First Gen Corporation (FGEN PM)
One of the world's largest geothermal energy producers, selling at >30% discount
Disclaimer: This is a record of my investment decisions, not financial advice. I may change my decisions without notice. Use this only for education and entertainment. Do not rely on this for your investment decisions.
My decision: Buy @ PHP 16.40 and below
Estimated fair value: PHP 23.60 per share
Conviction: +4 (1 to 5, 5 being highest)
Future free cash flow > share price because:
FGEN is a good business
In the past 5 years, return on equity (ROE) averaged 12%. This is much higher than the 8% median in the industry worldwide
FGEN is the 3rd largest power generator in the Philippines. It holds ~20% market share in terms of gross power generation
Low-cost producer of renewable baseload energy
FGEN’s subsidiary, Energy Development Corporation (EDC), is one of the largest producers of geothermal energy in the world
Geothermal energy is cheaper than other sources of baseload energy like coal and natural gas. Price is also less volatile because it does not require fuel
Although solar and wind energy are slightly cheaper, they cannot replace geothermal energy because they are intermittent
FGEN’s management is competent and incentivized
CEO Federico Lopez and COO Francis Giles led the company since 2008 and 2010
The Lopez family has > 68% economic interest in FGEN
Valuation is cheap
Discounted cash flow (DCF) suggests IRR > 10% p.a. with >30% margin of safety
Over the next 10 years, I estimate revenue will shrink 10% p.a. This will mainly be driven by 8% p.a. volume decline and 3% p.a. price decline
Retirement of gas plants. FGEN’s major gas plants are ~25 years old vs average useful life of 30 years
Cheap solar power will reduce demand, but will not completely replace natural gas (see point 1(c))
I estimate operating profit margin (OPM) will improve from 21% in 2024 to 30% by 2034
By 2034, geothermal and other renewable energy will account for 100% of power generated, up from 42% in 2024
Renewable energy carries higher margins because they do not consume fuel
In its peer group, FGEN appears cheapest (see appendix)
GIC and Macquarie are looking to sell their 35% voting interest in EDC for USD 2 bn.1 This will value FGEN’s 65% stake at USD 3.7 bn, 32% higher than FGEN’s enterprise value of USD 2.8 bn
KKR acquired 14.1% voting interest in FGEN at prices between PHP 22.50 – PHP 33.00 per share2
Risks:
Some risk of oversupply. Installed capacity in the Philippines will increase by 7% p.a. through 20273
However, solar accounts for 60% of the increase. After accounting for the low net capacity factor of solar plants (~20%), I estimate the annual increase in installed capacity to ~4% instead. For the past 10 years, peak demand increased by ~4% p.a.4
Cheap solar power may displace FGEN
FGEN geothermal: Low risk because of the reasons discussed in point 1(c)
FGEN natural gas: Volume will decline. Cheap solar power will likely drive down day-time electricity prices. However, I have already modelled this in my DCF. Also, the decline will likely be gradual because natural gas is still required to provide ancillary services and load following
About:
3rd largest power generator in the Philippines
Date: 27 May 2025
Share price: PHP 16.40
Market cap.: PHP 58.05 bn (~USD 1.0 bn)
DCF model
If you want a copy of my DCF model, comment below
Using my model, you can analyze the 10-year trends in volume, price, expenses, demand, supply, etc. You can input your own assumptions and forecasts
If there’s sufficient demand, I will prepare my model for publication
Appendix
FGEN looks cheap. It has the lowest P/E. Debt level is low
Introductory readings