NT2 VN_A murky short-term outlook

HOLD – Outperform

Target Price: VND 29,195

Target Price Upside:  +22.9%

What’s news

• Renegotiation of the purchasing agreement with EVN is likely to reduce NT2’s contracted selling price.
• Contract volume to fall from 80% of total volume in 2019 to 60% in 2024.
• Input gas supply shortages will only be fully resolved in 2021.
• NT2 will be net cash positioned by 2021.

Our views

• Two short-term downside risks: a cut to the contract selling price and a volume shift to the lower-margin “competitive” market.
• Future dividend payments thus face downside risk. This is critical because the high cash dividend yield is NT2’s major attraction.
• We think the market has largely discounted the negatives, but the stock may remain pressured until PPA renegotiations are done.

Going debt-free in 2020E = lower financial expenses. Long-term debt should be VND 497 bn by 2019E, down from VND 1,558 bn at 2018A, and we expect NT2 to become debt free by 2020E. Thus, interest payments should fall by 25.8% YoY in 2019E and 45.3% YoY in 2020E.

PPA renegotiation with EVN, especially in terms of pricing, is the key risk. The renegotiation is not yet concluded, but we reckon the new PPA will almost inevitably be less favorable for NT2 than the original deal. In addition, the National Load Dispatch Centre (A0) has mandated a reduction in contract-based electricity purchases (Qc). We thus assume that NT2’s Qc will fall from 85% of total volume in 2018A to 80% in 2019E, and Qc is likely to be reduced to 60% of total volume longer term.

Forward cash dividend values are thus uncertain. NT2’s generous dividend policy has resulted in a dividend yield of greater than 10% since 2016. While we believe that NT2 should maintain a 90% payout ratio, the absolute dividend could be affected by the reduced of Qc and PPA selling price, both of which would reduce profitability.

Gas supply issues should be resolved by 2021. Gas supply instability may not be fully resolved until 2021E. NT2’s demand was 3 mn cubic meters (cbm) per day in 1H19 while supply was only 2.7 mn cbm per day. However, the Sao Vang Dai Nguyet fields should add 5 mn cbm of gas supply from 2H20, which should fully resolve the gas supply issue. Yuanta vs consensus.

Our forecast is relatively conservative vs the Street. Our 2020E EBITDA of VND 1,585 bn is 3.2% below the consensus. This is likely due to our conservative assumption on contract volume (Qc), with our FY20E gross margin at 12.2% vs. the consensus’ 14%.

We initiate coverage with a HOLD-O/P rating. Our target price of VND 29,195 is based on a three-part fair valuation approach with weightings of 40% for DDM, 40% for EV/EBITDA, and 10% for the FCFF methodology.

For the complete report, please access here: 20191002 NT2 initiation_Murky short-term outlook

Analyst: Binh Truong, binh.truong@yuanta.com.vn