Infigen Energy owns and operates renewable energy generation assets, primarily windfarms, in Australia. Ord Minnett’s previous view on the stock was underpinned by a negative outlook for the company’s three traditional revenue streams: 1) merchant power sales would come under pressure as more generation capacity rolls out; 2) revenue from green certificates would come down as the renewable energy target (RET) is reached; and 3) power purchase agreement (PPA) prices are now so low that Infigen is unlikely to sign further contracts.
These factors have not changed, but the share price has derated to such an extent that we estimate it would now be at least 10% cheaper to buy Infigen than to build new windfarms. With valuation now looking significantly more interesting, we have upgraded our recommendation on Infigen to Buy from Hold.
- Share price derating – Since October 2017 Infigen’s share price has declined about 20% (as at early April), compared to the S&P/ASX 200 which has risen 3%. We believe the derating has been driven by: 1) declining wholesale electricity prices; 2) an acceleration in the building of renewable capacity and the implications on large-scale generation certificate prices; and 3) the change in the company’s corporate strategy to that of a commercial and industrial retailer.
- Valuation – We estimate the current share price is implying a valuation of $1,847 per kilowatt (kW), down from its two-year peak of $2,714/kW and close to the low point of $1,837/kW. Importantly, this is well below the cost of building new capacity. Our target price has decreased to $0.71 from $0.73 in line with our discounted cash flow valuation, which has reduced by 3% and implies about $2,150/kW of capacity, leading us to lower our target price to $0.71 from $0.73 based on an 8% post-tax weighted average cost of capital.
- Balance sheet – The announcement last month that Infigen would refinance its debt facility does not necessarily mean the introduction of dividends or other means of capital returns, in our view. The transition of the company to an electricity retailer has changed the risk profile of its cash flows and, therefore, we believe management’s initial priority will be to degear the balance sheet.