July 29, 2015

MER 1H15 earnings up 18% YoY

Manila Electric Co (MER) yesterday reported an 18% YoY increase in 1H15 core net income to P11.6b from P9.9b the same period last year. The results imply that 2Q15 core earnings reached P7.2b, a 25% increase. Although distribution revenues came in slightly lower (down 2%), operating income grew 14% to P9.8b in 1H15 and 19% to P8.3b in 2Q15.

The improvement in operating profit is attributed mainly to lower other expenses, particularly provisions. By our estimate, other expenses declined 56% to P2.4b in 1H15 and 45% to P1.8b in 2Q15.

Sales volume up 3% in 2Q15 but industrial sales stayed subdued. The commercial sector led the growth, registering a 4% increase with real estate, hotel and restaurants and trade driving the growth. Residential sales were up 3%, boosted by higher customer count and better consumption due to slightly warmer temperature. Industrial sales, however, remained soft and rose by just1%, sustaining the growth momentum posted in 1Q15. Meanwhile, preliminary indications showed sales volume rose by 7% in July. Note, however, that this was coming off a low base due to service interruptions caused by typhoon Glenda last year.

Our take: Although sales volume is expected to be slightly better than 1H15, the lower interim rate adjustment of negative 10% (-P0.16/kwh) beginning July will pull down MER’s full year results by P2.2b (net of taxes). This has already been factored into our estimates, with MER’s full year profit guidance of P18.5b in line with our 2015 full year core income target of P18.6b.

We currently have a 12-month TP of P295/sh, which was derived using a 10% discount to our fair value estimate of P327/sh. Regulatory uncertainty remains a concern over the short-term, hence the discount. However, on a longer-term view, MER is our best pick in the utilities sector. – WealthSec