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Case Analysis

CASE

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11 views5 pages

Case Analysis

CASE

Uploaded by

dineshkumaarvac
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Summary of the Case: Aboi z Power Corpora on - Cost of Capital During the Pandemic

The case focuses on Janel Favila, an equity analyst managing the Student Managed Investment Fund
(SMIF) at the Asian Ins tute of Management (AIM). Favila is tasked with deciding whether the fund
should invest in Aboi z Power Corpora on (AP), a leading power genera on and distribu on
company in the Philippines.

Key Highlights:

1. Business Context:

o AP is a prominent player in the power sector with a diversified por olio of


renewable and non-renewable energy sources.

o The company faced challenges during the pandemic, including reduced energy
demand and project delays.

2. Impact of the COVID-19 Pandemic:

o The Philippine economy experienced a 9.5% GDP contrac on in 2020, leading to a


recession.

o Record low-interest rates (2% policy rate) created uncertain es in WACC es ma on.

o AP’s revenues and net income declined due to lockdowns and lower demand.

3. Investment Decision Challenge:

o The main task is to es mate the Weighted Average Cost of Capital (WACC)
accurately to perform a discounted cash flow (DCF) valua on for AP.

o Key uncertain es include whether to normalize risk-free rates to account for


pandemic condi ons and how to adjust the equity beta.

4. AP's Financial Performance:

o Opera ng revenues for the first nine months of 2020 decreased by 14%, while
opera ng expenses dropped by 15%.

o AP’s debt includes bonds issued in tranches, with recent issues at low coupon rates
reflec ng the pandemic’s low-interest environment.

5. DCF Valua on Assump ons:

o Revenues are projected to grow modestly during the pandemic and stabilize post-
pandemic.

o Opera ng and capital expenditures are aligned with historical trends.

o Terminal value is es mated using a growth rate of 2.58%.

Conclusion:

Favila must decide whether AP’s undervalua on jus fies a buy recommenda on, considering the
uncertain es in WACC es ma on due to pandemic-driven market distor ons. The case highlights the
challenges of making investment decisions during vola le economic condi ons.
Slide 1: Title Slide

 Title: Aboi z Power Corpora on: Cost of Capital During the Pandemic

 Sub tle: A Case Study Analysis

 Prepared by: [Your Team Name/Names]

 Date: [Date of Presenta on]

Slide 2: Case Overview

 Focus: Es ma ng Weighted Average Cost of Capital (WACC) for Aboi z Power Corpora on
(AP).

 Context:

o AP operates in power genera on and distribu on in the Philippines.

o COVID-19 pandemic led to economic uncertainty and low-interest rates,


complica ng WACC es ma on.

 Goal: Decide if AP is a good investment for the AIM Student Managed Investment Fund.

Slide 3: Company Background

 Founded: 1998; Listed on the Philippine Stock Exchange in 2007.

 Segments:

o Power Genera on: Renewable (hydro, geothermal, solar) and Non-Renewable (coal,
oil).

o Power Distribu on: Serving key ci es like Cebu and Davao.

o Retail Electricity Supply: Major player in Luzon and Visayas regions.

 2020 Financials:

o Revenue: ₱81.1 billion (first nine months).

o Opera ng Expenses: ₱61.85 billion (down 15% from 2019).

Slide 4: Impact of COVID-19

 Economic Effects in the Philippines:

o GDP fell by 9.5% in 2020 (worst since WWII).

o Lockdowns caused disrup ons in demand and opera ons.

 AP’s Challenges:
o Revenue drop due to lower demand.

o Delays in new projects like GNPower Dinginin Coal Plant.

o Increased tax and interest expenses.

Slide 5: Investment Decision Challenges

 Core Issue: Calcula ng WACC under pandemic condi ons.

 Concerns:

o Low interest rates ar ficially lowering cost of debt.

o Uncertainty around normalizing risk-free rates.

o AP’s financial performance affected by economic slowdown.

Slide 6: WACC Es ma on Components

 Equity Cost:

o Use adjusted beta (Blume's method): βadj=0.67×βraw+0.33\beta_{\text{adj}} = 0.67


\ mes \beta_{\text{raw}} + 0.33.

o Equity Risk Premium: 6.56% (as per Damodaran).

o Risk-Free Rate: Treasury note yields from 2020 or normalized rates.

 Debt Cost:

o Consider Series D and E bonds as representa ve of marginal debt cost.

o Series D: Coupon 5.2757%, 7-year maturity.

o Series E: Coupon 3.125%, 2-year maturity.

 Capital Structure:

o Use market value of debt and equity for weights.

Slide 7: Key Financial Data

 Debt: ₱232.75 billion (interest-bearing liabili es).

 Equity: ₱121.24 billion (a ributable to equity holders).

 Betas:

o 2019 raw beta: 0.611.

o 2020 raw beta: 0.594.

 Risk-Free Rate Op ons:


o 10-Year Treasury Note in 2020: 3.00%.

o Historical average (2011–2020): ~4.23%.

Slide 8: DCF Valua on Summary

 Assump ons:

o Revenue growth:

 2021: Flat (pandemic condi ons).

 2022: 1.58% growth.

 2023–2025: 2.58% CAGR.

o Opera ng expenses: Based on 2020 percentage to revenues.

o Capital expenditures: Pick up post-pandemic.

 Terminal Value Formula:


TV=FCF5×(1+g)÷(WACC−g)\text{TV} = \text{FCF}_5 \ mes (1 + g) \div (\text{WACC} - g).

o g=2.58%g = 2.58\%.

Slide 9: AP's Resilience During the Pandemic

 Fully opera onal during lockdowns.

 Work-from-home arrangements and digital opera ons.

 Maintained partnerships to manage risks.

 Focused on a 50:50 energy mix by 2030 (renewable and thermal).

Slide 10: Recommenda ons

 Invest Decision:

o If WACC reflects pandemic reali es: AP undervalued, strong buy.

o If normalized WACC: Reassess based on adjusted valua on.

 Considera ons:

o Pandemic recovery melines.

o Future investments in renewable energy.

o Resilience and stability of AP’s opera ons.

Slide 11: Conclusion


 AP is a promising investment candidate for AIM SMIF.

 Accurate WACC es ma on is cri cal to decision-making.

 Reflects value, stability, and strong fundamentals.

Slide 12: Q&A

 Title: Ques ons and Discussion.

 Add placeholders for audience queries.

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