Fair value -> 10,875LAK, currently trading at 4,650LAK
Thesis
As Laos continues to develop, utility companies will benefit from the growing populations and increasing infrastructure that’s able to carry products and services to more of the populous country. EDL is currently trading at 5x 2012F earnings with a 11% dividend yield (based on a 50% payout ratio). While highly geared at 92%, this will rapidly dissipate as the consistent earnings streams come through. Peers in the region are trading at 25x 2012F earnings and don’t have the growth profile that EDL does. EDL presents another opportunity to profit from a rerating and investors will be paid to hold it an wait.
Introduction
EDL was incorporated in 2010 to act as a public entity for the generation assets of Electricity du Laos. It was floated with 7 generation assets in December 2012 at 4,300LAK. EDL generates revenues from selling the electricity produced to the government electricity company (EDLG). The terms of the agreements are set out in the Power Purchasing Agreements (PPAs) for a term of 30 years with a negotiated renewal period of 10 years.
The electricity generation assets are transferred from EDLG to EDL based on terms in the Concession Agreements (CAs) at or around book value. This gives EDL the benefit of buying depreciated assets and earning inflation adjusted revenue streams from the associated contracts.
Pricing Contract
EDL is contracted to sell its power to EDLG according to a pricing contract that was implemented at the inception of EDL. The starting tariff was 413.89 Kip/KWh (5.13 US Cents/KWh – vs the average retail price in the US as at Dec 2011 of 12 US Cents/KWh or 21 US Cents/KWh in Singapore form 1 July to 30 September 2012).
The tariff rate increases at 1% p.a. and has been designed to deliver an IRR of ~15%. The IRR calculation assumes a 56.4% capacity factor, which seems low when compared to the 5-year average of 71.5% capacity. When the power plants are able to operate above the designated tariff level, EDL should be able to generate super-profits.
Recent Capital Raising
EDL recently raised US$49m cash through a rights issue to receive shares in IPPs that will be transferred to EDL and also cash to fund future capital expenditures. The total size of the rights issue is equivalent to US$195m. However, the Government (75% shareholder) is participating through issuing shares in 4 IPPs that are going to be transferred to EDL.
EDL IPP
EDL IPP
Following the transfer of the shares in the IPPs, EDL will control ~30% of the installed generation capacity in Laos.
Valuation vs Comps
EDL is currently trading on 7.61x FY2012F EV/EBITDA vs Asian comps on 11.6x (35% discount) and 5.24x P/E vs Asian comps on 26x (80% discount). As it pays out 50% of NPAT, EDL is also paying a respectable dividend when compared to comps, giving a 10% yield, when you could expect a 2.5% yield for holding one of the more established power producers in Asia. The rerating opportunity combined with the respectable dividend yield makes EDL a BUY in my book.
EDL – CompCo Valuation
Market Analysis
The electricity industry in Laos has been experiencing substantial growth averaging 13% p.a. from 2001-2009 and EDL is projecting that the total domestic demand growth will increase by over 20% annually. Generation capacity is expected to grow from 2,562MW to 24,022 MW, with up to 85% of the capacity being exported to neighbouring countries.
EDL – Generation Growth
EDL – Demand and Supply
EDL – Expansion
EDL – Power Sector Opportunity
Shareholders
The Government has relaxed the restrictions on foreigner shareholdings, allowing foreigners to hold up to 20% of the total listed shares. Individual foreign shareholders are restricted from owning more than 5% of the total shares outstanding.
EDL – Shareholders
Issues
The power generation industry in Laos is highly capital constrained; EDL expects that the capex required for the Laos electricity industry for 2010-2020 will reach USD3.22bn. EDL will have capital requirements of at least USD1.29bn during this period. This represents a substantial capital investment by EDL and with the high mandated payout ratio, EDL will struggle to be able to finance the investments itself.
The recent rights issue shines some light on how EDL may be able to purchase fund the cap-ex program. In the recent rights issue the Government effectively transferred generation assets to EDL in lieu of paying cash. If EDL doesn’t have sufficient capital to be able to sustain the cap-ex program, it’s likely that the Government will continue to transfer the assets into EDL in a similar way. The dilutionary consequences need to be considered.
Scuttlebutt
As mentioned with BCEL, Laos appears to be growing quickly and from the ground, it looks like it’s at the tipping point where it could begin to launch itself to catch up with it’s neighbor Thailand. As the infrastructure and rate of industrialization increases EDL will be poised to benefit from the increasing demand for “western” goods and corresponding increase in electricity consumption.
As at writing I don’t have a position in EDL but am intending to initiate one within 30 days. If you’re considering investing, please do your own due diligence.
