ERM Power Poised To Do Better

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– ERM Power on track for prospectus forecasts
– Upside potential from power generation sites, gas discoveries
– Macquarie retains Buy rating post meeting with management

By Chris Shaw

ERM Power ((EPW)) is an electricity supplier to the business customer market in Queensland in particular and develops, owns and operates low emission gas-fired power stations. In February ERM Power delivered a solid interim result, one that indicated full year guidance was achievable.

Post the result, both RBS Australia and Macquarie reiterated Buy ratings on the stock and following a meeting with management this week Macquarie has retained a positive view. The meeting highlighted a number of positives for ERM Power.

With respect to retail operations, Macquarie notes ERM Power has continued to lift market share as it utilises the $40 million raised via the initial public offering for shares. The market share increase has been achieved at the same time as margins have increased.

Macquarie estimates around 80% of gross profit in FY12 has been contracted and with two quarters remaining before FY12 begins, this suggests risk to prospectus forecasts is to the upside.

The Braemer 3 and Wellington 1 power generating sites continue to be developed and management is confident offtake and gas agreements can be finalised during 2011. According to Macquarie, BG and Santos ((STO)) are natural clients for both ramp and swing gas requirements and their own power needs.

The direction of futures and cap prices will impact on any Final Investment Decision (FID) regarding the projects, with Macquarie seeing a shift to carbon pricing as a likely positive for the decision. Assuming FID comes this year, Macquarie expects this will act as a further positive share price catalyst.

ERM Power is currently exploring for additional gas and recently announced success with the Red Gully well. The quantity of gas is currently unknown but as Macquarie points out, the discovery an be added to the GinGin discovery and potentially be commercialised relatively quickly. This should accelerate the development of the Three Spring's power station in Western Australia.

Post the meeting with management, Macquarie has not adjusted earnings forecasts for ERM Power. Estimates in earnings per share (EPS) terms stand at 4.9c this year, rising to 31.9c in FY12. This compares to EPS forecasts for RBS Australia of 2.2c and 15.7c respectively. 

Based on these forecasts, Macquarie has a price target on ERM Power of $2.34, while RBS Australia's target stands at $2.25. Over the past year shares in ERM Power have traded in a range of $1.62 to $2.03.

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