Is First Gen a good buy?

At the stock market these days, the buzz is about First Gen’s IPO and the agonizingly weak response of the market. In fact, Universal Robina Corp., the Gokongwei family’s food manufacturing company, which came up with an IPO at about the same time, is performing better.

First Gen Corp., formerly First Generation Holdings Corp., is the primary holding company of the Lopez group’s power generation and energy-related businesses. It owns four power plants accounting for about 11 percent of the country’s power generating capacity.

First Gen is in the market to raise fresh capital for a planned expansion of its generating capability, including the possibility of acquiring some of the existing power plants of the National Power Corp. that are being sold under the government’s privatization plan.

The first hint of problems with First Gen’s IPO came when it changed its first indicative range of P51-74 per share to P51-62. Then just before the actual opening date, the final offer price dropped to P47. After one week of trading, the stock closed at an even lower price of P45 per share.

Funds raised were much lower than expected, at P8.5 billion from an earlier target of P11.2 billion. It did not also help that major shareholders decided against a secondary shares offer apparently due to the market’s sheepish response.

Core fundamentals

At first glance, any prospective investor should feel convinced of First Gen’s strategic importance as a good buy. It is, after all, the largest Filipino-owned independent power producer in the country with a secured cash flow source. Its major client, Manila Electric Co, is the country’s largest electricity distributor serving more than four million household, commercial and industrial customers and accounting for about 60 percent of the country’s electricity requirement. First Gen has a 25-year power purchase agreement with Meralco.

First Gen also has a 22-year gas supply agreement with the Malampaya consortium and other gas sellers. This should be seen as a stabilizing factor in its long-term operations.

Then there is First Gen’s strong unique position of eventually being able to benefit from any increases in economic activities in Luzon. The company is situated near a potentially high economic growth area, and no new power plants are currently being planned to address increased electricity needs.

Finally, most of the current assets of the holding firm are in their early years. This translates to an assurance of low maintenance costs and reliability in power generation capability.

So what is wrong with First Gen that has kept prospective investors shy of biting the bullet?

The risks

Ironically, what should have been First Gen’s greatest strength, i.e., having Meralco as its sole client, is turning out to be its greatest risk. The market appears to be concerned about Meralco’s current financial problems and its subsequent crippling effect on First Gen’s bottom line.

Such difficulties include Meralco’s ongoing refund of overcharges worth a total of P30 billion, and its dispute with state-run Napocor over a 10-year power supply contract, currently valued as a liability of between P14-42 billion. At the same time, Meralco has been finding it more difficult to raise its electricity rates as can be seen from a recent Supreme Court decision that voided a previous tariff hike.

First Gen or its units are also parties to some legal proceedings, which may result in substantial liabilities. These include unit First Gas‚ ongoing arbitration with Siemens over the construction of its Sta. Rita power plant. It is also in a dispute with the Malampaya consortium over unconsumed but contracted natural gas.

It does not help that delays in the sale of state-run power plants have been a major concern among investors in the sense that First Gen’s future growth is hinged on it being able to put up a new power plant and buy existing generation facilities that the government will put up on the auction block.

Flat growth

In the past years, First Gen’s net profits have also not been too impressive: in 2003, the company declared its NIAT at P5.33 billion; this dropped to P4.96 billion in 2004; initial estimates of the 2005 performance are not upbeat, more likely seen as about the same level as the previous year. Early indicators do not offer cheery news for 2006 either. Higher crude prices are dampening consumer demand, and could offset potential increases in revenues resulting from higher electricity rates.

To buy or not to buy

The weak response to First Gen Corp.’s recent IPO is seen by many as an aberration that has temporarily dampened the Philippine capital market’s sterling record last year. (Capital raised from public offerings rose 25 times to P55.5 billion last year, its highest level since the 1997 Asian financial crisis.)

Being the largest Filipino-owned independent power producer and having as its affiliate the country’s largest power distributor, First Gen is in a very strategic position to seize opportunities in the power sector.

But for those in the know in the stock market, the prognosis on First Gen is to wait.

Searching for more willing partners

"Breaking Barriers" on IBC-TV13 (12 mn every Thursday) will feature on Thursday, 23rd February 2006, Energy Secretary Raphael P. M. Lotilla as he discusses the government’s search for partners more willing to get involved in the country’s pursuit of energy self-sufficiency.

Sec. Lotilla confirms the good news is that there is not only gas but also oil in the Malampaya field. According to Shell Exploration, the consortium leader, the field has potential reserves of more than 200 million barrels and that 30 million could be immediately recovered. The bad news is that Shell and its major partner Chevron-Texaco consider the Malampaya oil deposit as "sub-commercial," or in plain words, not worth their time and attention.

As Energy Eecretary Popo Lotilla clearly stated, "even if this is just 20 million barrels, this will still be a big help to the country." If crude prices were just conservatively pegged at $50 per barrel, the oil trapped in the offshore Palawan natural gas find is valued at $10 billion. This might be peanuts for Shell and Chevron-Texaco, but definitely not for the Philippines.

Apparently, the big boys, Shell and Chevron-Texaco, are not keen to make new investments in the field and would rather just watch their earnings in the natural gas reserves grow. Consequently, President Arroyo directed PNOC-EC, a government entity and a minority stakeholder in the Malampaya consortium, to lead the search for interested parties from among other oil companies willing to invest in the project and help the country benefit from the trapped Malampaya oil in three to five years.

We may never join the OPEC league, but at least, as emphasized by the DOE secretary, we can say we relentlessly pursued self-sufficiency in energy despite heavy odds and even without the help of the big boys.

Join us break barriers and gain insights into the views of Sec. Lotilla on various issues related to the energy situation in the country. Watch it.

Search for the Philippine Poker Champion

The search for the first Philippine Poker Champion continues as non-wager satellite tournaments are held weekly in various sites accredited by the Philippine Poker Tour (PPT). Winners of the non-wager satellite tournaments earn a seat in the main event scheduled on 8th and 9th April 2006 at the Airport Casino Filipino Paranaque.

One may also play at the main event by registering and paying the full tournament fee at Philippine Poker Tour offices.

Visit www.PhilippinePokerTour.com <http://www.philippinepokertour.com/> for more details about the search for the first Philippine Poker Champion being conducted in partnership with Solar Entertainment and The Philippine Star.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected] or at [email protected]. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz