Southeast Asian utilities’ demonstrate robust first-quarter performance-
The utility firms in ASEAN have had a strong financial performance. The companies now need to rise to the challenges of investing in future capacity requirements and adapting to policy changes.
The utility companies of Southeast Asia stand out among the other listed firms in the region, in terms of their financial performance. Factors such as robust demand and stable fuel prices have contributed to the performance of the players in this industry. Going forward, demand growth is expected to remain strong.
However, unless the utilities invest in capacity expansion and economies in the region become more integrated, they are likely to encounter headwinds in the future. The good news is that governments in the regions are expected to introduce vital reforms that, in the long run, may bode well for the companies operating in this sector.
Southeast Asia Infrastructure analysed the performance and outlook of 14 top utility players (based on market capitalisation), which have been listed as “ASEAN Stars” by the ASEAN exchanges. Of the firms analysed, Malaysian utility players have posted the most impressive financial performance; they are situated in a rather comfortable position going forward, due to favourable policy changes in the near future. Filipino players have also performed fairly well; however, their prospects would depend on the commissioning of projects in the pipeline. In contrast, players in Thailand are facing an economic slowdown; thus, they are mulling over the possibilities of venturing overseas.
Better days ahead with promised protection from volatile fuel costs
The utility industry of Malaysia is currently undergoing a transformation. This situation is primarily due to the expected implementation of the Fuel Cost Pass Through (FCPT) mechanism that will protect players from the volatility of fuel costs.
Under the proposed mechanism, consumers will bear the costs for an additional fuel component in electricity bills, which means that it will be the consumers who will have to bear the costs of hikes in fuel prices, rather than the companies. This will also take into account foreign exchange fluctuations. In effect, the electricity tariffs of peninsular Malaysia will be set in accordance with rules designed to encourage utilities to become more efficient through the aforementioned incentives. In Southeast Asia, such a system is already in place in countries like Singapore, the Philippines, and Thailand.
The major listed utility players in Malaysia include Petronas Gas Berhad, Tenaga Nasional Berhad, YTL Power Interntaional, and YTL Corporation Berhad. Except for YTL Corporation, all the companies increased their net profit margins during the January–March 2013 quarter, as compared to the previous fiscal year. Petronas Gas boasted the highest returns on capital employed (RoCE) of 4.23 per cent, while the corresponding figures of its peers ranged from 1.2 to 2.2 per cent. Further, the debt–equity ratios of these companies occupied the 1.5–2.8 range, with the exception of Petronas Gas. Its ratio of 0.31 indicates that the company remains underleveraged.
The proposed FCPT mechanism, in addition to easing the government’s subsidy outlay, will improve the earnings of the state-owned Petronas Gas. The earnings of the company are also expected to be driven by the continuing robust demand. Petronas has also made equity investments in planned liquefied natural gas (LNG) projects that will diversify its portfolio in the coming years. In order to carry out its expansion plans, the firm may resort to raising funds through sukuks which is likely to push its leverage further, at least in the short to medium run.
As for Tenaga Nasional, its sales in the commercial segment are steadily increasing, which should help the company to improve its profit margins, as the segment yields the highest sales margin among all the other segments it caters to. The company also intends to leverage on its competency in the energy business, as it highlighted a possible “creation of a new revenue stream” in its annual plan.
In the case of YTL Power, the company expects its broadband business to break even by end-2013. This development should ease the pressure on its profitability margin to some extent, as well as protect the company from a potential drop in its earnings due to the expiration of its power purchase agreement in 2015. Currently, the company is buying back its stocks – a move that will affect its equity position.
The Philippines: Policy changes might put pressure on future margins
The utilities industry of the Philippines is witnessing significant changes on the policy front. Thus, utilities’ ability to modify their revenue and operations strategy in response to these changes would shape their future performance.
One of the major changes that will affect the utility business is the change in the pricing structure of the ancillary revenue services introduced by the National Grid Corporation of the Philippines. This move will have an impact on the firms’ ancillary revenues from hydroelectric plants.
Another major policy change that will affect the future earnings of the players is the tariff resetting under the Performance-based Regulation (PBR); this process is scheduled to start by end-2013 or early 2014. As the current tariff period will end in mid-2015, analysts believe that the upcoming tariff resetting, in the best-case scenario, will lead to a flat tariff trend. The earnings of these companies will be impacted, at least in the near term.
The Philippines’ top listed players in the utility space include Aboitiz Power, the Energy Development Corporation (EDC), First Gen Corporation, Manila Electric Company, Metro Pacific Investment Corporation, and Manila Water Company.
In terms of their financial performance, the profit margins of most of these companies for the first quarter of 2013 improved from last year. Their RoCE ranged from 3 to 8 per cent. On an aggregate basis, the extent of leverage of these companies also declined compared to the previous year.
For the immediate future, the companies have plans to expand and venture into new sectors, which is likely to shape the firms’ standing. EDC, for instance, has planned new capacities that should be commissioned by 2014. It has also forged overseas joint ventures to implement geothermal projects in Peru and Chile. In addition, its foray into wind projects is expected to be the key drivers for the firm’s near-term earnings. As for Manila Electric Company, its margins will probably be undermined by the potential impact of the PBR resetting. However, the firm’s planned expansion into coal and gas generation is likely to boost its earnings.
In the case of the water utilities, the much-awaited tariff resetting, done every five years, has been delayed. The two water utility firms, Manila Water and Maynilad, have been waiting to raise average water tariffs in order to ease the pressure on their profit margins. Moreover, the Metropolitan Waterworks and Sewerage System (MWSS) is likely to review its concession contracts with these companies in a bid to prevent them from passing on corporate income tax to consumers. The uncertainties around the possible outcome, analysts believe, will limit the sector’s ability to realise its potential gains, at least in the short run.
Meanwhile, the profit margins and future earnings of Metro Pacific are likely to rise. Key contributors to its positive prospects are the steady growth of the company’s tollway business and its plans for bidding in the upcoming infrastructure projects, such as the CALA expressway and Cebu Mactan airport.
Thailand: Venturing abroad for growth
Struggling with inadequate power resources and growth within the national boundaries, Thailand’s utilities are looking to expand their footprint in the Southeast Asian region in a bid to maintain their growth momentum.
The country’s top listed players in the utilities segment include Electricity Generating (EGCO), Glow Energy, and Ratchaburi. On the financial front, the operating profit margins of these players, with the exception of Ratchaburi, for the first quarter of 2013 have exceeded their corresponding figures in the previous year. However, in terms of the extent of their leverage, these firms have debt–equity ratios that range from 0.6 to 1.8. While the RoCE has increased for EGCO and Glow Energy, that of Ratchaburi has declined marginally.
On the operations front, EGCO is likely to enjoy a boost in its earnings in 2013: more than three of its projects are slated for commissioning during the year. The company also plans to explore investment opportunities in Thailand and abroad – a move that could push the company towards fund-raising.
Ratchaburi also has elaborate expansion plans. It aims to spend 10 million baht on its expansion in Laos and Australia in 2013, in addition to enhancing its domestic presence. In the near term, the operating income of the firm may be driven by its investment plans in Japan and Australia, which are likely to be concluded by September 2013.
Meanwhile, Glow Energy, whose plans include a scheduled debt repayment, expects to reduce its debt–equity ratio. Also, on the cost front, the company’s outlay for coal has been hedged for the current year.
Indonesia: Strong performance
The only Indonesian utility player among the ASEAN stars is the state-owned natural gas transportation and distribution company PT Perusahaan Gas Negara Tbk. (P Gas) Of all the players in the utility space in Southeast Asia, P Gas yielded the highest RoCE during the January–March 2013 period, posting a return of about 10 per cent. Leverage-wise, the company is in a comfortable position with a debt–equity ratio of 0.56. Though its profit margin for the quarter was lower than that in the corresponding period of the previous year, it exceeded the figure of the preceding quarter.
Overall, the earnings outlook of P Gas is positive, based on secured margins and the limited volume downside. The company’s upcoming step will be crucial for its margins: it aims to secure LNG supply by entering the LNG space. This move is likely to lead to an earnings surprise in 2013.
Preparing for the future
At present, the utility sector of Southeast Asia is going through a transition phase. Though the growing demand bodes well for the sector, the firms will still need to rise to the challenges of investing in future capacity requirements and adapting to policy changes that can potentially undermine margins and increase competition. How the companies choose to respond to these changes will shape their future growth. The success of these firms and other players in the utility space is critical for the growing Southeast Asian region, given its massive energy and clean water needs that will continue to grow in the years to come.
