We maintain our SELL rating on AEV but upgrade its Target Price to PHP 48.00 (from PHP 47.05) after taking into account our Target Price revisions on subsidiaries Agoutis Power Corp. (AP) and Union Bank of the Philippines (UBP). We forecast a 15% decline in profits in 2014 driven by lower net income from AP and UBP which account for 92% of AEV’s core profits.
AEV reported PHP 21.0billion in core Net Income, 10% lower year-on-year but higher than our forecast of PHP 20 billion, driven by Pimlico and Agoutis Land's higher contributions. Revenues, on the other hand, grew by 12% to PHP 91.0 billion in 2013. EBITDA (excluding assoc. earnings) was at PHP 26.7 billion in 2013, 3% lower compared to PHP 27.5 billion in 2012.
We upgraded our valuations on subsidiary AP after considering capacity expansions between 2014-2017, which amounts to over 1,320 megawatts in additional capacity. We estimate that this adds PHP 10.00 to our NAV estimate. Profits from AP's power generation segment remained weak, declining by 33% to PHP 15.2 billion in 2013. We continue to see a decline in AP's earnings driven mainly by higher income taxes after the expiration of the income tax holiday on several power assets. We see earnings declining by 15.0% in 2014 and 10.0% in 2015.
Subsidiary UBP, meanwhile, reported Net Income of PHP 9.0 billion in 2013, 19.0% higher compared 2012 and in line with our forecast. We expect UBP to post an earnings decline of 7.0% in 2014 to PHP 8.4 billion, as interest-yielding assets and fee-based services shoulder the reduced contribution of trading gains. Similar to other banks, UBP will have to grow its loan portfolio to offset the effects of higher interest rates.
Pilmico reported a 3.0% decline in Net Profits to PHP 1.26 billion in 2013. Stronger profits from farms and flour segments were offset by the profit decline from the feeds business. Higher input costs and lower average selling prices underpinned the 19.0% decline in booked profits from the feeds division. Feeds account for 42.0% of total Net Income. We expect Pilmico's net profits to be flat this year driven by marginal increases in selling prices and sales volume.
We see AEV's Net Income to decline by 12.0% to PHP 18.4 billion in 2014 and stay flat in 2015. We think lower profits from AP and UBP will weigh down consolidated profits as these account for 92.0% of our projected profits.
RECOMMENDATION: We upgrade AEV's Target Price to PHP 48.00, but maintain our SELL rating, after taking into account our revised Target Prices for AP (PHP 43.00) and UBP (PHP 136.90).
AEV's 2014 P/E is at 17x vs. 14x regional peer average with an EPS growth of 49.0% on average. AEV also has no discount to our NAV at the current price compared to an average conglomerate discount of 27% in our entire stock coverage.
-PinoyInvestor
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