Unpopular power firms could be popular soon

During the past 12 months, the performance of listed power generation companies has been mixed.

Clean energy companies First Gen and AC Energy have performed strongly. Aside from the growing popularity of ESG (environmental, social and governance) or sustainable investing, both companies contracted the bulk of their capacity prior to the pandemic, protecting them from the steep decline 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 uncontracted capacity.

However, the tides are turning which could allow Semirara and Aboitiz Power to outperform both First Gen and AC Energy in the next 12 months.

Recall that from May 31 to June 2, National Grid Corp. of the Philippines (NGCP) raised the “red alert” status in the Luzon grid as peak demand exceeded the grid’s total capacity. This resulted in two consecutive days of rotating brownouts in some parts of Luzon.

Although the unplanned outages of several large plants in Luzon was partly to blame, higher power demand also contributed to the problem. According to data from WESM (Wholesale Electricity Spot Market) and IEMOP (Independent Electricity Market Operator), power demand is already above pre-pandemic levels. In fact, average peak demand reached 11,534MW in late May, higher than the average peak demand of 10,714 MW to 11,321 MW in 2019.

Because of the tight power supply situation, spot prices in the WESM jumped to about 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 comes online, the threat of seeing another “red alert” status in the future is much higher considering that the economy will be reopening faster with the vaccination process picking up steam. Moreover, after Aboitiz Power’s second coal plant with a total capacity of 650 MW comes online in 2022, there will 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 will take time to secure the necessary permits and to construct a plant.

The large uncontracted capacity of Semirara and Aboitiz Power negatively affected their profits last year. However, it is the same factor that will allow future profits of both companies to go up significantly given the tight power supply situation that is expected to persist. Note that both companies’ large uncontracted capacity will allow them to sell their excess capacity at higher spot prices in the WESM. Moreover, the tight power supply situation is expected to allow both companies to lock in new power supply contracts at higher prices, helping boost longer term profits.

Since 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 dividend yields. For example, even with its record low cash dividend of P0.85 per share, Aboitiz Power provides investors with a dividend yield of 3.6 percent. Meanwhile, Semirara provides investors with a very high dividend yield of 8.6 percent. There is also a strong possibility that both companies’ cash dividends will go up next year as both are expected to enjoy a sharp rebound in profits this year, allowing them to pay more to investors.

For the said reason, stock market investors who are looking for exposure in the power sector should consider investing in Semirara and Abotiiz Power, even though both companies are not clean energy plays. This is because both companies are expected to be major beneficiaries of the tight power supply situation and are trading at more attractive valuations relative to other power generation companies. INQ