen exhibited marked reduced profitability in the recent quarter. More importantly, more than half of the company’s several divisions recorded lower profits year over year brought by several specific reasons. In addition, the company’s most profitable segment, albeit only representing 3.7% of total unadjusted revenue – FG Hydro – experienced a government contract expiration thereby adding into the company’s reduced profitability.

First Gen also carried a leveraged balance sheet accompanied by a good amount of blue sky elements (goodwill and intangible assets).

In contrast to what can be observed in First Gen’s income and balance sheet statements, the company has performed prudent cash flow allocation in recent years as manifested by its ability to provide payouts while maintaining consistent debt reduction activities.

Asking a 3% margin from First Gen’s current book value would indicate a possible 6.95% upside to 20 pesos vs. the share price of 18.7 pesos at the time of writing.

In summary, First Gen is a pass.

Notes

(1) Company filings

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Disclosure: I do not have shares in any of the companies mentioned.