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Execution risk
by Gregg Adrian R. Ilag
Wednesday, February 01, 2012

Energy Development corporation's share price has fallen steeply for the past 2 sessions. EDC has lost 10.08% in the past two session due to the market's overreaction on the delays of the Bacman plant rehabilitation. The much anticipated Bacman power plant will compose 100% of EDC steam sales. Steam sales will approximately account for 5% of revenues due to the fact that tongonan and palinpinon power plant's are now contributing to electricity sales(95% of revenues). We were estimating P1.929 billion in revenues from the take or pay agreement of the Bacman plant. EDC's management has stated that it might have the power plant running by September. 

To factor in the execution risk of the Bacman power plant, We assume that it doesn't operate in 2012. Moreover, we have not included the target repricing of the power plant's price per Kwh for conservative purposes. In terms of absolute valuation (DCF) the effect will be minimal, the fair value will be reduced by an average of 0.93%. On the other hand, relative valuation shows bigger effects since these values are easily affected by profit margins (lower revenues leads to lower EBITDA and EPS). Relative valuation (industry valuation multiples) will lose around 15.97%. The average of the target prices is now 6.73, once we factor in both absolute and relative valuations. Given the current price, upside is still significant, we reiterate our BUY rating. The low prices of EDC are chances to accumulate the stock.

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