Australia | Feb 27 2014
-Strategic merit in acquisition
-Extra cash flow from placement
-Strong market share, increasing scale
By Eva Brocklehurst
Energy Developments' ((ENE)) interim result was swamped by the announcement of an acquisition, equity raising and a sell-down of the major shareholder's stake. Brokers welcomed the news, finding the acquisition and extra funds will give the company a suite of options for further growth.
Energy Developments announced the acquisition of 21MW of generation assets for $21m from Clarke Energy, with an option to acquire another 36MW for $30m. The company also announced a fully underwritten placement of $50m. Deutsche Bank has taken a conservative approach to the acquisition and assumed a 12-month lease-back period, with earnings commencing from the second half of 2015. The broker thinks there's strategic merit in the acquisition because, although it is earnings dilutive, that is largely from equity and does not take into consideration the increase in cash that will be available to fund further growth. The acquisition has attractive economics and, given the short time frame of the current contract, the company can redeploy these generation assets into the clean energy portfolio after the lease, which then reduces capital costs for future projects.
Deutsche Bank is of the opinion that the current multiples underpinning the stock are fair as, while the acquisition delivers higher returns and allows for the generation assets to be redeployed to the clean energy portfolio, risks still remain from new project execution while there are uncertainties regarding regulatory changes to clean energy schemes and any prolonged decline in green credit pricing. Major shareholder Greenspark will still own 69% of the company, after the sell down from 84%, and this is a significant overhang in the broker's view. There was no mention of any plan for the remaining stake.
On the FNArena database there are four Buy ratings. No Hold, no Sell. The consensus price target is $6.52, signalling 14.5% upside to the last share price. This has risen from $6.28 ahead of the results. The targets range from $6.05 to $6.85.
Credit Suisse suspects the initial 21MW will be deployed at APLNG's CSG fields, because of delays in power linkages caused by a dispute between the contractor, Powerlink, and landowners. In time, this broker also expects the assets will be re-deployed to clean energy. Credit Suisse thinks it is an attractive bolt-on acquisition with both high initial returns and the ability to redeploy the generators elsewhere, both in mines and CSG operations. The broker also highlights the fact that Energy Developments is one of the few operators in the country capable of making the economics work for such a service. Credit Suisse notes upgrades to FY14 and FY15 forecasts are largely driven by stronger offshore contributions, with US earnings increasing materially, albeit off a low base.
Cash flow was soft in the first half but UBS expects this to reverse in the second half, following the green credit inventory realisation. The broker remains mindful that the market will be focused on cash flow in FY14, as opposed to reported profit. As far as the acquisition goes, this provides the opportunity to expand the existing asset base over 3-5 years by about 50%, in the broker's view. The company's strong market share and increasing scale, as well as the improved performance in the US asset base, which can also be expanded, means UBS has upgraded the stock to Buy from Neutral. The broker likes the fact the company has addressed a liquidity problem with the placement and also likes the contractual capacity from the generation assets. The downside for the stock is seen in government policy on carbon mitigation, given renewable energy certificates are a source of revenue for the company.
JP Morgan is not prepared to factor in the acquisition or placement, as yet, but has upgraded dividend estimates for FY14, to 22.6c per share from 11.6c. Management did not pay an interim dividend because of a lack of franking credits but has committed to a fully franked final dividend of at least 22c for FY14. The company has narrowed FY14 earnings guidance to range of $179-185m, with the Australian component scaled back, offset by improved expectations from the US and Europe.
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