Australia | Feb 25 2008
By Chris Shaw
First it was the highly geared financial stocks that came under pressure as a result of the subprime crisis in the US and the flow through into capital markets across the globe and now some experts see the utility and infrastructure stocks as the next most likely sector to be sold down by hedge funds given their relatively high levels of gearing.
For some the process has already started, with wind farm and landfill gas producer Viridis Clean Energy Group ((VIR)) seeing its share price sold down from around $1.10 a few months ago to below $0.80 now. ABN Amro suggests this is a case of throwing out the baby with the bath water as the group’s strength of cash flow is being underestimated by the market, especially as around 73% of its debt is fixed at attractive rates through to 2017.
The broker has retained its Buy rating following the group’s profit result last week, which while containing some volatility in terms of results from individual divisions was broadly in line with its estimates. In divisional terms the German wind farm and US landfill assets slightly underperformed, which was offset by strength in the group’s UK wind farm and landfill operations.
One issue in the broker’s view is the high yield the stock offers (currently around 12.7%) makes it difficult for the company to find accretive acquisition opportunities, though on the flipside it points out the yield makes the stock something of an acquisition target as it would be easy for a predator to justify a move given the yield would cover the financing costs.
Growth also looks likely going forward as the Androssan wind farm in the UK is set for an expansion of capacity, while the group has also recently locked in a new power supply contract in the same market. Austock Securities, which rates the stock as a Strong Buy, points out the group has secured price increases of about 15% on gas from its UK landfill operations while the windfarm expansion should be able to generate an internal rate of return of around 20% and this underpinds strong growth from FY09.
As a result the broker sees the group’s growth outlook as solid in coming years, which should see EBITDA (earnings before interest, tax, depreciation and amortisation) increase from the $40 million achieved in FY07 to $52 million by FY09. As a comparison ABN Amro expects EBITDA of $44.9m in FY09, while UBS, which also rates the stock as a Buy, expects EBITDA of $49.8 million on an adjusted basis.
UBS has a valuation and price target on the stock of $1.05, down from $1.18 prior to the result as minor cuts to forecasts have been made to reflect the weaker US and German performance and adverse exchange rate movements. Austock’s target is $1.10, while ABN Amro has a price target of $1.00.
Only ABN Amro and UBS cover the stock among the broker’s in the FNArena database, meaning the average price target is $1.03, which compares to a median price target according to Thomson One Analytics of $1.08. Shares in Viridis today are slightly higher and as at 11.40am were up 1c at $0.78.