Bartleet Religare Securities Earnings review - 4Q FY21 | 27 June 2021

Vallibel Power Erathna PLC - VPEL SL

Nusrath Mohideen
Remains a good dividend play Manager
nusrath@bartleetreligare.com I 0112-5220392

Recommendation Current price Target price

HOLD 8.10 7.50
VPEL posted a positive bottom line of LKR 71.5mn for 4Q FY21 against a negative LKR Trading Snapshot
19.49mn previously, mainly aided by a 215% YoY growth in topline to LKR 155mn. Despite Utilities
GICS Industry Group
the fourth quarter being the dry season, the quarter has done exceptionally well supported
by higher rainfall in all three plants. Production registered 207% higher at 10.8mn’kWh, Market cap (LKR 'mn) 6,052
with average plant factor increasing to 21%, from generally hovering at 7%-10% during the Market cap (USD 'mn) 30
dry season. Other operating income too increased to LKR 21.5mn (previous - 4.78mn), of
Outstanding equity shares (mn) 747
which LKR 15.5mn were unclaimed dividend write off, all other costs remained as expected.
We believe higher rainfall will aid 1Q FY22E performance and have raised our total produc- Public Holding (%) - Mar'21 40.5%
tion to 85 GWh for FY22E (previous- 81 GWh). However, the absence of new projects con- 52-week High/Low (LKR) 8.30/5.60
tinues to weigh on valuations, after the remaining two plants PPA expires in 2026 and 2027,
YTD ASPI return (%) 15.3%
recommending a HOLD. The stock would remain a good dividend play until the expiry of
PPA of the remaining two plants. YTD Stock return (%) 1.3%
Beta 0.81
Plant performance: Production in all three plants viz; Erathna (10MW) and Denawaka Ganga
Bloomberg ticker VPEL SL
(7.2MW) and Kiriwaneliya (4.6MW) increased 3.55mn’kWh to 5.02mn’kWh and 3.03mn’kWh
to 4.59mn’kWh and 0.71mn’kWh to 1.20mn’kWh for the 4Q FY21 respectively. Production
for FY2021 increased to 81 GWh from 74 GWh previously. Comparatively higher rainfall
Valuation
during the dry season resulted in plant factor averaging at 21% from 7% previously. VPEL Valuation method DCF
biggest plant Erathna is now on an extended PPA term since July 2019 which will expire in CMP (LKR) 8.10
2039, with the standard payment now hovering at LKR 7.40. The rates were re-negotiated at
Intrinsic value (LKR) 7.48
LKR 7.02 with a yearly escalation rate of 3% up to 2039. Top line performance will weigh on
the performance of Kiriwaneliya and Denawaka Ganga with the PPA to expire in 2026 and DPS (LKR) 0.70
2027 respectively, until which both plants will enjoy higher tariffs. The avoided cost tariff Upside (%) -7.6%
was last revised in November 2020 (for CY 2020), with dry season and wet season tariff
increasing to LKR 21.25(+6.5%) and LKR 19.50 (+9.6%) respectively. We believe tariffs may Total return (%) 1.0%
continue to be on the higher side as alternative cost of energy continues to move upward. Rating HOLD
Other than regular maintenance expense cost will largely remain at bay.
Key Indicators
Valuations: Our TP for VPEL is LKR 7.50, after taking in to consideration the impact to reve-
nue from PPA expiration of Kiriwaneliya and Denawaka Ganga in 2026 and 2027 respective- FY 19 FY 20 FY 21 FY 22E FY 23E
ly. We believe Avoided Cost (AC) tariffs will be on an upward trajectory as the state is com- ROE (%) 32.0% 22.1% 18.5% 22.8% 21.4%
pelled to pay higher tariffs for the purchase of emergency power, with looming concerns
Dividend Yield (%) 11.5% 11.5% 13.5% 8.6% 8.6%
on power outages as demand increases. We have accounted for a 5% increase in AC tariffs
for FY22E and FY23E respectively. VPEL enjoys higher rainfall comparatively to other hydro P/E (X) 5.5x 7.0x 10.0x 9.5x 9.4x
plants, being strategically located in catchment areas. Thus believe volume volatility to be
P/B (X) 1.8x 1.5x 2.2x 2.3x 2.2x
within a range. Erathna plant continuing to be taxed at 14% from a previous 24% will aid
bottom line further. In the absence of new projects, the company we believe will maintain a EPS (LKR) 1.12 0.87 0.74 0.86 0.86
healthy dividend payout of more than 70% during the forecast period. The stock is trading
at dividend yield of 12.50% on FY 2021 DPS of LKR 1.00. AS PI vs. VPE L

Upside/downside risk: (1) Volatility in rainfall: despite weather forecast and south western
11 VPEL ASPI 9,000
monsoon predictions, rainfall has been volatile throughout the year. However, the strategic
placement of plants in catchment areas continues to benefit VPEL’s performance. (2) All 10
8,000
plants operating under the Avoided Cost tariff method - up for renewal yearly at a higher/
9
lower rate (3) Exhaustion of mini hydro projects (4) Obtaining permits for new projects
8 7,000
remains challenging (5) Possibility of delayed payments by CEB - the company is yet to
receive LKR 193mn as backlog payment for the Erathna plant. Earnings will deteriorate for
7 6,000
VPEL after the PPA expires for Kiriwaneliya and Deneweka Ganaga in 2026 and 2027 re-
spectively, if they do not diversify in to other renewable energy sources. The company we 6
believe are actively looking for opportunities in solar projects. Mention is made of a possi- 5,000
5
ble tri-party agreement between owners of rooftops and the CEB for the generation of
solar power. However, nothing has been finalized in this regard. 4 4,000
Jun-20 Sep-20 Dec-20 Mar-21 Jun-21

-
 Financial Summary
Plant Production
Y ear En din g 31 M arc h 2019 2020 2021 2022E 2023E

Su mmary In f ormation
BRS EPS (LKR) adjusted 1.12 0.87 0.74 0.86 0.86
BRS EPS growth (%) 16.4% -22.5% -14.8% 15.9% 0.6%
P/E on BRS EPS (x) 5.5 x 7.0 x 10.0 x 9.5 x 9.4 x
Reported EPS (LKR) 1.12 0.89 0.74 na na
P/E on reported EPS (x) 5.5 x 6.8 x 10.0 x na na
Sector P/E (x) 81.5 x 6.0 x 11.8 x na na
NAV per share LKR adjusted 3.43 3.99 3.33 3.49 3.65
P/BV (x) 1.8 x 1.5 x 2.2 x 2.3 x 2.2 x
Sector P/BV (x) 1.1 x 1.9 x 1.5 x na na
DPS (LKR) 0.70 0.70 1.00 0.70 0.70
Dividend yield (%) 11.5% 11.5% 13.5% 8.6% 8.6%
Tariff Rates- LKR (2010-2020)
FCFF (LKR'mn) 934 668 959 1,059 792
FCFE (LKR'mn) 772 663 955 1,055 788
CFPS (LKR) (0.13) (0.01) (0.46) 0.39 0.10
P/CFPS (x) nm nm nm 20.7 x 83.1 x
Mkt price(LKR) 6.10 6.10 7.40 8.10 8.10
Weighted average shares (mn) 747 747 747 747 747
Average mkt cap (LKR'mn) 4,557 4,557 5,529 6,052 6,052
Enterprise value (LKR'mn) 4,310 4,051 5,457 5,766 5,773
EV/Sales (x) 3.3 x 3.8 x 5.1 x 4.8 x 4.8 x
EV/EBITDA (x) 3.9 x 4.6 x 5.9 x 5.9 x 5.9 x

Key ratios 2019 2020 2021 2022E 2023E

Revenue growth (%) 15.1% -17.8% 1.8% 11.1% 0.7%

EBIT growth (%) 22.2% -22.3% 4.2% 9.4% 0.1%

Gross profit margin (%) 88.2% 86.1% 86.2% 87.3% 87.6%

Revenue growth - LKR‘mn % EBITDA margin (%) 87.0% 83.8% 85.7% 82.2% 81.6%
(2016-2021E) EBIT margin (%) 80.9% 76.4% 78.3% 77.0% 76.6%
2023E 1,205
ROCE (%) 38.6% 26.8% 28.3% 32.8% 30.7%
2023E 0.7% ROE (%) 32.0% 22.1% 18.5% 22.8% 21.4%

2022E 11% Payout ratio (%) 62.5% 80.7% 135.3% 81.8% 81.3%

Debt/equity (%) 0.0% 0.0% 0.0% 0.0% 0.0%

2021 2%
Net debt/equity (%) -17.0% -23.8% -10.9% -20.3% -21.3%
2020 -18%
Gearing (%) 0.0% 0.0% 0.0% 0.0% 0.0%
2019 15%

2018 1,118
KPI Dashboard for 4Q FY21

Generation Overall Plant Price Increase in

PAT growth - LKR‘mn %
Growth Factor tariff - Wet
(2016-2021E)
2023E 643
S eason

2023E 0.6% 207% 21% 10%

16%
4Q FY21 (YoY) 4Q FY21 (+14 pp YoY) FY 2020
2022E

2021 -17% Price Increase in DPS (L KR) DY

tariff - Dry S eason
2020 -20%

2019

2018
16%
6% 1.00 12.5%
719
FY 2020 FY 2021 FY 2021 on CMP
Valuation & Quarterly performance

4Q FY21 vs. 4Q FY20 performance

Income S t a t e me nt (LKR ' mn) 4Q21 4Q20 Var% C omme nt s

Revenue 155 49 214.8% Aided by higher rainfall

Gross Profit 116 15 672.4%

Recurring EBIT 108 (9) 1056.0%

Profit Before Tax 107 2 6456.3%

Income tax (35) (21) 67.7% Due to higher dividend income

profit for the period 71 (19) 267.4%

EPS (LKR) 0.09 (0.03) 236.0%

Valuation estimates

Based on a free cash flow valuation, we have arrived at a target price of LKR 7.50.

Key assumptions used in the valuation are as follows;

· WACC – 13.5%
· Terminal growth rate – 1.0%
· Risk free rate – 7.87% (8 year average bond rate)
· Beta – 0.81 (based on VPEL vs. ASPI share price movement)
· Equity risk premium– 7.0%

Valuation sensitivity

Ris k fr ee r a te
7.48 6.00% 7.00% 7.87% 8.00% 9.00% 10.00%
1.0% 8.61 7.96 7.48 7.42 6.94 6.53
Ter mina l Gr o wth 2.0% 9.02 8.28 7.74 7.67 7.15 6.70
Ra te 3.0% 9.52 8.67 8.06 7.97 7.39 6.90

Sensitivity in production/ tariff rate

TP (LKR) TP (LKR) TP (LKR) TP (LKR)

75mn/kWh 80mn/kWh 85mn/kWh 90mn/kWh
Tariff at 5 % above the present rate 5.89 6.06 7.97 8.41
Tariff at constant levels 5.51 5.69 7.54 7.96
Tariff at 5% below the present rate 5.15 5.31 7.14 7.52
Income statement - Annual

Al l numbe r s i n LKR ' mn 2019 2020 2021 2022E 2023E

R e ve nue 1 ,2 8 7 1 ,0 5 8 1 ,0 7 7 1 ,1 9 7 1 ,2 0 5
YoY growth % 15.1% -17.8% 1.8% 11.1% 0.7%
Cost of sales (152) (147) (149) (152) (149)
G r os s pr ofi t 1 ,1 3 5 912 928 1 ,0 4 4 1 ,0 5 5
Gross profit margin % 88.2% 86.1% 86.2% 87.3% 87.6%
YoY growth % 18.8% -19.7% 1.8% 12.5% 1.0%

Other income 9.27 4.98 21.48 0.40 0.40

S G & A E xpe ns e s (1 0 3 ) (1 0 8 ) (1 0 7 ) (1 2 3 ) (1 3 3 )
YoY growth % -0.3% 4.7% -0.9% 14.6% 8.0%
Depreciation and amortisation (78) (78) (80) (62) (60)
E BI T i ncl udi ng non-r e cur r i ng i t e ms 1041 809 843 922 923
YoY growth % 22.2% -22.3% 4.2% 9.4% 0.1%
E BI T e xcl udi ng non-r e cur r i ng i t e ms 1 ,0 4 1 809 843 922 923
YoY growth % 22.2% -22.3% 4.2% 9.4% 0.1%
E BI T D A e xcl udi ng non-r e cur r i ng i t e ms 1 ,1 1 9 886 922 984 983
YoY growth % 20.3% -20.8% 4.1% 6.6% -0.1%

EBITDA Margin % 87.0% 83.8% 85.7% 82.2% 81.6%

EBIT Margin % 80.9% 76.4% 78.3% 77.0% 76.6%

Ne t Fi na nce C os t 44 54 23 (1 ) 4
Finance income 49 59 27 3 8
Finance cost (5) (5.3) (4.6) (4.0) (4.0)

Pr ofi t be for e t a x 1 ,0 8 5 863 865 921 927

Pr ofi t be for e t a x (R e cur r i ng) 1 ,0 8 5 863 865 921 927

Income tax expenses (195) (154) (243) (203) (204)

Ne t pr ofi t for t he ye a r 890 709 622 719 723

Ne t pr ofi t for t he ye a r (R e cur r i ng) 890 709 622 719 723
YoY growth % 16.6% -20.4% -12.2% 15.6% 0.6%

At t r i but a bl e t o:
Equity holders of the parent 836 666 552 640 643
Non-controlling interest 54 43 70 79 80

Reported EPS per share (Note 1) 1.12 0.89 0.74 - -

BRS EPS adjusted (Note 2) 1.12 0.87 0.74 0.86 0.86

S our ce : C ompa ny Fi na nci a l R e por t s a nd BR S E qui t y R e s e a r ch

Not e 1 : Ba s e d on e a r ni ngs a s r e por t e d (una dj us t e d for non-r e cur r i ng) s ha r e da t a a dj us t e d for s pl i t s

Not e 2 : E PS a dj us t e d for s ha r e s pl i t , cons ol i da t i ons a nd non r e cur r i ng i nfor ma t i on
Balance sheet - March ended

Al l numbe r s i n LKR ' mn 2019 2020 2021 2022E 2023E

AS S E T S
Non-cur r e nt As s e t s
Property, plant and equipment 2,217 2,151 2,073 2,014 1,956
Intangible Assets 81 76 66 59 54
Right- to-use of Assets 39 46 46 46
Deposit on leasehold land 5 5 5 5 5
Deferred tax assets - - - - -
2,302 2,270 2,189 2,123 2,060

C ur r e nt a s s e t s
Trade and other receivables 296 505 577 499 691
Amount due from related parties 1 4 1 1 2
Cash and cash equivalents * 473 774 297 589 662
770 1,283 874 1,090 1,355
T ot a l As s e t s 3,072 3,553 3,063 3,213 3,415

E QU IT Y AND LIABILIT IE S
Equity attributable to equity holders of parent
Stated capital 1,174 1,174 1,174 1,174 1,174
Accumulated profit 1,387 1,809 1,313 1,430 1,550
2,561 2,984 2,488 2,604 2,725
Non-controlling interest 226 268 225 304 383
T ot a l E qui t y 2,787 3,252 2,712 2,908 3,108

Non cur r e nt l i a bi l i t i e s
Interest bearing loans and borrowings - - - - -
Lease liability - 42 46 46 46
Retirement benefit obligations 25 32 41 40 39
Deferred tax liabilities 112 122 132 132 132
137 196 219 218 217
C ur r e nt l i a bi l i t i e s
Trade and other payables 47 54 42 42 46
Interest bearing loans and borrowings - - - - -
Tax payables 100 51 85 40 39
148 105 131 86 90
T ot a l e qui t y a nd l i a bi l i t i e s 3,072 3,553 3,063 3,213 3,415

Sour ce : C ompa ny Fi na nci a l R e por t s a nd BR S E qui t y R e s e a r ch

includes cash and short term investments.

Top 20 Shareholders as of 31.03.2021

Na me o f s ha r eho ld er No . o f s ha r es %

1. Vallibel Power Limited 299,425,830 40.08

2. Mr K.D.D. Perera 144,812,225 19.38

3. Sri Lanka Insurance Corporation Ltd-Life Fund 33,296,740 4.46

4. Sri Lanka Insurance Corporation Ltd-General Fund 27,500,000 3.68

5. Mr K.D.H. Perera 18,750,000 2.51

6. Mr K.D.A. Perera 18,750,000 2.51

7. Ms K.D.C. Samanthi 9,375,000 1.26

8. Employees Trust Fund Board 8,931,225 1.20

9. DFCC Bank PLC A/C 1 6,400,000 0.86

10. HSBC Bank PLC-McKinley Capital Measa Fund Oeic Limited 5,846,105 0.78

11. Mr P.P. Subasinghe 5,173,190 0.69

12. Mr A.R. Grero 5,052,969 0.68

13. Perera and Sons Bakers Pvt Limited 4,500,000 0.60

14. Mr B.C. Tay 3,000,000 0.40

15. Acuity Partners (Pvt) Limited/Mr. Anthony Romesh Grero 2,796,493 0.37

16. Mr D.C.C. Joseph 2,642,143 0.35

17. Mr M.F. Hashim 2,612,989 0.35

18. Sampath Bank PLC/Mr.Arunasalam Sithampalam 2,500,000 0.34

19. Hatton National Bank PLC/Yonmeregna Simon Hewage Rushanka2,500,000

Sulakshana Silva 0.34

20. Mr M.I.M. Shafie & Mrs F.R. Shafie 2,500,000 0.34

Source: Company Financial Statements

Disclaimer

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Stock Ratings
Recommendation

Expected absolute returns (%) over 12 months

Buy
More than 10%
Hold
Between 10% and 0
Sell
Less than 0%

Expected absolute returns are based on the share price at market close unless otherwise stated. Stock recommendations are based on absolute upside
(downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future
price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation.

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