REE is a holding company with businesses including Mechanical and Engineering (M&E), office leasing, real estate and power. Income from associated companies, mostly contributed by power generators, accounts for nearly a half of its total earnings.
Key Summary
- We reiterate a BUY rating for REE with 52.3% total return, including a dividend yield of 4.9%.
- We raise our 2018F earnings growth from 15.6% YoY to 20.8% YoY thanks to a provision write-back from QTP and higher forecasts for some hydropower plants (TBC, TMP, VSH) given a strong Q1, which offsets slightly lower projections of M&E and office leasing segments.
- Long-term earnings growth could surpass our current forecast thanks to a guided 2018 new investment budget of USD130mn, triple that of last year, in power, water and real estate.
- REE is trading at an attractive 2018 P/E of 6.1x and P/B of 1.1x given ROE of 16.6%, enormous landbank and power plant assets.
PPC is heading for a fruitful year and bright long-term outlook. We estimate that PPC’s consolidated NPAT will grow 19.1% YoY to VND1.02tn (USD44.7mn) due to stable core earnings, a provision write-back of VND65bn (USD2.9mn) for QTP and a retroactive realized forex loss of VND125bn (USD5.5mn). In addition, we expect PPC and its associated companies to have higher utilization in coming years as the electricity shortage worsens. Meanwhile, HND (26% owned by PPC) will finish its forex loss in CIP booking in this year, which could help boost reported 2019 NPAT by 153.7%.
CHP's further stake acquisition confirms a higher earnings contribution for 2018. REE registered to buy 2.5 million shares of Central Hydropower Corporation (CHP), which would bring its stake from a current 20.1% to 22.1%. After completely solving its technical issues, this hydropower plant returned to operation in April 2018 and is expected to generate share profit of VND38bn (USD1.7mn) in 2018 and VND75bn (USD3.3mn) in 2019, compared to no contribution in 2017.
Strong backlog of USD260mn secures a positive outlook for Mechanical & Engineering (M&E) segment. We expect that earnings of the M&E segment will grow 4.8% and 7.0% over the next two years, but NPM is projected to decline by 100 bps due to an increasing copper price.
Two new projects will drive earnings growth of office leasing segment. We project 2017-2020 NPAT CAGR of 16.7% for this segment thanks to the start of operations of E-town Central (35,000 sqm) in 2018 and E-town East West (15,000 sqm) in 2019.
New acquisition of 35% stake in VCW brightens outlook for water segment. The new water associated company could double earnings of this segment in 2018. The company targets to solve a transmission problem late this year, implying 2019 NPAT growth of 25.8% for the water segment.
To see the full analysis report. Please contact to my email: Hong.nguyen@vcsc.com
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