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Mil in 9M17, equivalent to only 58.5% of our full year forecast of Php333 Mil.
110
Realigning estimates, maintain HOLD. We are realigning our estimates to account for the
weaker-than-expected third quarter results given the slower domestic revenues, lower margins, 100
as well as the additional provisions made by EEI in its ARCC JV. We reduced our revenue
assumptions in 2017 until 2019 in light of any additional delays in the Skyway project. We also
90
slightly reduced our margin assumptions given sustained rise in its operating expenses. After
factoring in the said factors, we cut our earnings forecast by 23.7% to Php651 Mil in 2017, by
7.6% to Php1.0 Bil in 2018, and by 4.4% to Php1.1 Bil in 2019. 80
28-Aug-17 28-Sep-17 28-Oct-17 28-Nov-17
EEI PSEi
We reduced our fair value estimate of EEI to Php12.40/sh from Php13.10/sh. Despite the
downward earnings adjustment for the next few years, long-term prospects of EEI remain
ABSOLUTE PERFORMANCE
attractive. Based on our new FV estimate, implied 2018E P/E is at 12.4X, slightly below its regional
peers 18E P/E of 14.0X. Still, we are maintaining our HOLD rating since the stock. At EEIs current 1M 3M YTD
price of Php12.36/sh, it is already trading close to our fair value estimate. EEI -13.27 -16.31 79.41
PSEi -0.19 3.30 21.04
FORECAST SUMMARY
Year to December 31 (Php Mil) 2014 2015 2016 2017E 2018E 2019E MARKET DATA
Total Operating Revenues 17,080 18,979 14,836 14,588 18,308 19,381
% change y/y 62.3 11.1 -21.8 -1.7 25.5 5.9 Market Cap 13,057.15Mil
EBITDA 1,815 1,265 113 1,706 2,287 2,416 Outstanding Shares 1,036.285Mil
% change y/y 11.9 -30.3 -91.1 1410.6 34.1 5.6 52 Wk Range 5.86 - 15.30
EBITDA Margin (%) 10.6 6.7 0.8 11.7 12.5 12.5 3Mo Ave Daily T/O 22.15Mil
Net Income 918 203 -848 651 1,036 1,093
% change y/y 0.3 -77.9 -518.1 -176.8 59.2 5.5
Net Margin (%) 5.4 1.1 -5.7 4.5 5.7 5.6
EPS (in Php) 0.89 0.20 -0.82 0.63 1.00 1.05
% change y/y 0.3 -77.9 -518.1 -176.8 59.2 5.5
RELATIVE VALUE
P/E (X) 12.3 55.9 -13.4 17.4 10.9 10.4
P/BV (X) 1.7 1.7 1.9 1.8 1.6 1.4 ANDY DELA CRUZ
ROE (%) 14.8 3.0 -13.4 10.7 15.5 14.5 RESEARCH ANALYST
Dividend Yield (%) 1.8 1.8 1.8 1.8 1.8 1.8
andy.delacruz@colfinancial.com
so urce: EEI, COL estimates
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EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT
EEIs net income for the third quarter of 2017 reached Php97 Mil, a turnaround from the
Php438 Mil loss booked during 3Q16. However, results were disappointing as profits reached
only Php507 Mil in 9M17, equivalent to only 59.4% of our full year forecast.
EEIs below expected results were due to the disappointing performance of both its domestic
and foreign operations. During 9M17, revenues declined by 4.7% to Php10.5 Bil, equivalent
to only 70.6% of our full year forecast. Moreover, GPM fell by 90 bps y/y to 12.2% while OPM
dropped by 140 bps y/y to 4.6%. The said factor resulted to a 27% drop in operating profits to
Php484 Mil, largely attributable to its local operations. Meanwhile, EEI booked another Php109
Mil worth of provisions for its foreign JV ARCC in 3Q17, bringing equity in net income of
associates to Php195 Mil in 9M17, equivalent to only 58.5% of our full year forecast of Php333
Mil.
Revenues for the third quarter grew by 7.2% y/y to Php4.0 Bil as several smaller projects begin
to pick up in the period. Still, the delay in its big ticket projects (particularly the Skyway project)
continued to soften its revenue booking. According to EEI, removal of the utility lines (which is
the reason for the right-of-way issue in its Skyway project) will not be finished until 2018. This
delay caused revenues in 9M17 to still decline by 4.7% to Php10.5 Bil. Revenues were slightly
below COL expectations as it represented 70.6% of our full-year estimates.
Margins decline
As discussed earlier, EEIs profits were also hurt by the 90-bps y/y drop in its GPM to 12.2% and
the 140-bps y/y drop in its OPM to 4.6%. The said factor caused EEIs 9M17 operating income to
drop by 27.0% y/y to Php484 Mil, equivalent to only 50.0% of our full-year estimate). Margins
fell as operating costs continued to increase despite the weak revenues. Operating expenses
grew by 2.7% y/y during 9M17 due to higher manpower costs as several personnel were
on stand-by due to limited work availability in the Skyway project. EEI said it also increased
spending on employee training.
EEI booked Php29 Mil from equity in net earnings of associates in 3Q16, a reversal from a loss
of Php748 Mil in 3Q16. However, the 9M17 total of Php195 Mil was below expected as we were
forecasting full year earnings of Php333 Mil. According to EEI, the JV booked an additional
Php109 Mil in preliminary provisions in 3Q17 to pre-empt possible losses in the dispute with
the main contractor (Snamprogetti Saudi Arabia Co. Ltd) of the problematic RP2 Naptha and
Aromatics Plant project.
Domestic order book flat q/q. EEIs domestic backlog remained relatively flat q/q at Php46.8 Bil
(down by only 0.2% q/q). We believe the company won additional projects that helped offset
construction revenues booked in 3Q17. The abundance of infrastructure projects that the
government plans to roll out should benefit EEI going forward as it remains in a good position
to win the bidding for new projects (such as railways, airports, and toll roads, among others).
We are realigning our estimates to account for the weaker-than-expected third quarter results
given the slower domestic revenues, lower margins, as well as the additional provisions made
by EEI in its ARCC JV. We reduced our revenue assumptions in 2017 until 2019 in light of any
additional delays in the Skyway project. We also slightly reduced our margin assumptions
given sustained rise in its operating expenses. After factoring in the said factors, we cut our
earnings forecast by 23.7% to Php651 Mil in 2017, by 7.6% to Php1.0 Bil in 2018, and by 4.4%
to Php1.1 Bil in 2019.
We reduced our fair value estimate of EEI to Php12.40/sh from Php13.10/sh. Despite the
downward earnings adjustment for the next few years, long-term prospects of EEI remain
attractive. Based on our new FV estimate, implied 2018E P/E is at 12.4X, slightly below its
regional peers 18E P/E of 14.0X. Still, we are maintaining our HOLD rating since the stock. At
EEIs current price of Php12.36/sh, it is already trading close to our fair value estimate.
VALUATION ASSUMPTIONS
For DCF
Risk Premium 5.0%
Risk Free Rate 5.0%
Beta 1.10
Cost of Equity 10.5%
Cost of Debt 5.0%
Tax Rate 30.0%
WACC 9.1%
Terminal Growth Rate 1.5%
PV (2018E-2022E) 3,696
PV of Terminal Value 9,115
Enterprise value 12,811
Less: Net Debt 36
Equity Value 12,847
O/S 1,036
FV Estimate 12.40
HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.
SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.
IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.