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OPINION

Green light for Greenko

Green light for Greenko
October 29, 2014
Green light for Greenko
IC TIP: Buy at 139p

The Aim-traded shares in the company have been sold down from around 180p at the end of last month which means you can buy almost 30 per cent more shares for your money now. In fact, the price has retreated to little over where I suggested buying when I initiated coverage at 134p (‘Buy signal flashing green’, 18 March 2013).

This is despite the fact that in the past few months the company has refinanced its existing debt facilities by issuing a US$550m (£341m) bond on the Singapore Stock Exchange priced on an 8 per cent coupon and maturing in 2019. The company has also just secured a US$125m (£78m) commitment for the next six years from EIG Global Energy Partners, a company that has $16.4bn invested in the energy sector across more than 290 projects. This replaces a $70m facility with Standard Chartered facility which was due to expire in January.

The company will pay a cash coupon of 5 per cent on the new credit line and a payment-in-kind (PIK) coupon of 6 per cent which is payable at maturity. EIG has the option of converting the PIK coupon into Greenko shares at 240p each, or 69 per cent above the current share price. The funding structure is favourable for Greenko as it means that more of its capital can be invested in rolling out its portfolio of highly profitable and cash generative clean energy assets. Interestingly, this is the first investment that EIG has made in the Indian energy industry, highlighting the quality of the assets and investment case for Greenko, in particular.

A pre-close trading statement from the company ahead of the release of interim results in early December has confirmed as much. In the six months to end September, Greenko’s power generation soared by almost 90 per cent to 1,225GWh on the same period in 2013. And with a better generation mix - hydro and wind each accounted for around 43 per cent of the total - this helped drive first-half revenues up 120 per cent to around €52m (£41m) and cash profits up 130 per cent to €38m (£30m). Reflecting the seasonality of earnings, analyst Adam Forsyth at brokerage Arden Partners predicts that revenues for the 12 months to end March 2015 will surge over 80 per cent from €53m last fiscal year to €95.9m to drive pre-tax profits up 170 per cent to almost €40m. On this basis, expect adjusted EPS to more than treble to 13.9c, or 11p at current exchange rates. This means that the shares are rated on less than 13 times earnings estimates.

 

Powering on up

But that only tells part of the story because Greenko has also confirmed that with all its projects currently under construction fully financed, its operational portfolio is set to exceed 1,000 MW next year, up sharply from 697MW at the end of September. Six hydro projects under construction will add 188MW of generating capacity, of which around half will come from the Dikshu project in Sikkim. That plant is scheduled to enter commercial operations at the start of the 2015 generation season. The other five projects are slated to become operational between late 2015 and early 2016.

Greenko is also powering up its wind farms and added 136MW of installed capacity in the latest six month trading period. The company has three new projects at advanced stages of construction and these have a total capacity of 338MW.

In other words, there is clear visibility in the construction pipeline for investors to be confident that Greenko's 1,000 MW total capacity target will be hit next year. Importantly, the energy back drop is favourable for renewable energy in India as conventional power assets struggle to supply power to the grid due to fuel supply and off-take price issues. It’s worth flagging up that Greenko has a cost advantage and is supplying power below the price of conventional generation in many states of India.

So with the roll-out on track, expect another step change in the company’s earnings in the financial year to March 2016. Based on estimates in the market, analysts are predicting Greenko’s turnover will surge to between €146m and €189m in that 12-month period. If achieved this will to lift operating profits to between €100m and $118m. Taking a conservative approach and using the lowest estimates, this still means that we can expect pre-tax profits of around €58m and EPS 21.6¢, or 17p. On this basis, the shares are currently being priced on 8 times earnings estimates for fiscal 2016, a very modest valuation for a company growing so quickly and one that is fully funded.

 

Technical set up

The strong fundamentals aside, there are sound technical reasons to believe that Greenko shares are overdue a recovery, and one that the forthcoming interim results are likely to prompt. For starters, Greenko's daily candlestick chart is informative as buyers moved in and pushed the price up from the intraday lows around 130p on both Thursday, 16 October and Thursday, 23 October. This created long tails on the chart, highlighting that a bottom could be in place. Secondly, the 14-day relative strength indicator (RSI) is heavily oversold and currently has a reading of 30. It will not take that much good news flow to spark a sharp rally from such oversold conditions.

Thirdly, the moving average convergence divergence (MACD) momentum oscillator appears to be bottoming out. Although still below its signal line, there could be a potential cross over in the offing. And finally, having traded in a tight price range between 130p and 140p since this month's sharp sell-off ended, the point and figure chart (2 point) will signal a triple top break-out on a close of 142p or above.

In my view with the technical set-up favourable, and the fundamental case unchanged since I last updated my view in the summer ('Bond investors warm to Greenko, 5 August 2014), a move in the price above the 140p level is worth following. Trading on a bid-offer spread of 136p to 139p, and on less than half Invesco and Arden Partners target prices of 310p and 300p, respectively, I rate Greenko shares a strong buy and have a conservative target price of between 225p and 230p. Buy.

Please note that I have written 22 other columns in the past fortnight including two today, all of which are available on my IC homepage...

■ Simon Thompson's 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 stockpicking'