Geothermal Gains in the Philippines

10/07/2015 10:00 am EST


Of all the countries we cover, the Philippines has the best outlook, with more than 6% GDP growth forecast for 2015 and 2016, coupled with low inflation and a solid trade balance, says Martin Hutchinson, editor of Pacific Wealth.

My favorite stock in the Philippines is Energy Development Corp. (EGDCY), the world's largest vertically integrated geothermal power company.

Generated by the earth's heat (in the form of active volcanoes, geysers, and hot springs), geothermal energy has a major advantage over other types of green energy, as it's relatively cheap to produce.

As a result, it's economically viable without government subsidies, provided the geothermal sources are sufficiently large and accessible, which they are in the Philippines.

EDC is well positioned to benefit from demand for cleaner energy. At home, it is an established company and politically well connected.

Since 2007 it been 50.1% owned by First Gen, a Philippine conglomerate formed to hold the power generation assets of the Lopez Group, a prominent Philippine family. (Federico Lopez is Chairman and CEO of EDC).

Currently, EDC produces about 9% of the electricity in the Philippines. It has also used its renewable energy expertise to acquire five concessions in Chile and Peru and is in negotiations in Indonesia.

The stock price has nose-dived this year due to an earnings shortfall, which we think is temporary. The shares trade at 12 times earnings for the past 12 months and under 10 times earnings estimated for 2016.

The stock is priced at a relatively high 2.6 times book value, but EDC—in the last four quarters—has had a stellar return of 5.9% on assets and 23.4% on equity, while its net debt to equity ratio of 1.17 times seems reasonable.

Dividends have risen 10% annually the past five years, and based on 2015 dividends of $0.45 per ADR, now yields 3.4%.

EDC offers one of the few opportunities to invest in a financially sound green energy company, with strong demand and a very reasonable valuation. As such, EDC is likely to energize our portfolios for years to come.

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