Fundamental Outlook Remains Intact.
At current valuations, we believe that SCC is undervalued relative to its peers trading at FY16F P/E of 13.1x a 23.2% discount to industry average of 17.1x FY16F P/E. We also view that its long-term fundamentals are intact as we are positive on SCC due to the following: a) robust 3-yr EPS CAGR of 13.7% yoy driven by its higher mining capacity of 50.0% to 12.0M MT, b) sustained attributable capacity expansion of 31.1% by FY19F negating the expiration of the income tax holiday of its Units 3 and 4 Coal power plants in FY20F, and c) cost leadership in an increasingly liberalized power
industry due to the vertical integration of its power and mining business segments.
1Q16 Was Boosted By Coal.
SCC's 1Q16 net income increased 15.9% yoy to Php2.9B from Php2.5B (18.1% and 16.2% above BPI Sec and consensus estimates, respectively). We believe that the higher than expected net income was driven by a) coal segment's outperformance as sales volume increased 16% yoy to 2.9M MT from 2.5M MT (31.3% of our full year forecast of 9.3M MT) and coal gross profit margin expanded 15.5ppts to 58.3% from 42.8% (vs our forecasted coal GPM of 35.8%), b) depreciation is skewed towards the latter part of the year as potential retrofitting will be done during 3Q16 or 4Q16, and c) lower effective tax rate as Calaca Coal plant Unit 2 was down. The power
segment's 674gWh electricity sales declined 31.4% yoy from 982gWh (12.7% of our full year forecast).
(Source BPI Report)