{"id":325933,"date":"2023-12-03T00:34:20","date_gmt":"2023-12-02T16:34:20","guid":{"rendered":"https:\/\/www.pinoyinvestor.com\/smartinvestor\/?p=325933"},"modified":"2023-12-03T00:34:21","modified_gmt":"2023-12-02T16:34:21","slug":"stock-in-focus-manila-electric-co-meralco-mer-3-dec-2023-by-ap-securities","status":"publish","type":"post","link":"https:\/\/www.pinoyinvestor.com\/smartinvestor\/stock-in-focus-manila-electric-co-meralco-mer-3-dec-2023-by-ap-securities\/","title":{"rendered":"Stock in Focus: Manila Electric Co. – Meralco (MER) – 3 Dec 2023 by AP Securities"},"content":{"rendered":"\n

Summary of Broker’s Recommendation<\/h2>\n\n\n\n
Stock Code<\/strong><\/td>MER<\/td><\/tr>
Company Name<\/strong><\/td>Manila Electric Co. (Meralco)<\/td><\/tr>
Broker<\/strong><\/td>AP Securities<\/td><\/tr>
Opinion Issued on<\/strong><\/td>3 Dec 2023<\/td><\/tr>
Recommendation<\/strong><\/td>Hold<\/td><\/tr>
1-Year Target Price<\/strong><\/td>PHP 351.25<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
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We raised our target price for MER from P392.48 to P405.24 after factoring
in the company\u2019s stellar outperformance in the 3rd quarter (3Q) of 2023. However, in light of recent political noise surrounding its franchise, we have opted to apply a 15% regulatory risk discount on MER\u2019s distribution utility business similar to what we have done with our valuation of MWC. Despite our optimism over the potential growth of MER\u2019s unregulated businesses in power generation and communication towers, its power distribution business still accounts for a significant bulk of its
earnings. And while this administration seems less inclined to break government commitments than the previous one, any sort of talk about an untimely review of MER\u2019s franchise agreement represents a significant amount of uncertainty that
we feel must be priced into our valuations. <\/p>\n\n\n\n

As a result, our TP for MER has gone down to P351.25, or a potential downside
of 4.55% from the last traded price of P368.00, resulting in a downgrade of our rating on MER from BUY to HOLD.<\/p>\n\n\n\n

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Analysis and Opinion<\/h2>\n\n\n\n

Laguna rep calls for MER franchise review<\/h3>\n\n\n\n

Laguna 1st district representative Dan Fernandez is proposing to revoke or split the power distribution franchise of MER into three to diffuse its market power, as well as to refund P200-Bn that it allegedly overcharged to consumers. Fernandez cited the alleged multiple pricing violations of MER, including but not limited to not updating its WACC since 2015 which resulted in higher electricity prices, as reasons to review the distributor’s franchise. The solon also expressed concern that the size of MER\u2019s captive market gives it outsized influence over the demand and supply of electricity, hence the proposal to split its franchise area into three.<\/p>\n\n\n\n

We have been down this rocky road before<\/h3>\n\n\n\n

This is not the first time that a non-expiring distribution franchise was put under review through political machinations. To recall, MWC and Maynilad had their franchises reviewed in 2019, resulting in the amendment of certain parts of their distribution agreement that fundamentally changed the costs that they are able to recover through tariffs. <\/p>\n\n\n\n

That episode with the water distributors put into question the regulatory certainty in the Philippines, and triggered a flight of foreign money even before the lockdowns of 2020. The same story played out recently with transmission company National Grid Corp (NGCP), although calls for the revocation or review of its franchise has not yet gained steam. It is likely that the same will happen if Congress makes amendments to MER\u2019s franchise before its supposed expiration in 2028.<\/p>\n\n\n\n

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Check how many brokers recommend this stock<\/h2>\n\n\n\n
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All Stock Rankings<\/a><\/blockquote>