Two leading Thai green energy companies.
January 09 2012. 10:30 AM www.thaistocks.com
Two leading Thai companies in Green Energy but with makeable different valuation
Green and renewable energy are increasingly getting attention in Thailand as elsewhere. Here I compare what to me are the 2 best companies in this sector. At the same time here is question to us retail investors: Why pay twice as much with 1/3 the dividend yield just on account of market capitalization?
Few if any Thai broker here so far write/research about listed green energy companies as none of the larger capitalized companies are pure green energy plays at present. Hence it seems for the local broker stock analysts its just off their radar screens, solely and only on lack of large market capitalization.
Contrast this to the US/EU where green energy (also called renewables), are increasingly a huge topic du jour, discourse besides enormous investments. Most famously and totally uncontested is the KEELING measurements/curve which demonstrates uncontestable alarming regular increases over past decades in global carbon dioxide. The debate is largely over as its rightly become a front burner issue now -on how to reduce its gravity.
The bigger investor issue this year may not be EU, gold or politics or the price of oil, nor inflation. The big issue will increasingly so be green energy which principally means for our purpose here 3 words: lower carbon dioxide! The new frontier now is cleantech! The days of dragging ones feet on this issue are over!
Green energy stock picks in Thailand have their own challenges and are limited to smaller capitalized choices, but they are recession proof, non-Western market correlated, Thai growth industry with no question exponential growth. The only reason why these are off the screens of broker analysts or fund managers, are because of their smaller size. As for a pure energy play you got to look beyond just “big”.
Green's have zero pollution or are at least carbon neutral versus natural gas which still emits some carbon dioxide, (CO2). Thailand along with 192 countries signed on in Cancun (2010), to actually reduce CO2 over the next many years and this, evenwhile the Thai economy keep growing. Which means the economy consumes every more energy. The prime minister just last week projected the Thai economy will grow 7% this year and the country’s largest energy company published a report that Thailand will experience lower domestic gas extraction, staring in 2017. Even before so, if the Thai economy regains its high growth potential. Regardless, CO2 must come down here as well. Green energy is the answer.
For the reasons stated, few brokers/analyst seem to care that Thailand at the country’s center, is about to construct one if not the biggest Wind energy project in SE Asia -all to be completed before year end. . Thailand has a stated government policy on mandating 20% electrical green energy, by year 2020.
China, despite low overall wind levels is now the leading global new wind energy electric producer. Also, by some measures China emits more CO2 emissions then the US! China is taking this subject now very seriously! The US for its part, after years of foot dragging, has pledged under the Cancun agreement to reduce CO2 emissions 17% by 2020, as compared to 2005 and this despite their electric energy growth being 1.4% a year. China and India, with Thailand in between, are hugely concerned as global warming may start melting some of the Himalayas and so may in time cause immense droughts in years to come to both countries.
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“Wind has reached a stage where it is no longer really an alternative. Its becoming a conventional energy source-still relatively small and facing its own constraints and challenges, but increasingly visible on the landscape of electric power and surely still on the fast track to growth.” *
“Wind energy is becoming the largest and fastest growing sources of renewable energy in the world today…..A standard turbine today turns out a hundred times as much electricity as one did in 1980”.*
* From the book: “The Quest” “Energy Security and the remaking of the Modern World” By Daniel Yergin, winner of the Pulitzer Price. (Penguin Books, 2011)
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A fair comparison on what appear to be the leading green companies listed on the SET.
Below I compare what I would see as the 2 very near pure play green energy companies in Thailand. With this I mean where their forward focus is to see well more then half their future revenues coming from building, engineering, related activities, part owning, all in green/renewable industry. Both companies are as far as I know as pure plays as it gets here; and with high expected profitability this year and beyond.
The main difference between them is the size of their market capitalization and as you will see, their respective p/e ranking and dividend yield. It shows again -and then some- how mostly larger market cap. size makes a stock here twice as expensive -along with 1/3 of the dividend yield. Can this be anything but a huge market valuation distortion, which brokers, stock promoters and most analysts here however never mention!
Market cap is highly cherished by institutional investors. But not all of us have this drawback! Retail rational investor for the most part just don’t care if a stock trades 1 million or many millions per shares in an average day. Short term traders and institutions do and so broker research is highly biased on that, not investor merit as seen from an individual investor point of view.
GUNKUL ENGINEERING PUBLIC COMPANY LIMITED (GUNKUL, 16.50) is a mid cap. stock here which claims to be moving full speed ahead evolving into a green energy company, notably with multiple solar projects and ambitious wind energy projects planed for Myanmar. In January ’12 GUNKUL was added to SET 100 index.
Some reports boast they will be in time selling their various new green energy projects to a local fund, or to some newly approved infrastructure fund? The Thai SET/SEC has for years stated they will allow such new tax favoured non property funds, but to date there are only property funds in place. One benefit of such a fund is that if it passes 90% of its earnings as dividends, it then enjoys tax advantages.
Gunkul earned 84.9 million Baht or 0.21 Baht per share for the cumulative first 9 months this year. Their third quarter showed a loss of 25 million due to the massive floods/delays and taxes. Some analyst projections report the company can earn 200 million Baht next year, or 0.50 Baht per share, but this appears too rosy of an outlook? Key risks into this year are GUNKUL’s dependence on a few state-owned electricity agencies, its foreign trading activities with Myanmar and delays in its solar power projects. Also import tax payments which appear on the increase. As we know large wind projects take a long time in planning.
According to TISCO broker, which brought this company pubic in 2009:
“ 2011-13 earnings forecasts revised down. The Thai Revenue Department insists that GUNKUL needs to pay a 30% tax rate on sales of imported solar panels to its subsidiary and other customers…flooding in many provinces has delayed GUNKUL’s plan to build 10 small power plants with a combined capacity of 56.9MW ”…Tax payments will continue next year we expect GUNKUL to face more heavy tax payments in 2012 as GPS will continue its construction of solar power plants next year. Another subsidiary, G Power Gen (GPG), will also build a solar power plant in 2012 and we expect GUNKUL to use the same method as GPS in booking revenue, implying further tax payments.”
Assuming to be generous that GUNKUL can earn after tax 200 mill. Baht for ‘11, their earnings per share should so be around 0.50 Baht -as the company has 400 mill. shares outstanding. At their current price of 16.50, this values the stock with a high p/e of 33. (16.50 divided 0.50). If the company pays a dividend at 40% of net profit, which its stated dividend policy is, the dividend yield on the current market price, comes to a miniscule 1.2%.
Despite upbeat projections not sure GUNKUL can keep a "50% earnings growth for some years to come" as some reports claim and even less so, with no capital increases. Also Myanmar projects are likely more uncertain & risky/delays then similar projects in Thailand. GUNKUL has good connections and trading history there and Myanmar has very high potential yes, but its another “going to”, and we know these take time.
You can see a most recent management interview with GUNKUL at the Bangkok Post article at this link:
http://www.bangkokpost.com/business/economics/273905/gunkul-pursues-growth-in-the-next-level
You can see Gunkul’s good web site at this link, (but for me their investor relations links where not working):
http://www.gunkul.com/Home/Index.php?language=en
For Gunkul mostly solar plants will drive earnings growth over the next few years.
Solar projects use less land, are less high tech and much easier to start and complete then others, like wind energy. Hence there is potentially more competition in those because its relatively easy for competition to join in on the boom.
In December ’11, Gunkul announced that it might launch a joint venture with the Electricity Generating Authority of Thailand (Egat), the Provincial Electricity Authority (PEA), and foreign investors to develop its wind-power project in Burma worth Bt60 billion. The company last month signed a memorandum of understanding with Burma's government for the project with a capacity of 1,000MW for export to Thailand. No assurance on how long that will take to complete or what the delays maybe?
The company will conduct a feasibility study for six months after the signing of the MoU and take another six months to install the wind turbines to measure the wind currents. The statistics will be collected for one year before beginning plant construction. The project is expected to produce electricity within three years. (Vs. Demco which is at the end of this year).
Gunkul has a few broker research reports out. The company was IPO (went public) in the 3 Q. of 2010. Its first trade date was October 19 ’10. Like DEMCO, GUNKUL has given “Opportunity Day” presentations, which are broadcast live from the Stock Exchange of Thailand (SET) and after this archived.
See this link: http://www.set.or.th/set/oppdaybyperiod.do?language=en&country=US
DEMCO PUBLIC COMPANY LIMITED (DEMCO 3.54) is a company with over 20 years of advanced electrical experience -and then some. You can see their web site at this link: http://www.demco.co.th/main.html
This 4 years ago listed SET company has some 105 engineers on its payroll and vast experience in sophisticated electrical engineering processes, substations, underground systems etc.. Click on their web sites’ link “Work experience” to appreciate the sophistication of their professional endeavour over the past 20 years.
Besides being awarded a few Solar projects this year the company now has a record backlog of over 9.3 Billion Baht. Solar does not feature dominantly in those. Besides its growing core business, in August of last year, DEMCO undertook the start of construction (besides a 27% ownership) in what will by far be Thailand’s largest wind energy project. The West Huay Bong 3 and West Huay Bong 2 project, these are combined a total 12.5 Billion Baht investment , where DEMCO itself will oversee & build as the plant manager, the 2.7 Billion Baht construction part.
As the company states in its SET news release on December 29 2011.
“Therefore, the company can start construction and realize the revenue since August 1, 2011 and the West Huay Bong 3 project will be finished in October 2012 and the West Huay Bong 2 project will be finished in December 2012.”
DEMCO has stated in various and regularly held SET “Opportunity Day” presentations, that it expects a gross profit margin on this alone of around 12-14%. The weakness of the EURO currency vs. the Thai Baht recently only makes this more likely in my view, as some procurements are coming from Europe (like SIEMENS Wind rotars). The company stated 2 weeks ago that the Huay Bong 3 project is already 40% complete and the Huay Bong 2 which just started is 5% complete. Completion dates for both are right on schedule: to be before end year 2012. The Thai floods had not affected any of this. Their projects are happening now, not “going to”.
DEMCO also recently stated that flooded substations by industrial developers near Bangkok in late 2011, has brought them new high margin business on this as well. Newly awarded solar projects and repairing flooded substations is the new good margin business in addition to their Wind mega project -and their core business.
In its latest company presentation “Opportunity Day” on November 29, DEMCO stated: “Our company expects revenues to grow 55% this year over last, or to a new record. Then, grow another 50% over that in year 2012” or, for a yet another new record, to 6 Billion Baht for calendar 2012.” DEMCO has held regular “Opportunity Day” presentations all along but few analysts show up, purely and only due to smaller market cap., as noted.
Based on this one can visibility see DEMCO’s 4Q. ‘11 net profit to near double as compared to the 3 Q., on expected 1.7 Bill of revenues. Realize this is over the already excellent reported 3 rd Q. of 0.12 Baht per share profit. Based on this, I realistically expect around 0.40 per share for all of 2011. (Remember their wind project is in full motion and so revenues/profits guaranteed).
The company reported 53 million Baht profit in the 3rd quarter -and 86 million cumulative for the first 9 months of 2011. Again: a 0.38 to 0.40 Baht per share profit is reasonable to expect for calendar 2011 as this massive wind project has now been in full construction with good progress on both phases, since early August (phase 1) and December 2011 (phase 2). Year 2012 should show further growth on that, due to its massive backlog and the company reaffirming its revenues growing another 50%, as quoted above.
This year there will be some share dilution due to warrants# 3 converting at the end of this month. The warrants are convertible at only 2.69 per share, so it is expected some 80 to 90% will convert. Hence around 90 million more shares will be outstanding. (But realize the company also has some 30 million shares in Treasury stock, which it bought back last year on the open market, so this reduces total outstanding shares.)
Next June 2012, the company has indicated it may invoke a rights offering which would likely see its shares outstanding increase by another 1/3. But we also know from their extraordinary shareholder meeting hand-out last June (which we attended) and from the Asia Plus financial advisor document, that due to their new 27% ownership of AEOLUS (which owns 60% of this mega wind project), DEMCO will reap 200 million Baht in dividends from this, starting in calendar 2013.
Compare the expected dividend yield of both these increasingly “green” companies:
Based on their stated payout ratio of 40%, same as Gunkul, one could expect a 0.16-0.18 Baht dividend from DEMCO this year, or near a yield of 5% on the current stock price of 3.54. This as compared to 1.2% on Gunkul, as 40% of its 0.50 EPS, is 0.20 Baht per share, on the 16.50 Bath current stock price! (Note that DEMCO for long pays dividends twice a year.)
Now compare the p/e valuation of both these to be “green” companies.
The expected year 2011 trailing p/e ratio of DEMCO (3.54) is only 8.5, based on the near assured earnings of 0.40 per share, as explained above.
The expected year 2011 trailing p/e ratio of GUNKUL (16.50) is 33, based on the consensus earnings estimate of 0.50 per share for last year. Note that TISCO whom brought them public, expects GUNKUL to earn 0.53 per share for last year, based on its latest November 11 research report but it warns on tax uncertainty. Hence there seems a bit more uncertainty on GUNKUL then DEMCO, regarding 2012 earning visibility.
For year 2012 it gets a bit more complicated for DEMCO as there is share dilution due to warrants #3, which are this month being converted.
Conservative DEMCO management has in December stated a further 50% revenue growth for this year to 6 Billion Baht. If we can assume a 6% net profit margin, this would come to 360 million Baht in net profit after tax. But I think their net profit margin is likely to revert to its mean of around 7%, because the wind project has a stated 12-14% gross profit margin and its solar and other core business is similar -or higher. (Substations command a fat 18% gross profit margin. Also see notes below).
DEMCO’s outstanding shares will likely increase to 550 million shares this year, as I assume most warrants will convert. Hence, 360 mill. Baht. divided by 550 million shares comes to a projected earnings per share (EPS) of 0.65 for year 2012.
Note, there are also warrants #4 outstanding but these will not convert until 2013. If the company does have a right offering later this year, further dilution will set in, but then again 200 million Baht in dividends will flow to the company in addition to its core earnings, due to its acquired 27% ownership in Aealous. Wind Energy Holding, the majority shareholder of AEOLUS, has in addition several more wind farms planned and is waiting for EGAT approval (Power Purchase Agreement). The grand target is 1,500 mw. The 2 projects mentioned above are just the first step.
If I modestly assume a 0.50 earnings per share for this year, due to dilution effect, I still come with a calendar 2012 p/e for DEMCO at only 7. This is a modest estimation because as noted the company bought back 30 mill. shares of its own stock a year ago.
GUNKUL, according to reputable broker TISCO, expects to earn 0.99 per share in 2012, but maybe TISCO is too conservative? Even assuming GUNKUL can earn 1.10 per share next year, its p/e still comes to 15 or just more then double that of DEMCO.
GUNKUL as noted has some tax as well as execution risks, as many of their projects are “going to”. This vs. DEMCO, which is in full swing and near half completed on their massive Huay Bong 3 and Huay Bong 2 projects. Further for DEMCO, both gigantic RATCHABURI ELECTRICITY GENERATING HOLDING PUBLIC CO.,LTD, a major Thai Utility company, and CHOBU of Japan, a major Japanese utility company, each own 20% of this mega wind project, so further giving credibility to all this. (DEMCO has stated the expected Internal return (IRR) on this wind project is just above 15%. The company has conducted 3 year certified wind studies before starting this.)
As noted, some here have stated that GUNKUL may sell in time some or all of its green energy projects bundled up to a fund for a nice profit? Surely DEMCO as well can sell its massive wind energy venture to a fund, domestic or foreign. Where largeness often commands a premium! (DEMCO has a far larger green energy project on hand and already purchased half of its 27% stake in the Aelous, the company which will own 60% of this gigantic wind project. (Huay Bong 3 and Huay Bong 2). )
To me DEMCO has a very undemanding valuation for such a growth company well removed from recessionary feared US/EU -and with entrenched large contracts in hand. All bank financing has been 100% secured since May of 2011. Mgt. re-affirmed that the 2 wind projects are not and cannot be delayed -and are fully expected completed before this years end!
All sounds very upbeat with little competition and little execution risk as the company has the manpower in hand and much of the preparation work has been is done. Realize that projects like these require lots of preparation work and once this is done carry little execution risk for an experienced company like DEMCO.
DEMCO's seniors/founders are ex-part of the very senior ex-executive team from EGAT and so have all the contacts and history and knowledge there, going back for decades. I think they are more experts in what they do then GUNKUL, or anybody else here for that matter.
The big difference is that DEMCO is not in the top 100 SET stocks, commands a market cap of around half -as compared to GUNKUL and to date only has one broker report published (last November). On the other hand, GUNKUL shares are 59% closely held by the biggest shareholder and 70% held by the top 5 biggest shareholders, vs. DEMCO’s top 5 shareholders own 40% of the outstanding shares. Hence GUNKUL shares are considerably more closely held.
The question remains -well shown- through this example:
Why should GUNKUL trade at a forward year 2012 expected p/e of 33 vs. less then 10 for DEMCO? Does it all look so much brighter for GUNKUL beyond 2012? I don’t think so and certainly not 3 times more. Similar, why is DEMCO’s expected dividend yield 3 times more then GUNKUL?
As we see, it mostly has to do with relative size of their market cap. (mkt. cap.) and so shows yet again how in Thailand at least, you often pay twice as much for a stock and then some, yet, get half the dividend yield -minus some. Just on account of the size of a company. But don’t expect any broker here to explain that folly.
Maybank Kim Eng’s * top team there is transparent in that it discloses that it only looks at the 150 most liquid stocks or something like that, but then does not state the fact this constraint/ limitation alone, makes for a far more expensive universe. Fact is an often very large premium is paid for relative share liquidity and mkt. cap.
Not mentioned anywhere is that liquidity and mkt. cap. is very relative and which to retail investor is often insignificant. As there is enough liquidity for the amount these investors invest. The question goes begging: Why pay far more for something which is not your requirement, or you don’t care about??
Individuals the world over know -in this day and age- that largeness does not necessarily make it always better. Maybe this limitation and Thai broker aloofness is one core reason why Thai retail client numbers have not been growing here for a decade -despite income per person (GDP, per capita) which has doubled over the past ten years.
Best Regards,
Paul A. Renaud.
Some side notes:
--The only reason DEMCO had a p/e ratio of 50 a couple of quarters back is because they were gearing up this massive new wind project (s). I.e. hired many new engineers and invested allot of time, resources and energy into all that. Also its core earnings got hit post the '08-09 North Atlantic induced financial crisis. Mostly it was the long start up procedure on their massive wind project -now in the making- which dented earnings down and so shot up the p/e ratio back then.
--DEMCO’s large “completed but unbilled work” amount of 1.1 Bill. should drop this year as 40% of this comes from the official electric authority awaiting final testing which has been done. This should/could further increase earnings this year but I have not included this in my projections.
--The wind adder rate is guaranteed on DEMCO's existing mega project as is spelled out in the Financial Advisor document from last June! Think about it, no way would the multiple Bank consortium give DEMCO a 600 mill. baht bank loan, which was only part of the 12.6 bill Baht total wind project financing without this. If this adder rate falls apart for any reason on past fully approved projects nobody in their right mind would ever invest in any green projects here, as the whole financials would just collapse. It preposterous to think the adder rate would change for their exciting approved mega project. (This is very different and gets confused with such changes in Europe -which have to do with feed-in-tariffs by retail users).
There are two other listed green companies but they are micro cap’s and one of the first one listed here is operating at a loss and the second one has a turbulent history.
SPCG PUBLIC COMPANY LIMITED and SOLARTRON PUBLIC COMPANY LIMITED
* Maybank Kim Eng is the first ranking broker here which promotes itself and to clients as a retail broker. It was recently 50.2% acquired by Maybank of Malaysia. Maybank Group is Malaysia’s largest financial services group. The Maybank Group has over 1,750 branches and offices in 14 countries, with 40,000 employees serving over 18 million customers.
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