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An Infigen Opportunity – (ASX: IFN) Part 1

1Y Price v Relative Index

Key Points

We are recommending Infigen Energy with a BUY rating. Our rating reflects our confidence in the company’s growth strategy and industry outlook. However, there are still concerns regarding the balance sheet risk within the company in which the company has addressed.

Industry Outlook

  • Climate commitments made by the Australian government has signified the potential growth of the renewable energy sector.
  • Renewable energy target of 20% by 2020 was made along with Australia’s intention of going green.
  • Surplus of large-scale generation certificates (LGCs) with the estimated number of LGCs validated to increase in the following years.

Earnings Review

Revenue has increased due to higher electricity prices, LGC prices and higher compensated revenue. Domestic EBITDA increased 67% between FY15 to FY17 to $139 million. EBITDA margins has clearly improved over the years with the 2017 margin at 72%. Due to debt servicing and sustaining capex, no FCF has been generated over the years.

Investment Risk

  • IFN is to refinance the facility through a new Australian dollar Facility. However, refinancing transaction costs of $27m was greater than expected.
  • Balance sheet risk. Net debt has increased with the debt repayment being offset by drawdown of the Bodangora debt facility.

Investment Idea

  • Opportunity to accelerate growth with various upcoming projects. Cherry Tree is also now investment ready with Bodangora construction on track to be operational in 1Q19.
  • Refinancing is positive to building business flexibility as IFN looks to expand its offering to provide green solution to corporate clients.
  • Political support has proven to be beneficial for IFN’s assets with new incentive schemes providing upside to the company’s valuation.

Potential Catalyst

  • Energy policy developments
  • Quarterly revenue reports
  • Monthly production reports

Infigen Company Overview

Infigen owns 557 MW of installed generation capacity operating in New South Wales, South Australia and Western Australia and sells the energy and LGCs through a combination of medium and long term contracts and through the spot market. The company’s development pipeline comprises approximately 1,100 megawatts of wind and solar projects in Australia. Infigen Energy was founded in 2003 and is headquartered in Sydney, Australia.

Assets State Capacity (MW)
Alinta Wind Farm WA 89.1
Bodangora Wind Farm NSW 113.2
Capital Wind Farm NSW 140.7
Capital East Solar Farm NSW 0.1
Lake Bonney 1 Wind Farm SA 80.5
Lake Bonney 2 Wind Farm SA 159.0
Lake Bonney 3 Wind Farm SA 39.0
Woodlawn Wind Farm NSW 48.3
Total 669.9
Under Construction 113.2
Operating Assets 556.7

Projects under development: Bodangora

The Bodangora wind farm development project is located near Wellington, New South Wales. It will have a capacity of 113.2 MW and 33 wind turbines which can generate enough electricity to supply ~49,000 NSW homes a year. Furthermore, it has entered into a power purchase agreement with 60% sold to energy Australia until 31 Dec 2030. Estimated full commercial operation is to be in the second half of 2018

Earnings Review

Overall, the numbers have been strong so far as the company continue to display solid numbers signifying their drive towards growth. The main concerns relating to the financial numbers would be its balance sheet risk in terms of refinancing, which will be discussed later, as well as the LGC outlook.

FY2017 Financial Performance

Revenue has increased due to higher electricity prices, LGC prices and higher compensated revenue. This has however been partially offset by lower production sold due to less favourable marginal loss factors.

2017 EBITDA has increased as compared to 2016 mainly due to larger revenue and non-cash income from fair value revaluation following acquisition of 50% interest in Bodangoara wind farm. Domestic EBITDA increased 67% between FY15 to FY17 to $139 million displaying growth potential in the market. EBITDA margins has clearly improved over the years with the 2017 margin at 72%. Due to debt servicing and sustaining capex, no FCF has been generated over the years. Operations and maintenance cost stability and guaranteed minimum turbine availability is achieved as a result of long-term service and maintenance agreements across the current fleet of operating assets.

1H18 Financial Performance

The numbers for 1H18 has been solid so far with revenue of $118.2m and EBITDA of $88.0m. This surpassed estimates from RBC and JPMorgan. Production actually decreased to 854 GWh (-4%) on the pcp but it is partially offset by improved turbine and network availability.

Revenue Underlying EBITDA Net Profit Costs
$118.2 million $88.0 million $26.7 million Operating – $23.0 million

Corporate – $6.2 million

Development – $1.0 million

Pcp $115.4 million, up 2% pcp $84.0 million, up 5% pcp $21.4 million, up 25% pcp $21.1 million, up 9%

pcp $8.9 million, down 30%

pcp $1.5 million down 33%

Increase in operating cost is primarily due to expansion of internal capability and transition of operation and maintenance across different projects. The large decline in corporate cost is due to prior period’s one-off restructuring expenses.

Infigen Company Analysis

SWOT Analysis

Strengths

Experienced and highly capable management team

The management team in IFN has broad experience in the Australia energy and infrastructure sector. The CEO was also the CEO of Stanwell Corporation, one of Queensland’s largest energy generation companies from 2001 until 2005.

These experiences can really help IFN since it is currently still at the growth/expansion stage where the company will strive to establish its presence within the industry.

Balanced Portfolio

IFN’s current electricity portfolio over the next 5 years consist of an equal mix of plant Power Purchase Agreements (PPAs), combination of wholesale and C&I contracts, and spot market sales.

This has actually allowed IFN to hedge against the various pricing and tenor risk. The 1H18 spot electricity exposure has been reduced from 56% in the previous corresponding period to just 40%. This is essential in the industry due to the rapidly fluctuating market conditions.

Weakness

Balance Sheet Risk

IFN has a large amount of debt within its balance sheet. The D/E ratio in 2017 is 153% which is higher than the industrial average 90.75% for the green and renewable energy sector as calculated by Damodaran.

However, with that being said, the company is currently expanding its facilities which is one of the main reasons for the high debt. Furthermore, as seen from the graph, the amount of debt has gone done considerably over the years showing improvements in the balance sheet. Hence, more time is needed to observe how IFN handles the debt situation to strike a balance between expansion and growth along with its financial risk.

Opportunities

Advanced pipeline of potential development projects

Western Australia New South Wales
Approved Wind Projects ~350 MW Approved Wind Projects ~230 MW
Approved Solar Projects ~45 MW Approved Solar Projects ~60 MW
Total ~395 MW Total ~ 290 MW
South Australia Victoria
Approved Wind Projects ~450 MW Approved Wind Projects ~230 MW
Northern Territory Queensland
Solar Projects (Development approval in progress) ~22 MW Solar Projects (Development Approval in Progress) ~165 MW
Approved Wind Projects ~65 MW
Total ~22 MW Total ~230 MW

As seen from the summary above, there are strong pipeline projects for IFN signifying the growth potential of the company. This is a good opportunity for the company to expand in future years increasing its revenue stream.

Threats

Steep decline in wholesale energy prices

A steep decline is forecasted between 2018-2022 mainly due to the entry of 6,000 MW of renewable capacity which was incentivised by the existing renewable energy target. The market is predicted to become oversupplied between 2021 and 2022.

This would be a threat to IFN’s growth in the next few years with the oversupply that the market would be facing. In terms of the pricing threats, IFN’s balanced portfolio serves as a strong hedge against any changes in price. In the next few years, IFN could possibly look for another market in which they are able to leverage on their core competency.

Industrial Analysis

Porters’ Five Forces

Threat of New Entrants – Low

In the sector, there are high fixed costs involved. This deters new competition as they would be forced to leave due to difficulty of building brand name recognition. In addition, there is a high start-up capital needed for development of power plants or wind farms etc. Due to stricter regulations in the sector, regulatory approval is required which could serve as a deterrance.

Power of Suppliers – Low

The industry is dominated by a handful of firms with significant power over generational companies. The leverage is also reduced due to wide spread of players with each holding small shares.

Power of Buyers – Moderate

Power is treated as a commodity and there tend to be many buyers in the market. However this has led to highly competitive pricing and service with buyers being to switch providers easily. Switching cost is low due to shorter term contracts with certain consumers (especially residential). Hence buyers tend to have a significant leverage.

Threat of Substitutes – Low

As mentioned earlier, power is being treated as a necessity. Hence there are very little substitutes. Furthermore, the demand for power is inelastic. Even though there are alternative ways to generate power, there are not external substitutes to power.

Existing Rivalry – High

Competitive environment where a few large energy producers like AGL energy dominate the market. There are more players rising due to increasing R&D and technological advances.

Industry Outlook

Climate Commitments

Australia will reduce emissions to 26-28% on 2005 levels by 2030. This target represents a 50-52% reduction in emissions per capita and a 64-65% reduction in the emissions intensity of the economy between 2005 and 2030.

26 – 28%

50-52%

64-65%

Australia has also implemented policies to achieve the target emissions. At the core is the $2.55 billion Emissions Reduction Fund and its Safeguard Mechanism which is complemented by energy efficiency improvements and direct support for investment in low emissions technologies and practices.

This bodes well for IFN since the Australian government would be supportive of the sector itself and reliefs would also be provided. Furthermore, in order to meet the target, companies would be incentivised to make the switch towards low emissions technologies and practices increasing sales for IFN.

Renewable Energy Target (RET) Scheme

The renewable energy target is set to operate in two parts – Small-scale Renewable Energy Scheme (SRES) and the Large-scale Renewable Energy Target (LRET).

LRET provides financial incentive for establishment or expansion of renewable energy power stations. This is done through legislating demand for Large-scale Generation Certificates (LGC). The LRET includes legislated annual targets which will require significant investment in new renewable energy generation capacity in coming years. The large-scale targets ramp up until 2020 when the target will be 33,000 gigawatt-hours of renewable electricity generation. SRES creates a financial incentive for households, small businesses and community groups to install small-scale renewable energy systems.

Lowering cost of renewables

Renewable energy costs have plunged by up to 70 per cent since 2009. As seen from the graph, wind and solar are much cheaper as compared to traditional sources of energy. This is due to the fact that its fuel free and faces no regulatory risk in the form of carbon price. In addition, renewable plants can be built within one to three years. This can be compared against coal-fired plants which generally require four to seven years. Traditional sources of energy are simply too expensive and the newer technology has delivered cleaner, more efficient and cheaper ways to directly harvest energy to power our lives.

With renewable energy being at the forefront of the power sector, the industry is just going to get larger with more reliance on it due to greater efficiency.

Infigen Media Release on $605M Syndicated Agreement



Categories: Australian Stocks, Featured

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2 replies

  1. Great article on a relatively undiscovered company!

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