Australia | Jul 07 2008
By Chris Shaw
Having long been considered a possible takeover target renewable energy group Energy Developments ((ENE)) may have initiated the process by declaring it would commence a strategic review that may result in some or all of the company being sold off.
As Citi notes the review will call for expressions of interest in the business, while also examining alternatives for new operating strategies that could enhance the group’s value. But in the view of Macquarie while this means the “For Sale” sign has effectively gone up the timing of the review is poor, as the cost of capital for the company is currently high and this means any price for the group is unlikely to surprise on the upside from current valuation levels.
The group’s largest shareholder is Infratil of New Zealand with a 30% stake and while Infratil has agreed to not sell its holding prior to August 18th Citi sees it as a likely seller in due course. Potential buyers according to Macquarie include those companies interested in the fact the group is one of Australia’s largest green credit generators.
While the potential of a takeover means the stock may trade higher in the short-term the broker suggests it is fundamentally overvalued at present levels, especially as the FY08 result is unlikely to be an impressive one. On Macquarie’s numbers the company will return EBITDA (earnings before interest, tax, depreciation and amortisation) of around $95 million, which is towards the lower end of management’s guidance range.
In earnings per share (EPS) terms this would equate to around 11.9c, rising to 15.4c in FY09 and 19.8c in FY10 but here the broker is relatively conservative compared to others in the market such as Cit at 12.1c, 17c and 21c respectively, while ABN Amro is at 14c this year, 15.8c in FY09 and 16.7c in FY10.
For Macquarie the fact the stock is in play is not enough to see it shift from its Underperform rating, but ABN Amro has upgraded to Buy from Hold on the expectation the stock will trade closer to its asset value as the review draws closer to its conclusion.
This implies a valuation based price target of $3.27, up from the broker’s previous target of $2.98. By way of comparison Citi has a price target of $2.75 and Macquarie is at $2.15, which is far and away the lowest in the FNArena database. The average price target is $3.04.
Citi points out future pricing levels for carbon credits have a major impact on the group’s valuation, as if a long-term price of $15 per certificate was achieved compared to the $8 per certificate in the broker’s model it would lift its valuation to $3.65.
Overall the FNArena database shows two Buys, three Holds and Macquarie’s Underperform. The stock’s price over the past 12 months has ranged between $1.60 to $4.61 and as at 11.05am today it was down 1c at $2.59.