Over the past 12 months, the performance of listed power generation companies has been mixed.
Companies with clean energy First Gen and AC Energy have performed strongly. Aside from the growing popularity of ESG (environmental, social and governance) or sustainable investment, both companies gained most of their capacity ahead of the pandemic, protecting them from the steep fall in spot prices last year.
Meanwhile, Semirara and Aboitiz Power have underperformed. Aside from having a large exposure to unpopular coal plants, both companies suffered from weak earnings in 2020 due to their high level of non-contracted capacity.
However, the tide is turning, which could allow Semirara and Aboitiz Power to surpass both First Gen and AC Energy for the next 12 months.
Remember that National Grid Corp. from the Philippines (NGCP) from 31 May to 2 June raised the “red alarm” status of the Luzon network as demand exceeded the network’s overall capacity. This resulted in two consecutive days of rotating brownouts in some parts of Luzon.
Although the unplanned interruptions of several large plants in Luzon were partly due, higher demand for power also contributed to the problem. According to data from WESM (Wholesale Electricity Spot Market) and IEMOP (Independent Electricity Market Operator), the demand for electricity is already above pre-pandemic levels. In fact, the average peak demand reached 11,534MW at the end of May, higher than the average peak demand of 10,714 MW to 11,321 MW in 2019.
Due to the tight power supply situation, spot prices in WESM jumped to approx. P9.29 / kWh, significantly higher than the average price of P3.42 / kWh during the first four months of the year.
Although the power supply situation is expected to stabilize in the second half of the year, when Aboitiz Power’s 650-MW coal plan goes online, the threat of seeing another “red alert” status in the future is much higher given that the economy reopens faster with the vaccination process takes up steam. After Aboitiz Power’s second coal plant with a total capacity of 650 MW went online in 2022, there will also be no new coal plants from 2023 to 2025. While the government is now taking steps to encourage the private sector to build new plants, it is taking time to secure the necessary permits and to build a facility.
The large untapped capacity of Semirara and Aboitiz Power negatively impacted their profits last year. However, it is the same factor that enables the future profits of both companies to increase significantly given the tight power supply situation that is expected to last. Note that the large non-contracted capacity of both companies allows them to sell their excess capacity at higher spot prices in WESM. In addition, the tight power supply situation is expected to allow both companies to lock in new power supply contracts at higher prices, which will help increase profits in the longer term.
As Semirara and Aboitiz Power have underperformed First Gen and AC Energy, both stocks are trading at much lower valuations. More importantly, both stocks provide investors with high dividends. For example, Aboitiz Power gives investors a dividend of 3.6 percent, even with its record-breaking cash dividend of P0.85 per share. Shares. Meanwhile, Semirara is giving investors a very high return of 8.6 percent. There is also a strong possibility that both companies’ cash dividends will increase next year, as both are expected to have a sharp decline in profits this year so they can pay more to investors.
For this reason, stock market investors seeking exposure in the electricity sector should consider investing in Semirara and Abotiiz Power, even though both companies are not pure energy games. This is because both companies are expected to be major recipients of the tight power supply situation and trade for more attractive valuations compared to other electricity generation companies. INQ
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