Small Caps | Mar 18 2019
Infigen Energy continues to focus on several renewable energy channels, pursuing growth amid volatility in the electricity market.
-Expected to aggressively pursue growth in firming capacity
-Stock price implies value below replacement cost of generation assets
-Capital management opportunities exist
By Eva Brocklehurst
Visibility of earnings for Infigen Energy ((IFN)) is improving, with a large portion of FY19 production under contract. The company, which is a developer and operator of wind and solar assets across Australia, expects growth of 14% in production in FY19, as Bodangora wind farm in NSW comes on line.
The company continues to focus on several channels amidst the volatility in the electricity market. Most recent developments are the Lake Bonney battery and Cherry Tree wind farm in South Australia. Guidance for average pricing of $125-130/megawatt-hour was provided at the first half results, around -6% below the FY18 price guidance, while realised pricing in the first half was down -5%.
Canaccord Genuity expects the company to aggressively pursue growth in firming capacity – the maintenance of committed levels of power output from renewable power plants – and apply a capital-light strategy to traditional renewable developments. This should also lead to less earnings volatility.
The company is heavily contracted over the medium term, the broker notes, which excludes any potential uplift from the ramp-up of Sydney Water's desalination plant. Energy policy continues to remain an uncertainty at a federal level, although the broker suggests a win by the Australian Labor Party should benefit the sector.
South Australian electricity futures appear robust and Canaccord Genuity's forecast is slightly ahead of the company's pricing guidance, at $131/megawatt-hour. Canaccord Genuity retains a Buy rating and $0.88 target, noting the stock trades at a discount to book value, as well as replacement costs.
Ord Minnett also has a Buy rating and $0.80 target, agreeing that the stock price implies a value that is less than the replacement cost of the generation assets. The highlight of the recent results was the strong growth in commercial and industrial (C&I) retailing.
The broker continues to take a conservative view of that side of the business, assuming no growth and lower margins. Ord Minnett estimates the C&I retailing business contributed $20m in revenue and a 50% gross margin in the first half, which shows the company's strategy has had some success.
Despite macro headwinds, the broker is largely positive about valuation, estimating the stock is implying a valuation of $1450/kilowatt installed capacity versus the capital expenditure required to build new wind farms of $2000/kilowatt.
Capital management opportunities exist post debt re-financing, Macquarie observes. The company will consider a distribution with the FY19 results and the broker expects a small pay-out, although acknowledges a buyback may emerge.
The amount of distribution will be subject to the company's capital intentions going forward, as well as the wholesale pricing environment. Macquarie believes Infigen Energy has performed strongly on costs and there is valuation support, retaining an Outperform rating and $0.78 target.
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