PC1: Excellent exposure to energy value chain

BUY

TP upside (downside) +52.5%
Close 20 Feb 2020
Price                       VND 15,800
12M Target        VND 24,092

What’s new?

• Market leader in power construction.
• Expanding in renewable energy – hydropower and wind capacity.
• Residential property sales to recover in 2020: a short-term catalyst for gross margin and ROE..

Our view

• PC1 is a proxy on the energy value chain: pole making, power construction, and generation.
• High margin renewable energy is a medium term earnings catalyst.
• Concentration risk. Sales to EVN are decreasing, but EVN still accounts for ~50% of PC1’s total revenue.

PC1 is the market leader in power construction and steel tubular pole manufacturing, where barriers to entry are substantial and competition is moderate, but profitability is constrained by regulation. Electricity generation accounts for a lower share of revenue but a larger proportion of profits. We see PC1 as an excellent proxy on the government’s plans for substantial investment in energy in the years ahead.

Renewable energy is a medium-term driver. PC1’s four profitable hydropower plants have installed capacity of 114 MW, and it expects to add 47% extra capacity with three more hydropower plants in 2020. In addition, PC1 plans to invest US$77m into a 48MW wind farm which should be entitled to favorable feed-in tariffs of UScents 8.5/kWh if launched before November 1 2021. Energy is the company’s most profitable business with gross margin of 65%, and we expect this segment to deliver 16% revenue CAGR in 2019-2023E.

Short-term catalyst from property development revenue bounce in 2020 due to initial sales at its Thanh Xuan project. We forecast VND 887 bn in revenue from sales at Thanh Xuan, up 4.7x from 2019 when PC1 only sold a few units that were left over from My Dinh project in 2019.

Yuanta vs consensus. Our target price is 8.6% below the consensus mean, whereas our EPS forecasts are higher by 1.8% for FY20E and 11.5% for FY21E. The FY21E discrepancy is likely due to our more optimistic assumptions that all the hydropower running at near full capacity. Our relatively cautious target price is due to the discount rate, as we are conservative on market risk. Still, we see 51.5% upside to our TP.

We initiate coverage with a BUY rating. Our target price of VND 24,092 is based on a weighted approach comprising FCFF (50%) and EV/EBITDA multiple (50%) methodologies. At the current price, PC1 is trading at an attractive 4.6x FY20E EV/EBITDA.

For the complete report, please access here: 20200220 PC1 initiation v2

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