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Infigen Energy earnings questioned on renewables outlook

Infigen Energy earnings questioned on renewables outlook

Firming evidence of a looming dive in prices for renewable energy certificates and the softening market for wholesale electricity have started to weigh more seriously on wind power producer Infigen Energy, with some in the market forecasting a sharp drop in longer-term earnings.

Shares in Infigen sank as much as 6.5 per cent on Tuesday after Morgans slashed its target price by 44 per cent to 35¢, citing "deteriorating forward fundamentals". The stock recovered to close down 1¢ at 61¢, a four-month low.

The shares have sunk 25 per cent in the past year amid concerns about future prices for large-scale generation certificates (LGCs), which help underpin earnings for Infigen, the former Babcock & Brown Wind Partners.

Infigen has been targeting more direct sales contracts with industrial customers to reduce exposure to spot prices for "black" power and LGCs.

But Morgans analyst Nathan Lead noted that about one-third of Infigen's generation is sold into the National Electricity Market at spot prices, while its exposure to spot LGC prices is due to rise to 78 per cent in 2021-22, from 23 per cent this year.

He noted that forward electricity prices in the NSW and South Australian regions relevant to Infigen have turned southwards. At the same time, spot prices for LGCs, currently about $80, now look set to drop to about $20 by 2020-21, several years earlier than previously assumed.

In February, the forward market for LGCs showed prices falling to $40-$55 in 2020.

Morgans estimates Infigen's earnings before interest, tax, depreciation and amortisation will fall by more than $50 million by 2022, to $85 million, from an expected $139 million in 2016-17.

Infigen finance director Sylvia Wiggins disputed Mr Lead's calculations, saying he had not taken into account the future value of "NEG units" under the National Energy Guarantee that would effectively replace LGCs, or the continuing need to surrender more LGCs through to 2030 even after the 2020 target was met.

"I don't accept his model and his bearishness," she said.

Still, Watermark Funds Management's Tom Richardson described declining LGC prices as "a big issue" for Infigen.

The unexpected acquisition by Brookfield of a 9 per cent stake in Infigen in April is also expected to provide support for the stock. Infigen chairman Len Gill said then that Brookfield, which bought in at about 58.5¢ a share, had stated it has "no current intention" of making a takeover offer for Infigen. But investors aren't ruling out some corporate activity given the infrastructure giant's active track record in M&A.

"That makes it tough to short," one investor said.

The replacement value of Infigen's wind farms also points to a higher value for the stock, said Hayberry Global Fund's Matthew Blumberg.

Mr Blumberg noted Infigen is trading at an implied value of less than $2 million per megawatt of installed capacity, compared to about $2.5 million per megawatt for the $280 million Granville Harbour wind farm in Tasmania being developed by Palisade Investment Partners.

"I imagine if Infigen took their assets to the market there would be interest at higher see-through values, and at the same time there would be some businesses that would see Infigen's generation fleet as complementary to their businesses," he said.

"As much as the outlook looks negative, the value is there, particularly in a constantly evolving energy environment."

Infigen, whose largest shareholder is UK-based The Childrens Investment Fund, last week reported a 36 per cent jump in electricity production for the fourth quarter, helping drive a 4 per cent rise in full-year generation.

Fourth-quarter revenues also leapt higher, up 35 per cent to $43.4 million, driving full-year sales up by 7 per cent. Infigen is due to release full-year earnings on August 27.

Morgan's 12-month target price for Infigen's shares is less than half of JPMorgan's at 71¢ and Macquarie's at 78¢, although those date from March and April, respectively.

Australian Financial Review

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