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An Infigen Opportunity – (ASX: IFN) Part 2

For Part 1 of Nicklaus Loong’s article on Infigen:  click here

Infigen’s opportunity to accelerate growth

As shown in the previous article, IFN has a strong pipeline of projects totalling approximately 1,620 MW. One of its projects, Cherry Tree, is also now investment ready with IFN assessing the various opportunities for PPA operations under the Victorian reverse auctions. Due to its large debt, IFN is considering an offtake solution or to attract an investor with lower cost of capital. Furthermore, the Bodangora project remains positive as construction remains on track for operations beginning in 1Q19.

With more upcoming projects, IFN is currently growing rapidly and shows strong growth potential in the market. A long-term view is essential in terms of investing in IFN.

Refinancing plans

IFN has announced that it has implemented their refinancing plans which was previously announced. It is part of the five-year plan to continue its growth in the energy market. The company has a troubled past where it was struggling under a huge debt burden. Furthermore, compliance with the covenants proved to be a hassle. The cash sweep present has also prevented the company from distributing any dividends to investors since excess cash flow would be used to repay the debt.

The company now is no longer dependent of joint ventures to move forward with its pipeline of development projects. This provides the company with the needed flexibility to thrive in the industry.

Facilities Term Loan A $160 million
Term Loan B $365 million
Working Capital Facility $20 million
LC & Bank Guarantee Facility $60 million
Lenders Term Loans A & B Goldman Sachs Group as initial lender
Working Capital and LC/BG Commonwealth Bank of Australia

West Pac Banking Corporation

Goldman Sachs Group

Amortisation
  • $160 million, sculpted over 5 years (Term Loan A)
  • Additional amortisation may be payable on and from 30 June 2021 based upon a leverage ratio test

From the refinancing plans, it is obvious that the company is moving forward by increasing its options, supporting growth and attracting investors through sustainable dividends. The refinancing plans helps to build flexibility going forward which is essential is the industry. However, the disappointing factor is the high transaction cost of $27 million which is slightly above expectations.

Development of the National Energy Guarantee

The guarantee will require retailers to contract with or directly invest in generation, storage or

demand response so that there is a minimum amount of dispatchable energy available to meet consumer and system needs and the average emissions level of the electricity they sell to consumers is in line with Australia’s international commitments. The guarantee could lead to more electricity supply putting downward pressure on prices. This would lead to a reduction in residential bills in the order of $100-115 per annum over the 2020-2030 period. Preliminary analysis suggests that the power mix would include around 28-36% renewables.

Even though electricity prices may decline, the policy would lead to greater price stability which is beneficial to IFN. Furthermore, with the policy encouraging a greater weightage of renewable energy inside the power mix, IFN would be able gain governmental support as it attempts to grow its presence in the market.

Investment Risk

Balance Sheet Risk

As mentioned in the earlier articles, IFN suffers from a balance sheet risk due to its high D/E ratio. During the period, net debt actually went up by 39.9 million. This was due to the drawdown of the Bodangora debt facility and the net effect was reduced by debt repayment of 41.1 million of the Global Facility and $3.3 million of the Woodlawn facility. Even though the reduction in net debt is positive, it was still lesser than what was expected.

Oversupply of LGC

In response to the oversupply of LGCs by 2020, forward contract prices of LGCs have actually fallen as shown in the graph above. However, throughout 2017, there is still a premium of about 15% charged by retailers for 2020 LGCs as compared to forward contract prices.

IFN faces this risk of a fall in LGC prices as overbuilding is highly possible given the current market conditions. Furthermore, the LGC supply will only continue to grow as the new renewable generation enters the market. Nonetheless, IFN has applied certain precautions such as maintaining a balanced portfolio and entering into long term renewable energy PPA.

 

Financial Forecasts

Picture 7

Equity Valuation

Base Case Valuation

According to a DCF done by RBC, the valuation for IFN is $0.83 per share. This is derived from a free cash flow to equity DCF methodology forecasting free cash flow to 2031. RBC applied a 9.5% cost of equity and a 9.0x EV/EBITDA terminal value to reach the valuation. The price target of 85cps is set with reference to the DCF and, given the implied all-in return, justifies our Outperform rating. Our base-case DCF assumes that the Large-scale Renewable Energy Target (LRET) is not extended beyond 2030. The basis of our base-case DCF is long-run marginal cost (LRMC) estimates for electricity and LGCs from FY21. Our base-case valuation conservatively does not incorporate any potential upside from a more favourable carbon policy evolving in Australia over time.

Upside Scenario

The upside scenario based on a DCF done by RBC is $1.50. This is based on:

+10/MWh wholesale electricity price assumptions including LRMC estimates

High carbon price assumption ($75/t)

+1% increase in long-term capacity factors

Downside Scenario

The downside scenario based on a DCF done by RBC is $0.40. This is based on:

-$10/MWh wholesale electricity price assumptions including LRMC estimates

LRET is not extended beyond 2030 and prices -$10/LGC

-1% decrease in long-term capacity factors

+1% interest costs

No valuation for growth options

Comparable Valuation

On top of the DCF valuation done by RBC, we have also done a comparable valuation.

Picture 9

Based on the comparable approach, the average price per share is approximately 1.05.

The companies are mainly chosen based on the following criteria:

  • Key Business Drivers
  • Financial Metrics (Rev etc)
  • Industry Classification
  • Geography
  • Similar Risk
  • Growth Potential

The multiples used are mainly involving enterprise value due to the nature of the industry. Companies in the renewables energy sector tend to have a high leverage and their capital structure varies across companies. Hence, it would not be appropriate to use P/E ratio in the valuation.

Evaluation

Picture 5

As seen from the football field analysis, the average price is approximately 1.32. This is much higher as compared to the current price of IFN. Going by the valuations done, we could say that the IFN is being undervalued now.

The precedent transactions tend to have a larger valuation as compared to the multiples approach and DCF. This is to be expected as a control premium is included inside the valuation amount for precedent transactions. Without the valuation by precedent transactions, the estimated share price would fall to 1.02.

Valuation through the precedent transactions method would still play a part for IFN, given that Brookfield has just acquired a 9% stake in IFN.



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