March 21, 2014

MPI posts 10% growth in 2012 core net income

Metro Pacific Investment Corp yesterday announced core net income of P7.2b, up 10% YoY but short of the P7.5b consensus forecast. Maynilad Water and Manila Electric Co (MER, Buy) were the biggest contributors to operating income at 44% and 27%, respectively. The fast-growing toll road and hospital units just accounted for 22% and 7%, respectively. Key points from the results are as follows:

Maynilad's contribution to MPI's earnings grew 7% YoY on account of a 4% increase in billed volume and a 3% effective tariff increase that just tracked inflation. Maynilad failed to secure a tariff rate hike. Instead, the regulator has proposed a tariff cut which will be the subject of arbitration proceedingsthat have yet to commence.

MER's contribution rose 5% YoY given the 4% in energy sales and some contribution from retail electricity supply. MER's core net income of P17b (+5% YoY) was below our P17.6b forecast and the P17.9b consensus forecast.

Contribution from the toll road business grew 19% YoY which was bolstered by the integration of CAVITEX as well as the 6% increase in average daily traffic and 5% rise in average kilometers travelled for NLEX.

Hospital revenue contribution went up 15% on higher revenues from various hospitals and the inclusion of earnings from Delos Santos Medical Center.

Our take: MPI's continuing expansion and acquisitions have been fueling growth. However, the company is facing increasing regulatory risks with some of its rate hike applicationshaving been delayed by disputes. We do not expect earnings growth to accelerate without the resolution of its rate hike petitions for the various utilities.

Maynilad has just suffered a setback in its arbitration case for a tariff hike with the withdrawal of the arbitration panel member that the company nominated. It is now evaluating a shortlist of potential replacements but this should delay further the commencement of arbitration proceedings. In the meantime, pending any resolution of the dispute, Maynilad will not be able to raise its tariffs (even for inflation adjustments) and will rely solely on volume sales growth and any efficiency improvement for earnings growth.

MER is set for a tariff rebalancing next year but this early management has raised concerns that this year's review may be weighed by populist pressures. The prevailing low interest rate scenario could bring down the applicable WACC which is a key component of the tariff adjustment. The company is hoping that a revaluation of its assets (to raise the regulatory asset base), the inclusion of previously disallowed maintenance and pension costs, andhigher capex commitments can compensate for a lower WACC to bring up tariffs.

Meanwhile, future prospects will be underpinned by continued expansion by Maynilad, MER and its toll road unit. MPI is also set to bid for the CALA Expressway project to be auctioned under the Public Private Partnership program. To finance potential investments, MPI said it is looking to sell up to 20% of its stakes in existing hospital and toll road assets, as well as resort to additional borrowings. Management yesterday disclosed that it has been receiving attractive offers for stakes in its toll road and hospital businesses. – WealthSec