Manila Electric Co (MAEOY) (PHS:MER, Financial), commonly called Meralco, is an electric utility company serving the Philippines. Meralco is the largest private sector electric distribution utility in the country. It covers 36 cities and 75 municipalities, with a franchise area of 9,685 square kilometers including metropolitan Manila.
The company was founded in 1903 and is headquartered in Pasig, Philippines. The company trades on the OTC exchange in the U.S. as a unsponsored ADR (American Depository Receipt), with each ADR representing two common shares. The company also trades on the Philippines Stock exchange under the symbol MER.
More about Meralco
Meralco generates, transmits and distributes electricity through its portfolio of thermal power plants. Most of the energy produced by the company comes from its natural gas and coal facilities. Meralco generates almost all of its revenue through the sale of electricity.
While nearly all the company's direct customers are residential entities, total energy sales are split fairly evenly between commercial, industrial and residential customers. Meralco's operating segments include Power and Other Services.
The Power segment consists of electricity distribution, which is engaged in electricity distribution and supply of power on a pass-through basis, and power generation.
The Other Services segment is involved primarily in electricity-related services, such as electro-mechanical engineering, construction, consulting and related manpower as well as light rail maintenance services, e-transection, bills collection, insurance, e-business development, distribution and energy systems management.
Low long term debt
Meralco is interesting because not only does it have a high dividend yield (5.1%) but surprisingly low long term debt.
According to GuruFocus, the amount of cash on its books is greater than its long-term debt, which is unusual for a utility. Below is a diagram of the company's balance sheet as of September 2020 (figures in USD).
While the company has significant long term liabilities, a perusal of the 2019 annual report shows that these are "customer advances." In the Philippines, customers must pay for electricity is advance by maintaining a deposit with the utility. Its a nice arrangement from the utilities perspective. This means the company is able to maintain stable income and cash flows, though this year, because of the pandemic, free cash flow has suffered. This should bounce back as the economy recovers.
Return on equity is impressive as well and has been over 20% since 2012.
Impact of Covid-19 in 2020
Revenue and net income have been impacted by the pandemic according to the company, with revenue down by 14%, Ebitda down by 7% and core net income down by 9% from last year.
However, the stock has also fallen by a third since last year:
The stock price above is in Philippine Pesos. Each ADR is worth two common shares.
The Philippines is a developing country. The GDP per capita has grown by about 7% per annum for the last 20 years. This would imply that electricity demand will continue to increase in the long term as the country continues to develop.
Electricity rates are relatively high in the Philippines due to reliance on coal and natural gas for generation. The risk is that as renewables like solar get more competitive, they could disrupt utilities like Meralco, which is itself moving towards installing utility scale solar and wind farms. The company also has some regulatory risks as electricity rates are regulated in the Philippines (though this is the case in most countries).
Meralco is a dominant utility in the Philippines with a good dividend yield (around 5.2% currently) and low debt due to the unique system in the Philippines where customers pre-pay for electricity by maintaining a deposit. This enables the utility to, in essence, get an interest free loan from the consumer. This results in a high return on equity.
However, the company is in a developing country and thus, alongside the higher growth runway, it is also exposed to higher political and currency risks. However, on the plus side, it has been around for well over 100 years and its bonds are rated investment grade (BBB-) by S&P. Overall, I believe it is a moderately safe investment to take on as the country recovers from the pandemic. It should provide a solid bounce back of 20% to 30% in the stock price by my estimates. My price target is for $14 per ADR in 12 to 18 months.
Disclosure: The author does not have a position in the Manila Electric Company at present but is considering a long position.
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