In fact, shares in Greenko surged over 20 per cent to end the day at 140p, and on massive turnover, with almost 600,000 shares traded in 185 bargains. In so doing, they have given a major buy signal in my view having completed a multi-month base formation that started in December 2011 after the company's share price found a floor at the 100p level. In fact, having tested the 100p level on no fewer than three separate occasions in the past 15 months, the base is clearly complete and a share price break-out above the previous high of 143p from October 2012 looks firmly on the cards. So not only is the technical situation very positive, but the heavy buying on Friday looks well founded, too.
New funds to accelerate development of projects
That's because the new funds will enable Greenko to ramp up the construction of its substantial power portfolio and take advantage of the attractive power opportunities in India. In fact, Greenko has just announced that it has added six new run-of-river hydro projects totalling 425 megawatts (MW) to its active development pipeline. Two projects are added to the existing hydro cluster in Himachal Pradesh and a further four projects are being added to form a new regional cluster in Arunachal Pradesh, with site work expected to start at both locations in late 2013. With this financing, Greenko is now targeting approximately 2,000 MW of operating capacity in 2018, double the target for 2015.
Greenko's existing hydro portfolio consists of three clusters, in Himachal Pradesh, Sikkim and Karnataka. The Himachal cluster contains 11 operational run-of-river hydro projects totalling 71 MW and two projects, totalling 33.6 MW, are under construction. In Sikkim, Greenko has a 96 MW project under construction, while the Karnataka cluster contains five operational run-of-river hydro projects totalling 94.25 MW and three projects, totalling 58 MW, that are under construction.
It's worth noting that Greenko's existing northern hydro projects have performed strongly, thanks to excellent hydrology, and these new projects provide a great opportunity to improve portfolio returns since they can connect directly to the high-voltage transmission network and deliver premium priced peaking power. The new projects are expected to have Plant Load Factor for net sellable energy above 50 per cent and deliver a bumper return on investment.
Highly profitable business
Clean energy projects are clearly a very profitable line of business because, in the half year to the end of September, Greenko reported a 28 per cent rise in underlying revenues (adjusted for currency movements) to €25.4m and made an adjusted cash profit of €17.7m, or a cash profit margin of 70 per cent. On an operating profit basis, this translated to half-year profits of €12.8m which, if annualised, equate to over €25m. To put that into perspective, Greenko had equity shareholder funds of €205m excluding €42m of non-controlling interests at the end of September last year, so this is not just a profitable company, but one that is enjoying high returns on capital employed. It also means that Greenko can easily service net borrowings of €184m on these projects. Balance sheet gearing is around 74 per cent.
In my view, it is both the profitability of utility scale wind farms and Himalayan run-of-river hydro projects and the growing demand for energy in India which will have appealed to GIC, a long-established investor in the infrastructure sector. The sovereign wealth fund was clearly taken by the investment case because the £100m invested converts on a one-for-one basis into ordinary shares in Greenko at a price of 260p per share subject to final adjustment between 1 July 2015 and 30 June 2017. That means the issue of 38.26m shares, or the equivalent of 19.5 per cent of Greenko's enlarged share capital on a fully diluted basis. In other words, for GIC to make money on its investment Greenko's share price would have to rise by over 85 per cent from the current level of 140p. The proposed investment is conditional on Greenko's shareholders approving certain resolutions at an EGM on 4 April 2013 but, given the price the board have extracted on this deal, we can take it as given that they will sanction this massive investment.
Trading strategy
Following Greenko's sharp share price rise on Friday 15 March, the company is now capitalised at £210m - a modest premium to book value. But with the financial firepower of GIC behind it, and the conversion of the new investment into equity at more than double the company’s current book value of 118p, it doesn't take a genius to work out that as the new projects come on stream and start generating profits, there will be a significant uplift in Greenko's book value. In fact, even without factoring in the uplift in net assets from investment gains on new projects, when the £100m investment by GIC is converted into equity this would at a stroke lift Greenko’s own book value to 147p a share. So, in effect, the current share price is a new base for investors since it is in effect fully asset backed.
And, following this transformational deal, I can see investors warming to Greenko’s investment case once they work out the potential upside for the company which, from my lens, could easily see the company's share price rally back to between 200p and 210p in the coming months. This was the major support level that gave way 18 months ago. Needless to say, I rate Greenko’s shares, on a bid-offer spread of 134p to 138.5p, a strong buy and have an end-June target price of 200p.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of this year I have written 48 online articles, all of which are available on my homepage. These include articles on the following companies this week:
Communisis, Polo Resources, Randall & Quilter, Terrace Hill, Fairpoint (Bumper small cap gains, 18 March 2013)
Sanderson ('Jumping the gun: take three', 14 March 2013)
Spark Ventures ('Spark a re-rating', 13 March 2013)
Netplay TV ('Another roll of the dice', 12 March 2013)
Global Energy Development ('Patiently waiting', 12 March 2013)
US equity market trade ('Profit from St Patrick's day', 11 March 2013)
