October 28, 2014

MER’s 3Q14 core earnings flat at P4.42b, sets 2014 profit guidance of P17.8b

Earnings rose 5% YoY to P14.29b but represent a deceleration from the 8% growth posted in 1H14. Quarterly core earnings came in flat at P4.42b in 3Q14 (vs. P4.39b in 3Q13), hit by lower distribution rates (down by 5.5% to P1.5562/kWh) that took effect in July. As a result, overall distribution revenues came in 3% lower at P13.99b, with the decline partially offset by a 2% growth in volume sales to 8,954 GWh.

The commercial sector led the growth in sales with a 3% increase to 3,525 GWh on account of higher sales to the real estate (condominiums, BPO office space), retail trade and private services (hotels, malls, hospitals) sectors. Industrial sales, however, was almost flat at 2,747 GWh, possibly due to a slowdown in manufacturing activity because of delivery delays caused by the congestion problem at the port area. After posting a slight decrease in volume sales in 1H14 (down 0.5%), sales to the residential segment increased by 2% to 2,649 GWh, boosted by slightly warmer temperature for the quarter.

Despite lower distribution revenues, core EBITDA rose by 7% to P9.10b. Operating income was relatively flat in 3Q14 but other income (charges) improved by P755m, after posting a loss of P678m in 3Q13.

For the rest of the year, management has guided for similarly flat earnings in 4Q14, with full year core net income estimated to reach P17.8b, 5% higher than last year’s earnings of P17.02b. Management said the growth in energy sales has not kept pace with the growth in GDP due to “climatic and power supply availability factors.” Although constraints in volume growth are reportedly expected to improve for the balance of the year, the lower tariff in July will continue to bear down on distribution revenues.

Our take: We believe that the results were generally in line with expectations. Excluding one-time exceptional charges, the unaudited core net income reached P14.29b, equivalent to 79% of the consensus average of P18.12b. Had it not been two weather disturbances in July (Typhoon Glenda) and September (Typhoon Mario), we estimate volume sales would have been higher by 5%. The financial details are not yet available but we believe the improvement in core income came from lower equity losses from associates and JVs. MER’s Singapore investment continues to be a drag with an equity loss of P293m but partially offset by profits of P222m from MER’s 22% equity investment in Global Business Power Corp (GBPC). Earnings from GBPC should further improve next year with the recent completion of Toledo Power’s new 82 MW coal-fired power plant in Cebu.

Next year’s outlook remains uncertain with the risks of a potential power shortage and lower distribution rates seen affecting revenues in 2015. To address next year’s power shortage, the company said it has already signed up several customers with self-generating capacity to make available such capacity under the Interruptible Load Program (ILP). The company has already signed some 311 MW under ILP (including 151 MW under retail electricity supply) and is looking to sign an additional 141 MW. Meanwhile, we expect distribution rates to be lower next year when the new rates for fifth regulatory period are implemented due to possible cuts in MER’s WACC given the current low-interest rate environment. Although the new rates should take effect in July 2015, the company has hinted to a possible delay in its implementation. - WealthSec