The fixed income issue was priced on an 8 per cent coupon with maturity extending out to 2019 in order to enable the company to refinance its existing debt at an attractive rate. Chief executive and managing director Anil Chalamalasetty rightly points out that “the quality of our operational assets has enabled the company to access the larger debt markets at better costs, allowing us further scope as well to project finance our clean energy assets.” It augurs well for the future because “as Greenko builds on its predictable and phased roll outs, we are able to enhance our business and financial efficiencies across all forms.”
It’s worth flagging up too that equity investors have noted the significance of the mega bond issue. In fact, having oscillated in a tight trading range between 161p to 175p for the past seven weeks, Greenko’s share price burst out through the top of the range on news of the successful fundraise yesterday. From my lens at least, and having seen the share price pull back from a multi-year high of 193p in mid-February to test its 200-day moving average in May, this looks very much like a successful test.
As I have pointed out many times in the past, in bull markets the best time to buy is on a pull back to the long-term trend line. That’s one reason why I remained positive on the shares when I last updated the investment case when the price was 162p (‘Powering up’, 16 June 2014).
From a technical perspective, there is nothing to stop Greenko’s share price from running up to that February high, and beyond towards my own target price range of between 225p and 230p. If that target is achieved the company’s equity would be priced on the equivalent of seven times cash profit estimates to Greenko’s enterprise value for the financial year to March 2016. And I am not being too aggressive with my target price either; analysts at broking house Investec have a 275p target price and Arden Partner’s have a fair value of 245p a share, or 36 per cent above the current share price.
Strong macroeconomic and industry drivers
The fundamental case to invest is highly supportive too. Greenko’s capacity has more than doubled to 661MW since April last year, of which wind power accounts for over half. The pipeline is equally robust: around 423 MW of projects are under construction and 1,240 MW are in active development as Greenko creates a diversified hydropower and wind portfolio for India's high demand power market, supported by a reliable roll-out of high yield assets. The target is to achieve 1,000MW of operating capacity by next year, and to double capacity to 2,000MW by 2018.
The political back drop is equally encouraging. In fact, clean energy is becoming an increasingly important part of the Indian energy market and will provide a significant portion of the Indian Government's 12th Plan target for new capacity. The emphasis in the Indian energy market is changing too and is more focused on price discovery using reliable supply contracts, instead of unsustainable subsidised power. Furthermore, following the newly elected Prime Minister's statement to strive to deliver “24/7 power availability in the country”, renewable energy is being seen as a key political priority.
So, with capacity being ramped up, and demand strong, it’s hardly a surprise that Greenko’s profits are surging.
Attractive growth rates
In the financial year to end March 2014, Greenko still managed to grow revenues by 38 per cent to €53m (£42m) and increase operating profit by almost 40 per cent to €27.5m. After finance costs, pre-tax profits shot up two thirds to €13.5m to lift adjusted EPS up by over a half to 4.5 cents.
Analyst Adam Forsyth at broking house Arden Partners is forecasting a further ramp up in revenues and profits for the financial year to March 2015, reflecting another sharp increase in capacity. He predicts turnover will surge from €53m to €96m which in turn will more than double Greenko’s operating profit to €63m. On this basis, expect pre-tax profit of €35.2m and EPS of 13 cents, or 10.4p a share. This means that Greenko’s shares are trading on around 17 times forward earnings. But that multiple is set to drop sharply as revenues start to flow through from Greenko’s pipeline of new capacity across a number of wind and hydro projects in India.
For the financial year to end March 2016, analysts are predicting turnover of between €146m to €178m and operating profits well above €100m. On this basis, expect pre-tax profits of between €50m to €55m and EPS as high as 18.5¢, or 14.5p. This implies the shares are priced on 12.5 times earnings estimates for fiscal 2016, a modest rating for a company set to quadruple EPS over the next two financial years.
Importantly, bond investors clearly believe in these revenue and profit forecasts, otherwise they would not have been prepared to refinance the company on the terms agreed. In time I expect equity investors to fall in line too as there is no way the shares should be trading on only 12.5 times earnings estimates. In fact, a growth company like Greenko should be able to achieve a multiple of at least 7 times cash profits to enterprice value (market value plus debt). So on the basis that Investec expect Greenko to generate cash profits of €143m in the financial year to March 2016, and after factoring in net debt of €551m, I arrive at my own target price range of between 225p to 230p.
Needless to say, having first advised buying the shares when the price was 134p (‘Buy signal flashing green’, 18 March 2013), I firmly believe that Greenko’s shares are well worth buying on a bid-offer spread of 178p to 180p.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
