Australia | Jan 18 2007
By Chris Shaw
Solid growth prospects and an attractive dividend yield are positive attributes to a stock, so it is little surprise both Deutsche Bank and Citigroup have initiated coverage on Babcock & Brown Power (BBP) with Buy ratings.
The company, which is a pure play on the power generation sector, appears to fill both requirements as it offers a yield of almost 9% on 2008 forecasts while being expected to generate EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 74% in FY08 on Deutsche’s estimates.
Citigroup is equally positive, the broker predicting the company will produce five-year compound EBITDA growth of 25% while offering stable cash flows and a growth component. This should be good enough for a total one-year return of more than 20% on the broker’s numbers.
The company has a well diversified portfolio of assets, Deutsche noting it controls eight generators totalling nearly 3000MW of capacity across Australia. Growth in these markets looks solid, the broker pointing out the National Electricity Market Management Company (NEMMCO) is forecasting consumption growth at annual rate for the next decade of 0.8% in Victoria, 1.7% in NSW, 3.5% in Queensland, 1.6% in South Australia and 2.2% in Western Australia.
This offers some growth potential within its existing assets, while Deutsche notes there remain acquisition opportunities going forward given NEMMCO estimates there will be capacity shortfalls in some markets in the future.
Brownfields expansion opportunities also exist, Citigroup expecting these may prove to be relatively low cost expansion options and could double the company’s generating capacity. It also sees some shorter-term upside if the decision to go ahead with the 640MW Uranquinty station in NSW is made.
With the company having long-term agreements in place there is security in cash flows, while Deutsche notes the mix of base load and peaking power generation capacity providing a significant level of operational flexibility within the portfolio.
The broker also likes the company’s strategy of selling electricity price risk hedging contracts, as this boosts revenues while still allowing the company to participate in medium-term increases in electricity prices.
On the broker’s estimates the company should produce earnings per share of minus 3c in 2007, 6c in 2008 and 7c in 2009, while at the current share price the stock is on a forecast yield in 2008 of around 8.7%. Citigroup is forecasting lower EPS at minus 0.2c in 2007 and minus 2.3c in 2008, but sees a jump to 14.1c in 2009.
Deutsche and Smith Barney Citigroup are currently the only brokers in the FN Arena database to cover the company, but this can be expected to change in coming months and could also prove positive for the share price as buying support may emerge as the stock becomes better known in the market.
Deutsche has a price target of $3.05, while Citigroup is targeting $3.10. The shares are trading higher today in a stronger market, as at 1.45pm the stock was up 10c at $2.87.