This electricity supplier has recharged its business after a natural calamity affected its operations, producing one its most profitable years to date.

However, as-reported metrics seem to downplay this recovery showing returns significantly lower than its TRUE earning power.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Newsletter:
Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus
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SPC Power Corporation (SPC:PHL) primarily engages in power generation and distribution across various regions within the Philippines. The company currently operates various power plants, mainly coal-fired and diesel power plants, and are located within the Visayas region. Through its various projects, the company is able to generate around 360 megawatts of capacity.

As part of its vision for the future, SPC Power stated that it plans to increase its thermal capacity by 470 megawatts along with integrating around 300 megawatts of renewable energy (“RE”) projects.

During the middle of 2021, SPC Power’s board of directors amended its Articles of Incorporation for it to explore the development and utilization of RE for electricity generation. This includes various sources such as solar, wind, and hydro, as well as hybrid systems.

However, the company faced difficulties when Typhoon Odette ravaged, causing damages of up to PHP 28 billion to the Visayas region. As a result, the company’s income declined by 27% from PHP 1.6 billion to PHP 1.2 billion in 2021, due to the cost of repairs to its distribution facilities.

Despite this, SPC Power is still determined to explore sources of RE while still growing its portfolio of traditional sources of power. The company is aiming to invest in solar power projects, targeting around 80 megawatts of increased capacity, which it plans to roll out in the Visayas region in the medium term.

As part of its preparation to explore solar power projects, the company is also pursuing the installation of battery energy storage systems (“BESS”). This energy storage will also be used to manage the intermittence of the energy source.

For 2022, SPC Power made significant acquisitions to increase its power generating capacity, including the purchase of two power barges (“PB”) from ACEN Corp.

The PBs 102 and 103, which are both 4 units of 8-megawatt oil-fired diesel barges, were acquired for PHP 39 million each. The barges are located in Iloilo City and Lapu-Lapu City, respectively.

Thanks to its focus on growth, SPC Power seemed to have bounced back from its unprofitable year. Net revenues for 2022 increased massively by 69% to PHP 3.3 billion from PHP 2.0 billion in 2021 due to the higher pass-through cost of services.

Despite higher fuel prices, total income for 2022 increased 8% to PHP 1.3 billion on the back of increased power demand as well as higher spot market prices for electricity. Its generation business segment contributed 27% to its total income at PHP 350 million, 10% higher than its PHP 320 million income in 2021.

Overall, despite setbacks in its plans, SPC Power appears set in continuing its growth through building its power portfolio.

SPC Power’s earning power is stronger than you think

SPC Power’s efforts to quickly recover from a devastating natural calamity seems to be lacking when looking at as-reported metrics with asset returns only showing 2%.

In reality, the company achieved higher Uniform returns of 15%, making 2022 one of its most profitable years in the past decade.

One of the distortions is due to the treatment of non-operating long-term investments according to the Philippine Financial Reporting Standards (PFRS).

Based on PFRS, non-operating long-term investments are part of the company’s balance sheet, but in reality, non-operating long-term investments are not essential to the firm’s assets and should be removed from the total assets.

For example, in 2022, SPC Power recognized a non-operating long-term investment of PHP 5.5 billion, making its asset base inflated at PHP 11.6 billion which resulted in an as-reported return of 2%. After removing it, however, along with the many other adjustments Valens makes, we arrive at an asset base of PHP 2.2 billion, resulting in a TRUE earning power of 15%.

SPC Power has a more efficient business than you think

Trends in Uniform ROA have been driven by trends in Uniform asset turns. For the decade, as-reported metrics have greatly understated SPC Power’s asset turns, a key driver of profitability.

Since 2012, as-reported turns ranged from 0.2x to 0.4x through 2022 while Uniform asset turns were able to reach a high of 1.5x, making SPC Power appear to be a less efficient business than real economic metrics highlight.

SUMMARY and SPC Power Corporation Tearsheet

As our Uniform Accounting tearsheet for SPC Power Corporation (SPC:PHL) highlights, the company trades at a Uniform P/E of 9.3x, below the global corporate average of 18.4x and its historical P/E of 22.1x.

Low P/Es require low EPS growth to sustain them. In the case of SPC Power, the company has recently shown a 15% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings and convert them to Uniform earnings forecasts. When we do this, SPC Power’s sell-side analyst-driven forecast is to see a Uniform earnings decline of 2% and immaterially in 2023 and 2024, respectively.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify SPC Power’s PHP 7.90 stock price. These are often referred to as market-embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink by 14% annually over the next three years. What sell-side analysts expect for SPC Power’s earnings growth is above what the current stock market valuation requires through 2024.

Moreover, the company’s earning power is 2x the long-run corporate averages. Furthermore, cash flows and cash on hand are over 8.5x its total obligations—including debt maturities, capex maintenance, and dividends. Intrinsic credit risk is 220bps above the risk-free rate. Together, this signals a low credit and dividend risk.

Lastly, SPC Power’s Uniform earnings growth is above its peer averages, however, its Uniform forward P/E is below its average peer valuations.

About the Philippine Markets Newsletter
“Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under IFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one Philippine-listed company that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earnings Tearsheet on a Philippine company interesting and insightful.

Stay tuned for next week’s Philippine company highlight!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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