KHP: good opportunity for long term investors based on dividend yield

Khanh Hoa Power Joint Stock Company (Ticker: KHP) is a subdivision of Vietnam Electrictity (or EVN for short). The company operates in generating and distributing electricity to households and business, which include: constructing stations, meter installation, electric experiment, consulting, and building grid with voltage of less than 110KV.

Despite the fact that Khanh Hoa electric company is not a big electricity generator in Vietnam, the company plays a crucial role in distributing electricity over Khanh Hoa province as well as surrounded areas. With a simple business model of purchasing electricity from EVN and redistributing to households customers, we assume limited fluctuation in the company’s future operation. In 2012, the average purchasing price was VND1,135 per kwh, a 5% increase YoY and average distributing price was VND1,353 per kwh.

KHP’s annual investment into transmission system is approximately VND50 billion along with annual depreciation of more than 110 billion vnd and maintenance cost of VND20 billion. The table below displays KHP’s cash flows projected for 2013-2018.

Note: 2012 CF and profit were irregular due to uninformative gain from a contract. We employ a cautious approach when projecting the annual growth rate from 22.5% in 2012 down to 3% for the following years. We will update our projection when we have more information on future prospects.

Large cash pile:

At the end of fiscal year 2012, KHP’s cash was worth VND393.7 billion, or VND10,000 per share. In Q12013, the amount decreased a little bit due to short-term financial obligation; however we believe cash value will remain at high level due to consistently positive CF. Besides, KHP’s receivable turnover is high which indicates quick cash collection; and therefore cash is expected to keep piling up.

Cash deposit will help the company to earn around VND30 billion on interest while the interest expense will be VND7.9 billion , a slight decrease compared to 2012.

Cash value is greater than book value provides an attractive valuation for KHP. The table below shows the fair value calculated by FCFF valuation method.

Modest investment in non-core business and good budget management

KHP has little exposure to investing in unrelated industries due to their modest investment, which we believe a good sign considering the current economic state.

Few non-core investments include:

Own 56.88% of Song Cho Hydroelectricity Company, which is VND10 billion in value

Own 750.000 shares of TonKin since 2007 at VND25,000 per share.

History of dividend boost will attract long-term investors because of higher offering rate than market average and saving rate.

Long streak of steady dividend payout even during difficult years convinces us that the company poises for another year with considerable value return to shareholders. At current trading price of VND11,500 per share, dividend yield is staying at 13% which is higher than current saving rate.

Cash Dividend:

Fair value calculated by FCFE valuation method.

Valuation summary:

Steady future profit, managed investment plan and predictable working capital are thoroughly interpreted through cash flows analysis and valuation for KHP. Besides, large cash pile will prompt KHP to deliver value back to shareholders. The table below displays the summary of our valuation and the average fair value

Recommendation: BUY

Short-term target: VND13,000 per share, Long-term target: VND18,600 per share.

Core business remains steady with consistent incomes

Model	Price: VND per share
FCFF	22,460
FCFE	19,375
ĐM	18,822
RE	17,353
EVA	17,869
P/B	17,019
P/E	17,787
AVERAGE	18,669