EEI Corporation TUE 28 NOV 2017

3Q17 results miss estimates as both

domestic and foreign operations
disappoint
3Q17 profits reach Php97 Mil. EEIs net income for the third quarter of 2017 reached Php97 Mil,
HOLD
a turnaround from the Php438 Mil loss booked during 3Q16. However, results were disappointing TICKER: EEI
as profits reached only Php507 Mil in 9M17, equivalent to only 59.4% of our full year forecast. FAIR VALUE: 12.40
CURRENT PRICE: 10.94
EEIs below expected results were due to the disappointing performance of both its domestic and
foreign operations. During 9M17, revenues declined by 4.7% to Php10.5 Bil, equivalent to only UPSIDE: 13.35
70.6% of our full year forecast. Moreover, GPM fell by 90 bps y/y to 12.2% while OPM dropped
by 140 bps y/y to 4.6%. The said factor resulted to a 27% drop in operating profits to Php484 Mil, SHARE PRICE MOVEMENT
largely attributable to its local operations. Meanwhile, EEI booked another Php109 Mil worth of
provisions for its foreign JV ARCC in 3Q17, bringing equity in net income of associates to Php195 120

Mil in 9M17, equivalent to only 58.5% of our full year forecast of Php333 Mil.
110
Realigning estimates, maintain HOLD. We are realigning our estimates to account for the
weaker-than-expected third quarter results given the slower domestic revenues, lower margins, 100
as well as the additional provisions made by EEI in its ARCC JV. We reduced our revenue
assumptions in 2017 until 2019 in light of any additional delays in the Skyway project. We also
90
slightly reduced our margin assumptions given sustained rise in its operating expenses. After
factoring in the said factors, we cut our earnings forecast by 23.7% to Php651 Mil in 2017, by
7.6% to Php1.0 Bil in 2018, and by 4.4% to Php1.1 Bil in 2019. 80
28-Aug-17 28-Sep-17 28-Oct-17 28-Nov-17
EEI PSEi
We reduced our fair value estimate of EEI to Php12.40/sh from Php13.10/sh. Despite the
downward earnings adjustment for the next few years, long-term prospects of EEI remain
ABSOLUTE PERFORMANCE
attractive. Based on our new FV estimate, implied 2018E P/E is at 12.4X, slightly below its regional
peers 18E P/E of 14.0X. Still, we are maintaining our HOLD rating since the stock. At EEIs current 1M 3M YTD
price of Php12.36/sh, it is already trading close to our fair value estimate. EEI -13.27 -16.31 79.41
PSEi -0.19 3.30 21.04

FORECAST SUMMARY
Year to December 31 (Php Mil) 2014 2015 2016 2017E 2018E 2019E MARKET DATA
Total Operating Revenues 17,080 18,979 14,836 14,588 18,308 19,381
% change y/y 62.3 11.1 -21.8 -1.7 25.5 5.9 Market Cap 13,057.15Mil
EBITDA 1,815 1,265 113 1,706 2,287 2,416 Outstanding Shares 1,036.285Mil
% change y/y 11.9 -30.3 -91.1 1410.6 34.1 5.6 52 Wk Range 5.86 - 15.30
EBITDA Margin (%) 10.6 6.7 0.8 11.7 12.5 12.5 3Mo Ave Daily T/O 22.15Mil
Net Income 918 203 -848 651 1,036 1,093
% change y/y 0.3 -77.9 -518.1 -176.8 59.2 5.5
Net Margin (%) 5.4 1.1 -5.7 4.5 5.7 5.6
EPS (in Php) 0.89 0.20 -0.82 0.63 1.00 1.05
% change y/y 0.3 -77.9 -518.1 -176.8 59.2 5.5

RELATIVE VALUE
P/E (X) 12.3 55.9 -13.4 17.4 10.9 10.4
P/BV (X) 1.7 1.7 1.9 1.8 1.6 1.4 ANDY DELA CRUZ
ROE (%) 14.8 3.0 -13.4 10.7 15.5 14.5 RESEARCH ANALYST
Dividend Yield (%) 1.8 1.8 1.8 1.8 1.8 1.8
andy.delacruz@colfinancial.com
so urce: EEI, COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT

TUE 28 NOV 2017

3Q17 profits reach Php97 Mil

EEIs net income for the third quarter of 2017 reached Php97 Mil, a turnaround from the
Php438 Mil loss booked during 3Q16. However, results were disappointing as profits reached
only Php507 Mil in 9M17, equivalent to only 59.4% of our full year forecast.

EEIs below expected results were due to the disappointing performance of both its domestic
and foreign operations. During 9M17, revenues declined by 4.7% to Php10.5 Bil, equivalent
to only 70.6% of our full year forecast. Moreover, GPM fell by 90 bps y/y to 12.2% while OPM
dropped by 140 bps y/y to 4.6%. The said factor resulted to a 27% drop in operating profits to
Php484 Mil, largely attributable to its local operations. Meanwhile, EEI booked another Php109
Mil worth of provisions for its foreign JV ARCC in 3Q17, bringing equity in net income of
associates to Php195 Mil in 9M17, equivalent to only 58.5% of our full year forecast of Php333
Mil.

Exhibit 1: Results summary

% of COL
in Php Mil 3Q16 3Q17 % Change 9M16 9M17 % Change
forecast
Revenues 3,741 4,010 7.2 11,053 10,531 (4.7) 70.6
Gross Profit 503 412 (18.0) 1,444 1,285 (11.0) 63.8
Gross Margin (%) 13.4 10.3 - 13.1 12.2 -
Operating Income 237 140 (40.9) 663 484 (27.0) 50.0
Operating Margin (%) 6.3 3.5 - 6.0 4.6 - -
Equity in net earnings of (748)
associates29 (103.9) (942) 195 (120.7) 58.5
Net Income (438) 97 (122.2) (314) 507 (261.7) 59.4
Net Margin (%) (11.7) 2.4 - (2.8) 4.8 - -
Source: EEI, COL Estimates

Revenues grow 7.2% y/y in 3Q17

Revenues for the third quarter grew by 7.2% y/y to Php4.0 Bil as several smaller projects begin
to pick up in the period. Still, the delay in its big ticket projects (particularly the Skyway project)
continued to soften its revenue booking. According to EEI, removal of the utility lines (which is
the reason for the right-of-way issue in its Skyway project) will not be finished until 2018. This
delay caused revenues in 9M17 to still decline by 4.7% to Php10.5 Bil. Revenues were slightly
below COL expectations as it represented 70.6% of our full-year estimates.

Margins decline

As discussed earlier, EEIs profits were also hurt by the 90-bps y/y drop in its GPM to 12.2% and
the 140-bps y/y drop in its OPM to 4.6%. The said factor caused EEIs 9M17 operating income to
drop by 27.0% y/y to Php484 Mil, equivalent to only 50.0% of our full-year estimate). Margins
fell as operating costs continued to increase despite the weak revenues. Operating expenses
grew by 2.7% y/y during 9M17 due to higher manpower costs as several personnel were

COL Financial Group, Inc. 2

 EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT

TUE 28 NOV 2017

on stand-by due to limited work availability in the Skyway project. EEI said it also increased
spending on employee training.

Equity in net earnings in JV reach only Php29 Mil in 3Q17 due

to additional provisions

EEI booked Php29 Mil from equity in net earnings of associates in 3Q16, a reversal from a loss
of Php748 Mil in 3Q16. However, the 9M17 total of Php195 Mil was below expected as we were
forecasting full year earnings of Php333 Mil. According to EEI, the JV booked an additional
Php109 Mil in preliminary provisions in 3Q17 to pre-empt possible losses in the dispute with
the main contractor (Snamprogetti Saudi Arabia Co. Ltd) of the problematic RP2 Naptha and
Aromatics Plant project.

Domestic order book flat q/q. EEIs domestic backlog remained relatively flat q/q at Php46.8 Bil
(down by only 0.2% q/q). We believe the company won additional projects that helped offset
construction revenues booked in 3Q17. The abundance of infrastructure projects that the
government plans to roll out should benefit EEI going forward as it remains in a good position
to win the bidding for new projects (such as railways, airports, and toll roads, among others).

Exhibit 2: End-period backlog summary

% %
in PhpMil 4Q16 1Q17 % Change 2Q17 3Q17
Change Change
Domestic backlog 45,720 44,000 (3.8) 46,900 6.6 46,800 (0.2)
Foreign backlog 11,770 10,700 (9.1) 10,000 (6.5) 8,000 (20.0)
Total backlog 57,490 54,700 (4.9) 56,900 4.0 54,800 (3.7)
Source: EEI

Realigning estimates, maintain HOLD

We are realigning our estimates to account for the weaker-than-expected third quarter results
given the slower domestic revenues, lower margins, as well as the additional provisions made
by EEI in its ARCC JV. We reduced our revenue assumptions in 2017 until 2019 in light of any
additional delays in the Skyway project. We also slightly reduced our margin assumptions
given sustained rise in its operating expenses. After factoring in the said factors, we cut our
earnings forecast by 23.7% to Php651 Mil in 2017, by 7.6% to Php1.0 Bil in 2018, and by 4.4%
to Php1.1 Bil in 2019.

COL Financial Group, Inc. 3

 EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT

TUE 28 NOV 2017

Exhibit 3: Summary of changes in forecast

2017E 2018E 2019E
in PhpMil
Old New % Change Old New % Change Old New % Change
Revenue 14,911 14,588 (2.2) 18,773 18,308 (2.5) 19,874 19,381 (2.5)
Gross Profit 2,015 1,809 (10.2) 2,498 2,402 (3.8) 2,606 2,542 (2.5)
Gross Margin (%) 13.5 12.4 - 13.3 13.1 - 13.1 13.1 -
Operating Income 968 678 (29.9) 1,345 1,230 (8.5) 1,359 1,300 (4.4)
Operating Margin (%) 6.5 4.6 - 7.2 6.7 - 6.8 6.7 -
Net Income 854 651 (23.7) 1,121 1,036 (7.6) 1,143 1,093 (4.3)
Net Margin (%) 5.7 4.5 - 6.0 5.7 - 5.7 5.6 -
FV Estimate 13.1 12.40 (5.3)
Source: COL Estimates

We reduced our fair value estimate of EEI to Php12.40/sh from Php13.10/sh. Despite the
downward earnings adjustment for the next few years, long-term prospects of EEI remain
attractive. Based on our new FV estimate, implied 2018E P/E is at 12.4X, slightly below its
regional peers 18E P/E of 14.0X. Still, we are maintaining our HOLD rating since the stock. At
EEIs current price of Php12.36/sh, it is already trading close to our fair value estimate.

COL Financial Group, Inc. 4

 EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT

TUE 28 NOV 2017

EEI Corporation (EEI) INCOME STATEMENT (IN PHPMIL)

FY14 FY15 FY16 FY17E FY18E FY19E
Revenues 17,080 18,979 14,836 14,588 18,308 19,381
% Growth - 11.1% -21.8% -1.7% 25.5% 5.9%
COMPANY BACKGROUND Gross Profit 1,730 2,236 1,876 1,809 2,402 2,542
% Growth - 29.3% -16.1% -3.6% 32.7% 5.8%
EEI Corporation (EEI) is a construction
EBITDA 1,349 1,900 1,423 1,364 1,976 2,110
company primarily involved in the % Growth - 40.9% -25.1% -4.2% 44.9% 6.8%
installation, construction, and erection of Operating Profit 941 1,380 790 678 1,230 1,300
power generating facilities, oil refineries, % Growth - 46.6% -42.8% -14.1% 81.4% 5.7%
Interest expense (124) (136) (163) (137) (120) (101)
infrastructures, and residential & office
Equity in net earnings of associates 424 (676) (1,316) 333 302 296
towers, among others. It is also involved in Other Income/Expense 35 (1) 58 46 59 57
construction projects overseas, primarily Pretax Income 1,318 636 (622) 930 1,480 1,562
through its joint venture in Saudi Arabia, Tax Expense 400 434 226 279 444 468
Al-Rushaid Construction Corporation Net Income 918 203 (848) 651 1,036 1,093
% Growth - -77.90% -518.10% -176.80% 59.20% 5.50%
(ARCC). EEI also has stakes in renewable
EPS (Php) 0.90 0.20 (0.80) 0.60 1.00 1.10
energy projects through several joint % Growth - -77.9% -518.1% -176.8% 59.2% 5.5%
venture companies, including PetroWind BALANCE SHEET (IN PHPMIL)
Energy Inc., and PetroSolar Corporation. FY14 FY15 FY16 FY17E FY18E FY19E
Cash & Equivalents 564 1,270 1,029 1,182 1,140 1,348
Receivables 5,973 6,340 6,728 4,863 6,103 6,460
REVENUE BREAKDOWN
Inventories 437 448 559 454 460 463
0% Other Current Assets 4,917 6,742 5,253 5,525 6,739 7,079
PPE 3,661 4,357 4,482 4,564 4,624 4,660
6% 1%
Other Non-Current Assets 2,800 3,314 2,153 2,153 2,153 2,153
Total Assets 18,352 22,472 20,203 18,740 21,219 22,164
Accounts Payable 4,602 5,277 5,000 3,993 4,971 5,262
Construction contracts
ST Debts 2,825 3,330 2,950 2,800 2,600 2,300
Services
Other Current Liabilities 3,395 5,452 5,123 4,483 5,600 5,923
Merchandise sales
LT Debts 778 1,500 1,214 1,104 860 605
Real estate sales
Other Non-Current Liabilities 93 131 72 72 72 72
Total Liabilities 11,693 15,690 14,359 12,452 14,103 14,162
Total Equity 6,659 6,781 5,844 6,287 7,117 8,002
93%
Total Liabilities & Equity 18,352 22,472 20,203 18,740 21,219 22,164
BVPS 6.4 6.5 5.6 6.1 6.9 7.7
Construction contracts
CASHFLOW STATEMENT (IN PHPMIL)
Services
FY14 FY15 FY16 FY17E FY18E FY19E
Merchandise sales
Income (loss) before income tax 1,318 636 (622) 930 1,480 1,562
Real estate sales
Depreciation & Amortization 408 521 634 685 745 810
Other Non-Cash Exp (Gains) (325) 796 1,384 (333) (302) (296)
Net interest income (expense) (86) (99) (103) - - -
Increase (decrease) in Working Cap (1,184) 347 734 101 (374) (98)
Income tax expense (424) (421) (374) (279) (444) (468)
Operating Cash Flow (293) 1,781 1,652 1,105 1,105 1,509
Capex (498) (1,137) (735) (772) (810) (851)
Other Investments 132 (1,076) (291) 337 307 301
Investing Cash Flow (366) (2,213) (1,026) (434) (504) (550)
Proceeds (Payment) Debts 542 1,326 (666) (310) (436) (544)
Payment of Cash Dividends (207) (207) (207) (207) (207) (207)
Others (4) - - - - -
Financing Cash Flow 331 1,119 (873) (518) (643) (751)
Effect of forex rates on cash (5) 19 6 - - -
Change in Cash (334) 706 (241) 153 (41) 208

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 EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT

TUE 28 NOV 2017

INVESTMENT THESIS: KEY RATIOS

FY14 FY15 FY16 FY17E FY18E FY19E
Large backlog provides investors visible
GPM (%) 10.1% 11.8% 12.6% 12.4% 13.1% 13.1%
growth in the next few years
EBITDA Margin (%) 7.9% 10.0% 9.6% 9.3% 10.8% 10.9%
EEIs domestic backlog as of end 2Q17 stands OPM (%) 5.5% 7.3% 5.3% 4.6% 6.7% 6.7%
at Php46.9 Bil, providing investors highly NPM (%) 5.4% 1.1% -5.7% 4.5% 5.7% 5.6%
visible topline growth in the next few years Times Interest Earned (X) 7.6 10.1 4.9 5.0 10.2 12.9
Current Ratio (X) 1.10 1.10 1.00 1.10 1.10 1.10
Beneficiary of governments infrastructure Net D/E Ratio (X) 0.50 0.50 0.50 0.40 0.30 0.20
Days Receivable 128.0 122.0 122.0 122.0 122.0 122.0
spending plan
Days Inventory 10.0 10.0 16.0 13.0 11.0 10.0
Given the abundance of infrastructure projects
Days Payable 109.0 115.0 114.0 114.0 114.0 114.0
that the government plans to roll out, we Asset T/O (%) 93.0% 84.0% 73.0% 78.0% 86.0% 87.0%
think EEI remains in a good position to win the ROAE (%) 14.8% 3.0% -13.4% 10.7% 15.5% 14.5%
bidding for those projects (such as railways,
airports, and toll roads, among others).

COL Financial Group, Inc. 6

 EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT

TUE 28 NOV 2017

Valuation RELATIVE VALUATION

P/E EPS Growth
Methodology 2017E 2018E 2017E 2018E
Gamuda Bhd* 16.3 14.2 23.2% 17.5%
IJM Corp Bhd* 17.9 15.4 -0.4% 16.3%
WCT Holdings Bhd 15.4 13.9 83.8% 10.4%
Nawarat Patanakarn Pub Co Ltd 33.5 22.3 99.0% 50.0%
Adhi Karya Persero Tbk Pt 13.7 9.5 82.1% 45.0%
Penta-Ocean Construction Co* 12.1 11.1 13.5% 9.2%
Wijaya Karya Persero Tbk Pt 14.6 11.9 -12.7% 22.4%
Sino Thai Engineering & Construction Pcl 33.4 24.9 -17.8% 34.2%
Megawide Construction Corp. 24.1 18.8 19.3% 27.9%
Average ex-EEI 20.1 15.8 32.2% 25.9%
Median ex-EEI 16.3 14.2 19.3% 22.4%
EEI Corporation 17.4 10.9 -214.7%** 59.2%
*fiscal year 2018
** co ming fro m net lo ss
A s o f Octo ber 25, 2017

VALUATION ASSUMPTIONS

For DCF
Risk Premium 5.0%
Risk Free Rate 5.0%
Beta 1.10
Cost of Equity 10.5%
Cost of Debt 5.0%
Tax Rate 30.0%
WACC 9.1%
Terminal Growth Rate 1.5%

PV (2018E-2022E) 3,696
PV of Terminal Value 9,115
Enterprise value 12,811
Less: Net Debt 36
Equity Value 12,847
O/S 1,036
FV Estimate 12.40

COL Financial Group, Inc. 7

 EARNINGS ANALYSIS I EEI: 3Q17 RESULTS MISS ESTIMATES AS BOTH DOMESTIC AND FOREIGN OPERATIONS DISAPPOINT

TUE 28 NOV 2017

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

KYLE JEMMRIC VELASCO JOHN MARTIN LUCIANO ADRIAN ALEXANDER YU

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
kyle.velasco@colfinancial.com john.luciano@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 8