Semirara Mining Corporation MON 21 SEP 2020

2H20 earnings set to improve

despite challenges
Despite numerous challenges facing SCC in 2H20, we expect SCC’s profits to improve as the
company plans to boost its coal production. Earnings from SCC’s power generation business
will also improve due to better plant availability and the power plants’ higher contracted
BUY
level.
TICKER: SCC
Coal prices remain low, but profits to improve on higher volume. Despite low coal FAIR VALUE: 25.60
prices, SCC’s profits from its coal mining business is set to improve in 2H20 mainly due CURRENT PRICE: 9.80
to its higher target production volume. While the selling price for coal will likely remain
weak for the rest of the year (the Newcastle coal index has declined by ~ 22% YTD, mainly UPSIDE: 161.19
driven by decline in demand due to the COVID-19 pandemic), this will likely be more than
offset by higher coal production. Based on our discussion with management, total coal
production target for 2020 is set at 15Mil MT, implying that 2H20 coal production volume ABSOLUTE PERFORMANCE
is expected to reach 9.25Mil MT, 60% higher than its production during 1H20.
1M 3M YTD
Power generation performance set to improve in 2H20. The performance of SCC’s SCC 2.30 -24.85 -55.45
power generation business is also set to improve in 2H20 owing to better plant availability PSEi -4.02 -0.69 -24.39
and higher contacted capacity level of its power plants. For Sem-Calaca Power Corp. (SCPC,
which holds the 530MW Calaca unit 1 and 2), the 260MW Calaca Unit 2, which has been on
life extension program since the October 2019, has finally been completed in 2Q20 and this
is expected to improve the overall plant availability for SCPC. Management also added that MARKET DATA
there are no planned outages for the rest of 2020. For Southwest Luzon Power Generation
Market Cap 41,759.23Mil
Corp. (SLPGC, which holds the 300MW Calaca unit 3 and 4), we believe that unplanned
outage remains a key concern as the prolonged outage of unit 4 during 1H20 was one Outstanding Shares 4,250.55MIl
of the main reason for SLGPC’s poor performance during 1H20(Php235Mil net loss) . For 52 Wk Range 8.30 - 23.95
2H20, management indicated that both units had a month long unplanned outage during 3Mo Ave Daily T/O 58.28Mil
August-September. Despite the higher than expected instances of SLPGC’s unplanned
outages, the plants’ performance may still improve in 2H20 as the company indicated that
it has bagged a new power supply contacted (valid until end-2020) of 150MW in July. This
brought the contracted capacity of SLPGC to 220MW or 73% of SLGPC’s total capacity.
FORECAST SUMMARY
Year to Dec. 31 2017 2018 2019 2020E 2021E 2022E
Sales 43,943 41,969 44,252 37,041 41,261 44,424
% change y/y 20.1 -4.5 5.4 -16.3 11.4 7.7
EBIT 15,403 13,349 10,240 7,130 10,769 13,764
% change y/y 19.5 -13.3 -23.3 -30.4 51.0 27.8
EBIT Margin (%) 35.1 31.8 23.1 19.3 26.1 31.0
EBITDA 22,242 22,017 17,633 12,882 16,781 20,034
% change y/y 29.3 -1.0 -19.9 -26.9 30.3 19.4
EBITDA Margin (%) 50.6 52.5 39.8 34.8 40.7 45.1
Net Profits 14,209 12,025 9,679 4,764 7,641 9,796
% change y/y 18.0 -15.4 -19.5 -50.8 60.4 28.2
NPM (%) 32.3 28.7 21.9 12.9 18.5 22.1
EPS (cents) 3.33 2.82 2.27 1.12 1.79 2.30
% change y/y 18.0 -15.4 -19.5 -50.8 60.4 28.2

RELATIVE VALUE
P/E(X) 2.9 3.5 4.3 8.8 5.5 4.3
P/BV(X) 1.1 1.0 0.9 0.9 0.8 0.8 George Ching
ROE(%) 39.5 31.0 23.0 10.5 15.7 18.5 Senior Research Manager
Dividend yield(%) 20.4 23.0 11.6 12.8 9.1 11.7 [email protected]
*Source: COL est imat es

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 FIELD NOTES I SCC: 2H20 EARNINGS SET TO IMPROVE DESPITE CHALLENGES

MON 21 SEP 2020

Coal prices remain low, but profits to improve on higher

volume

Despite low coal prices, SCC’s profits from its coal mining business is set to improve in
2H20 mainly due to its higher target production volume. While the selling price for coal
will likely remain weak for the rest of the year (the Newcastle coal index has declined by
~ 22% YTD, mainly driven by decline in demand due to the COVID-19 pandemic), this
will likely be more than offset by higher coal production. Based on our discussion with
management, total coal production target for 2020 is set at 15Mil MT, implying that 2H20
coal production volume is expected to reach 9.25Mil MT, 60% higher than its production
during 1H20. In terms of its marketing initiatives, management said that it is aggressively
marketing to domestic buyers by offering more attractive pricing schemes. Management
also added that coal exports (which declined 43% y/y in 1H20) could also improve in
2H20 as China’s manufacturing activities have been showing signs of recovery.

Power generation performance set to improve in 2H20

The performance of SCC’s power generation business is also set to improve in 2H20
owing to better plant availability and higher contacted capacity level of its power plants.
For Sem-Calaca Power Corp. (SCPC, which holds the 530MW Calaca unit 1 and 2), the
260MW Calaca Unit 2, which has been on life extension program since the October 2019,
has finally been completed in 2Q20 and this is expected to improve the overall plant
availability for SCPC. Management also added that there are no planned outages for
the rest of 2020. While the contracted level of SCPC is still low at only 170MW (32% of
capacity), management said it is currently actively negotiating for new power supply
contracts with power distribution companies and RES customers. For Southwest Luzon
Power Generation Corp. (SLPGC, which holds the 300MW Calaca unit 3 and 4), we believe
that unplanned outage remains a key concern as the prolonged outage of unit 4 during
1H20 was one of the main reason for SLGPC’s poor performance during 1H20(Php235Mil
net loss). For 2H20, management indicated that both units had a month long unplanned
outage during August-September. Despite the higher than expected instances of SLPGC’s
unplanned outages, the plants’ performance may still improve in 2H20 as the company
indicated that it has bagged a new power supply contacted (valid until end-2020) of
150MW in July. This brought the contracted capacity of SLPGC to 220MW or 73% of
SLGPC’s total capacity.

COL Financial Group, Inc. 2

 FIELD NOTES I SCC: 2H20 EARNINGS SET TO IMPROVE DESPITE CHALLENGES

MON 21 SEP 2020

Maintaining BUY rating

We have a BUY rating on SCC with a FV estimate of Php25.60/sh. Despite the poor
earnings outlook of the company this year owing to falling coal and power rates and
higher than expected instances of unplanned power outages, we believe that much of the
negative news is already priced-in. The stock is the cheapest among all power companies,
trading at only 5.5X 21E P/E based on our earnings forecast. Capital appreciation is also
significant at 161% based on our fair value estimate.

COL Financial Group, Inc. 3

 FIELD NOTES I SCC: 2H20 EARNINGS SET TO IMPROVE DESPITE CHALLENGES

MON 21 SEP 2020

Semirara Mining INCOME STATEMENT (IN PHPMIL)

Corporation (SCC) Revenues

2017
43,943
2018
41,969
2019
44,252
2020E
37,041
2021E
41,261
2022E
44,424
% Growth 20.1% -4.5% 5.4% -16.3% 11.4% 7.7%
COMPANY BACKGROUND
EBIT 15,403 13,349 10,240 7,130 10,769 13,764
Semirara Mining Corp. is a vertically- % Growth 19.5% -13.3% -23.3% -30.4% 51.0% 27.8%
integrated power generation company, EBITDA 22,242 22,017 17,633 12,882 16,781 20,034
engaged in both coal mining and power % Growth 29.3% -1.0% -19.9% -26.9% 30.3% 19.4%
Interest Expense (622) (814) (1,034) (1,188) (1,188) (1,188)
generation. The company owns the right
Other Income/Expense 683 220 178 205 205 205
to mine the coal resources of Semirara Pretax Income 15,464 12,755 9,384 6,148 9,787 12,781
Island in Caluya, Antique, until July 14, Tax Expense 1,255 730 (295) 1,384 2,146 2,985
2027, through its Coal Operating Contract Net Income 14,209 12,025 9,679 4,764 7,641 9,796
with the Department of Energy (DOE). In % Growth 18.0% -15.4% -19.5% -50.8% 60.4% 28.2%
2016, the company produced 12Mil MT EPS 3.33 2.82 2.27 1.12 1.79 2.30
of coal, representing more than 90% of % Growth 18.0% -15.4% -19.5% -50.8% 60.4% 28.2%

the country’s total coal production. In BALANCE SHEET (IN PHPMIL)

December 2009, Semirara evolved into
2017 2018 2019 2020E 2021E 2022E
a vertically-integrated power generation
Cash & Equivalents 8,471 1,903 6,457 23,645 29,068 35,999
company following its acquisition of the Trade Receivables 6,475 7,301 3,642 5,150 5,736 6,176
Calaca coal-fired plant. It currently has a Inventories 5,914 12,363 10,220 3,632 3,681 3,693
total power generation capacity of 850MW. Other Current Assets 3,474 4,172 1,285 1,475 1,643 1,769
PPE 43,014 43,520 47,631 45,479 43,068 40,397
Other Non-Current Assets 1,249 1,790 2,975 1,016 1,131 1,218
REVENUE BREAKDOWN Total Assets 68,596 71,049 72,209 80,396 84,327 89,252
Accounts Payable 10,851 9,946 8,451 8,180 8,290 8,317
ST Debts 3,556 10,426 5,529 5,529 5,529 5,529
Other Current Liabilities - - 14 14 14 14
LT Debts 14,469 10,043 13,068 19,144 19,144 19,144
39.4% Other Non-Current Liabilities 2,041 701 911 911 911 911
39.4% Total Liabilities 30,917 31,116 27,973 33,778 33,889 33,916
Total Equity 37,679 39,933 44,236 46,618 50,438 55,336
59% Total Liabilities & Equity 68,596 71,049 72,209 80,396 84,327 89,252
59%
BVPS 8.8 9.4 10.4 10.9 11.8 13.0

CASHFLOW STATEMENT (IN PHPMIL)

2017 2018 2019 2020E 2021E 2022E
Net Income 14,209 12,025 9,679 4,764 7,641 9,796
Mining Power
Depreciation & Amortization 6,839 8,669 7,392 5,752 - -
Mining Power
Other Non-Cash Exp (Gains) 273 526 652 1,188 7,199 7,458
Interest Expense (Income) -622 -814 -1,034 -1,188 -1,188 -1,188
Decrease (Increase) in Working Cap -2,492 -10,903 7,449 4,618 -693 -551
Operating Cash Flow 18,207 9,503 24,138 15,134 12,959 15,516
Capex -6,314 -9,528 -11,634 -3,600 -3,600 -3,600
Other Investments -968 956 -741 1,960 -116 -87
Investing Cash Flow -7,282 -8,572 -12,375 -1,640 -3,716 -3,687
Proceeds (Payment) Debts 1,312 2,333 -1,923 6,077 0 0
Payment of Cash Dividends -10,652 -9,571 -5,313 -2,382 -3,820 -4,898
Others -100 -252 -12 0 0 0
Financing Cash Flow -9,440 -7,490 -7,248 3,695 -3,820 -4,898
Change in Cash 1,485 -6,559 4,515 17,188 5,423 6,931

COL Financial Group, Inc. 4

 FIELD NOTES I SCC: 2H20 EARNINGS SET TO IMPROVE DESPITE CHALLENGES

MON 21 SEP 2020

INVESTMENT THESIS: KEY RATIOS

Cheapest power play in the sector 2017 2018 2019 2020E 2021E 2022E
Despite the very challenging earnings GPM (%) 53.7% 50.3% 39.8% 34.4% 40.3% 44.4%
outlook of the company, we believe that EBITDA Margin (%) 50.6% 52.5% 39.8% 34.8% 40.7% 45.1%
OPM (%) 35.1% 31.8% 23.1% 19.3% 26.1% 31.0%
much of the negative news is already
NPM (%) 32.3% 28.7% 21.9% 12.9% 18.5% 22.1%
priced-in. The stock is the cheapest among
Times Interest Earned (X) 24.8 16.4 9.9 6.0 9.1 11.6
all power companies, trading at only 6.2X Current Ratio (X) 1.69 1.26 1.55 2.47 2.90 3.44
21E P/E based on our revised earnings Net D/E Ratio (X) 0.25 0.46 0.27 0.02 -0.09 -0.20
forecast. Days Receivable 53.8 63.5 30.0 50.7 50.7 50.7
Asset T/O (%) 64.1% 59.1% 61.3% 46.1% 48.9% 49.8%
Vertical integration a key advantage ROAE (%) 21.2% 17.2% 13.5% 6.2% 9.3% 11.3%

over competitors
The Calaca plant sources coal from
Semirara’s existing mining operations,
allowing it to save on fuel cost compared
to its peers. Furthermore, SCC will enjoy
even higher cost savings from Calaca
unit 3 and 4 due to their abilities to
utilize waste coal in generating power.

COL Financial Group, Inc. 5

 FIELD NOTES I SCC: 2H20 EARNINGS SET TO IMPROVE DESPITE CHALLENGES

MON 21 SEP 2020

Valuation NAV VALUATION

Methodology Value (PhpMil)

Valuation
Value (Php/Sh) % of GAV % of NAV Methodology
Mining 32,527 7.63 30.7% 29.8% DCF
Calaca 54,271 12.74 51.3% 49.8% DCF
Calaca expansion phase 1 and 2 19,034 4.47 18.0% 17.5% DCF
Total 105,832 24.84 100.0% 97.0%
Less: Net Debt -3,240 -0.76
Equity Value 109,072 25.60
Less: Holding Company Discount 0 0.00
FV Estimate 109,072 25.60
Source: COL estimates

COL Financial Group, Inc. 6

 FIELD NOTES I SCC: 2H20 EARNINGS SET TO IMPROVE DESPITE CHALLENGES

MON 21 SEP 2020

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
[email protected]

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
[email protected] [email protected] [email protected]

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
[email protected] [email protected] [email protected]

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
[email protected] [email protected]

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 7