Financial Adviser: 5 Things Every Investor Must Know About AC Energy Corp and How to Profit from It
Ayala group’s renewable energy company, AC Energy Corp (PSE: ACEN) is set to be included in the Philippine Stock Exchange Index (PSEi) next week, August 16.
Known as the country’s blue-chip stocks, the PSEi represents a basket of 30 well-known and financially stable publicly traded companies in the market.
Ideally, companies that are considered part of the PSEi must have a track record of stable earnings for a number of years so that its performance as a group can better gauge the strength of the economy.
ACEN, which started as an energy company only two years ago via backdoor listing of the Ayala Group has yet to establish a record of earnings growth.
But the company’s future growth has been promising with its aggressive asset acquisitions to become the largest listed renewable energy company in Southeast Asia with a capacity to 5,000 MW by year 2025.
ACEN’s share price has risen by over nine times from a low of P1.04 per share at start of 2019 to a high of P9.66 per share yesterday.
The rise in share price also increased the company’s market capitalization from P39 billion in 2019 to P358 billion today.
At this market size, ACEN, which earned only P3.75 billion last year, is now more valuable than Globe Telecoms (PSE: GLO), which has a market capitalization of only P264 billion with a net income of P18.5 billion.
Further rise in ACEN’s stock price may make the company as valuable as Bank of Philippine Islands (PSE:BPI), which has a market capitalization of P375 billion, or its parent company itself, Ayala Corp (PSE: AC) at P464 billion.
With the market’s expectations of ACEN’s growth in the future, given the current environment, how much premium should we put on the stock’s valuation? What are the risks and opportunities of investing in the stock?
Just as in any investment, it is always good to research and evaluate the financial prospects of the company. When you are equipped with information, it is easier to make an objective decision.
Here are the five things every stock market investor must know about AC Energy:
1| Know the growth prospects
In 2019, when the Ayala group took over ACEN, a collection of 10 energy companies worth 621 MW in net attributable capacity were transferred into the company in exchange for P14.7 billion worth of shares at P2.37 per share.
ACEN continued to expand its energy portfolio by acquiring additional equity interests in South Luzon Thermal Energy Corporation and other development companies.
ACEN also launched greenfield solar plant projects in various locations that brought its total net attributable capacity to 990 MW by end of 2020.
This year, ACEN sold a total of 7.8 billion shares at weighted average price of P3.50 per share from a series of fundraising activities such as stock rights offer, private placement, and follow-on offering to raise P27.5 billion to finance its expansion.
With the funding, ACEN further increased its total net attributable capacity to 1,181 MW by end of first half of this year, 670 MW of which are from renewables.
Last April, to strengthen ACEN’s asset base, the Ayala group also agreed to transfer its offshore energy subsidiaries in India, Vietnam, Indonesia, and Australia with a collective net attributable capacity of 1,408 MW.
The offshore assets, which were valued at P85.6 billion, will be infused into ACEN in exchange for 16.7 billion shares at subscription price of P5.15 per share.
The acquisition of offshore assets will increase ACEN’s total net attributable capacity to 2,589 MW and enable the company to achieve 51 percent of 5,000 MW goal by year 2025.
It is estimated that ACEN will need to raise additional P125 billion more to enable it to achieve its 5,000 MW target in years to come.
Higher net attributable capacity for ACEN means higher revenue and earnings stream in the long term for the company.
2| Know the financial outlook
ACEN’s net income comes from two sources. One is from its own sale of electricity and the other from its share of earnings from joint ventures and associates.
Last year, ACEN’s total revenues from sale of electricity increased by 26 percent from P16 billion in 2019 to P20.3 billion. The increase in sales boosted its operating income after finance charges to P2.67 billion from a loss of P815 million in 2019.
Its earnings from associates and joint venture, on the other hand, also increased significantly from P206 million in 2019 to P898 million in 2020.
In total, after taking into account the other income and taxes, ACEN reported net income for 2020 at P3.9 billion, which was a huge improvement from the P132 million in 2019.
This year, with the infusion of offshore assets, ACEN’s net income for the first half already reached P4.1 billion.
However, a closer look will reveal that only half of the amount came from energy operations and the balance from other income, bulk of which came from interest income.
Moreover, ACEN’s own sale of electricity generated operating income net of finance charges of P1.0 billion, which was 39 percent lower from P1.6 billion in the same period last year due to lower gross profit margins.
ACEN’s earnings from joint venture and associates also declined by 1.8 percent to P936 million from P953 million last year.
Nevertheless, if we annualize the first half earnings of ACEN, total net income for the year should reach a minimum of roughly P8.2 billion, which should double the net income in 2020.
3| Know the pricing valuation
If we divide ACEN’s market capitalization of P358 billion by our projected net income of P8.2 billion by year end, we should expect the stock’s prospective Price-to-Earnings (PE) multiple to trade at 44 times.
At a PE ratio of 44 times, further upside in the stock price appreciation in the short-term appears limited as the PE expansion of the stock makes it comparatively expensive.
Now, if we consider only the recurring core income of the company, which is its income from its own sale of electricity and earnings from development investments, we can derive only half of the projected income or P4.1 billion
At this estimated core income, the stock’s prospective Price-to-Earnings (PE) is even higher at 87 times, which makes its pricing valuation incredibly high.
Perhaps, a better PE multiple reference will be the subscription price paid by the Ayala group at P5.15 per share, which was used to value the transfer of its offshore assets into ACEN.
Given our projected net income of P8.2 billion against market capitalization of P196 billion at P5.15 per share, ACEN’s prospective PE ratio is more reasonable at 24 times.
4| Know the premium for growth
Market perception plays an important role in pricing a stock but investing in a stock based on perceived future growth alone can be risky.
When the stock is well promoted, we tend to overpay for the stock’s growth potential, but when it is perceived poorly, we tend to bargain for the stock to compensate our risks.
The price of a stock represents market expectations about the future growth of its earnings.
If we want to value the “growth opportunities” of ACEN, we need to compute first the value of its operating assets.
To estimate the value of ACEN’s operating assets, we can simply discount its prospective earnings of P0.215 per share by the company’s hurdle rate of 8.8 percent to derive an intrinsic price of P2.45 per share.
If the current market price of ACEN is P9.37 per share and the intrinsic value is P2.45 per share, it means that the market is paying an extra P6.92 per share for the company’s long-term growth opportunities.
This premium represents about 73.7 percent of the market price of ACEN, which almost tripled its intrinsic value.
The average historical premium of PSE index stocks in 2018 during the peak of the bull market was only 48 percent.
Again, if we consider the price paid by Ayala group at P5.15 per share, ACEN’s premium will come out more sensible at 52 percent.
5| Know the shareholder value added
ACEN’s return on equity was relatively very high at 19.3 percent last year, but after it expanded its equity base from P20 billion in 2020 to P133 billion this year, its prospective return on equity has declined.
At our projected net income of P8.2 billion, return on equity will be roughly only 6.2 percent, which is lower than the stock’s hurdle rate at 8.8 percent.
We computed ACEN’s hurdle rate by taking prevailing 10-year bond yield of 3.967 percent plus its risk premium adjusted by its historical beta.
With a return on equity less than the minimum rate of return required by the market, the negative spread indicates loss of shareholder value added, which should make the stock trade at lower premium in the short-term.
The other way to look at it is by analyzing the relationship of a stock’s Price-to-Book (PB) ratio with its return on equity. A stock that trades at high PB ratio must be supported by a higher return on equity, and vise versa.
If ACEN’s book value at P3.49 per share at the current expanded equity and its market price is P9.37 per share, then its Price-to-Book (PB) ratio should trade at 2.68 times.
But because its return on equity at only 6.2 percent, the stock may need to trade at lower PB multiple.
The median PB multiple of PSE Index stocks at current prices is around 1.33 times and its average return on equity is about 5.9 percent.
If we consider the price paid by Ayala group at P5.15 per share, we will find the PB ratio of ACEN more acceptable at 1.47 times.
ACEN will need to catch up with its earnings over the long-term to justify its investment acquisitions, which are mostly developmental and not generating any income at the moment.
Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888