April 29, 2014

MER posts 1.6% YoY hike in 1Q14 net earnings

MER posted core net income of P4.088b, up 1.6% YoY. The relatively flat growth came on a 15% decline in overall revenues as electricity revenues fell 15.8% due primarily to a P9.3b billing adjustment for the December power purchases at the spot market as per the regulator’s order. However, this was also matched by a 20% drop in power purchased costs due to the same reason. Revenues were also affected by the shift of the supply to contestable customers who opted to be served by other retail electricity suppliers under the open-access regime.

Electricity sales grew 1.7% YoYYoY to 7,908 GWh as sales to industrial (+5.7%) and commercial (+2.2%) continued to gather pace and compensated for the 3.3% drop in sales to residential customers due to lower household consumption amid cooler weather (the recorded 1Q14 average temperature was the lowest in five years). Sales to residential customers accounted for just 27.9% of total sales vs. around 29-30% normally.

The overall average retail rate was at P9.56/kWh (+0.3% YoY) on higher generation (+2%), transmission (+8%) and taxes/universal charges (+8%). Meralco’s distribution charge marginally fell to P1.63/kWh vs. the P1.6474/kWh approved maximum average price for regulatory year 2014 and the P1.64/kWh average rate in 1Q13.

Our take: MER’s 1Q14 core income accounted for just 21% of our full-year estimate and consensus forecast. MER earned 23% of its full-year 2013 income in 1Q13. Nonetheless, we also highlight the big improvement in core EBITDA margin to 13.6% in 1Q14 vs. 10.9% in 1Q13 as per our estimates.

This is notwithstanding the 9.3% rise in operating expenses on higher labor costs primarily due to the consolidation of subsidiaries, and as the company frontloaded the payment of certain taxes and fees to avail of discounts. Otherwise, core EBITDA growth could have been higher than the 5.9% posted in 1Q14 and should have yielded a higher margin.

There is room for MER’s earnings to catch up given the onset of warmer weather that could spur residential consumption, the opening of another gaming facility later this year, and possible interest savings arising from refinancing maturing debt at lower rates and the prepayment of certain debts. We will review our forecasts upon the release of the full details of the results. – WealthSec