Wind Farm Economics

Infigen Energy is a developer, owner and operator of wind and solar energy assets. The stock has derated materially over the past two years, with the share price falling 57% versus the S&P/ASX 200 rising 5%, driven mainly by lower green certificate prices.

 

The current share price implies a total enterprise value of $950m, including $531m in net debt. The company owns 690 megawatts (MW) of wind farm generation assets, which implies a value of $1,421 per kilowatt (kW) of capacity. This is at least 30% below the cost to new build new plants – 90% of wind farms built over the past two decades have cost more than $2,000/kW.

 

Our recent analysis of the economics of a new wind farm showed that a plant built for a cost of $2,000/kW with a $55 per megawatt hour (MWh) offtake would generate an equity return of about 11%. It makes sense to us that an acquirer of Infigen would generate a greater equity return given it would cost less than building a new plant.

 

Further, we estimate that if an infrastructure company acquired Infigen at a 30% premium to the current stock price, and signed $55/MWh offtake for all uncontracted generation for the next 15 years, it would result in an unleveraged internal rate of return of 7%. At a gearing ratio of 80%, this would result in an equity return of 21%. We also note there is substantially less risk in this strategy than in building new plants, given that debt would be paid off within seven to eight years versus 15 years in the case of building a new plant. Additionally, we estimate significantly less sensitivity to long-run merchant power prices.

 

We maintain our Buy recommendation on Infigen with a target price of $0.80.

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