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NT2 - Rising gas prices erodes core earnings

From 2018, the contract volume (Qc) of NT2 was reduced by 5.5% to 4,025 million.  As PPA contracts of power plants were designed with a certain amount of Qc to ensure stable profit level for the plants against volatility in input prices, lower Qc also means higher risk. In addition, since the average gas price of NT2 in the first half of 2018 has increased by 21% YoY and almost doubled from 2016, we believe that gas input price is a significant risk for NT2. 

In the longer term, a reduction in gas supply from old gas fields in Nam Con Son basin could be compensated by new gas fields coming into operation in 2019 – 2022. However, the gas prices of these new fields are expected to be much higher than that of the old gas fields. Therefore, we expect a rising trend in input gas prices for NT2 in the next five years, resulting in further decline in its earnings and lower cash dividend in 2019 – 2021.

We estimate that 2018 NPAT will decrease by 9% YoY to VND 736 billion, corresponding to EPS of 2,467 VND/share. Although the above analysis shows a lower earnings base and lower expected cash dividend in the coming years for NT2, we also notice that the fall in 1H 2018 has fully reflected these unfavorable movements. Our target price is VND 27,100 per share. This target price, coupled with a VND 2,500 cash dividend in the next 12 months, yields a total return of 11% (calculated based on the closing price on 23 August). Therefore, we have a ACCUMULATE recommendation on NT2.