Contour extends its power portfolio

ContourGlobal’s (GLO) half-year net earnings halved from H2 2020, a consequence of increased financing costs and a reduction in foreign exchange translation gains. On an adjusted basis, the power generator saw cash profit increase by 15 per cent to $406m (£292m), driven by acquisitions, stronger operational performance in renewables, and favourable exchange rate shifts. Adjustments exclude expenses related to acquisitions and gains or losses from farm-down transactions.

Unlike many companies, ContourGlobal faced ‘no material financial impact’ from Covid-19 because it doesn’t distribute power and operates under fixed price contracts, thus protecting its revenues from price volatility. The FTSE 250 constituent owns 115 power plants around the world with 48 per cent in Europe, 30 per cent in Latin America and the rest spread between Africa and North America.

Its portfolio is made up of 39 per cent renewable energy sources and 61 per cent fossil fuels (including 17 per cent high efficiency co-generation). Of total revenue, 77 per cent was generated from fossil fuels, with the remainder attributable to renewable energy sources, representing a substantial increase in fossil fuel revenue from last year. Nevertheless, chief executive Joseph Brandt believes there is huge potential in its renewable portfolio, describing its value as “close to GLO’s entire market capitalisation” and added that the company is “actively evaluating transactions to realise this value and close the discrepancy between our stock price and our underlying value.”

The power group made several acquisitions during the period under review, including power plants located in the US and Trinidad and Tobago as well as a solar portfolio in Italy, which it hopes will follow the success of the Western Generation acquisition which added $32.2m to adjusted cash profits in the first half of this year.

Net cash generated from operations rose from $371m to $401m. And management will hand shareholders a dividend of 4.465¢ per share for the June quarter, continuing the commitment to increase the dividend by 10 per cent year on year. It sounds very much like a bond proxy and you could be forgiven for making that comparison given the troubling debt overhang, though you imagine there is an element of "sunk costs" in all of this. The company has increased its full-year guidance to $780-810m of adjusted cash profits. This would be a substantial rise from $722 in 2020, but with $607m in borrowings repayable within one year, the group may need to extend the terms of the debt, or perhaps raise further capital, although that is set against long-term, contracted revenues. Buy.

Last IC view: Buy, 202p, 10 Aug 2020