WA Industrials: Remote Power

Transcription

1 WA Industrials: Remote Power Pacific Energy Ltd PACIFIC ENERGY LTD Guidance of $29-30m EBITDA in FY13 plus growth in FY14 Pacific Energy Limited ( PEA, Company ) reported FY12 normalised NPAT of $11.1m (better than forecast of $9.7m). EBITDA was $21.5m (we had expected ~$22m). No dividend was declared (none expected). The normalisation of NPAT adds back contract amortisation and the very high tax charge (effective rate of 86%). The one-off increase to the tax charge was due to a retrospective change to tax legislation changing the tax treatment of the contract amortisation and will bring forward the timing that PEA will need to pay tax in December 2012 (and therefore dividends are possible in late FY13). The Company delivered operating cash flow of $27.1m, roughly evenly split between 1H/2H. Capex was $25.5m in 2H, up from $8.2m in 1H slightly above our expectations but included the purchase of a new workshop site ($5.7m). Net debt at end June was $21.6m, as expected. 190MW contracted FY13, 245MW FY MW tender book The company expect record earnings in both FY13 & FY14. explicitly, PEA expects FY13 EBITA of $29-30m. More The Company had an average of ~155MW of spinning generators in FY12 and has ~190MW contracted for FY13 and has 244MW contracted for FY14. In addition, the Company has 200MW tendered and indicative tenders outstanding. We expect FY12 EBITDA of $29.7m and FY14 of $41.6m. Retain Buy. On our estimates, PEA trades at FY13 p/e of 14.1x and EV/EBITA 9.7x which is still attractive given the visible growth into FY14 and the high margin and long term contract nature of the business. The Company has delivered its group-wide 250MW target and our forecasts assume ~335MW is won FY14 but incoming generating in FY15 and modest growth thereafter of 5% pa for five years then no growth into perpetuity. Consequently, we believe the risk of the Company not delivering our medium term forecasts is relatively low, and the actual earnings could be higher in the near term. We have a twelve month price target of $0.61, which assumes the stock will trade on FY14 p/e of 13.1x and EV/EBITA of 9.3x Fig. 1: Hartley earnings estimates Source: Hartleys Research Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 6 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 SUMMARY MODEL Pacific Energy Ltd (PEA) Company Information Profit & Loss ($m) 6/11A 6/12A 6/13E 6/14E Date 24 Aug 2012 Level 9, 37 St Georges Terrace KPS MW capacity (end) Share Price $0.500 Perth, WA, 6000 KPS MW installed (avg) Week High-Low $ $0.33 Ph: KPS Revenue Market Cap ($m) $177.8 Fax: Other Revenue Enterprise Val ($m) $ Group Revenue Ordinary Shares growth 126.7% 19.1% 36.3% 31.5% Fully Diluted Shares COGS ex Deprec. & Amortis Gross Profit Valuation margin 90.2% 91.9% 92.0% 92.0% Spot DCF (WACC 10.8%, Terminal growth 0.00%) $0.58 Head Office Costs EBITDA - Group mth fwd DCF (WACC 10.8%, Terminal growth 0.00%) $0.63 growth 164.2% 20.7% 38.5% 40.0% 12mth forward P/E (diluted) of 14x (Premium Micro Cap Comps) $0.69 EBITDA / Sales 66.3% 67.3% 68.3% 72.7% 1x nta $0.18 Depreciation mth fwd Div Yield of 3.6% (Gross up yield=bankbill +150bp) $0.61 EBITA Months Price Target (wgted avg above 4 avg) $0.61 EBITA / Sales 47.3% 49.5% 47.2% 50.6% Fully diluted P / E (6/13E) at price target 17.1x Cash Net Interest Fully diluted P / E (6/14E) at price target 13.1x Normalised Pretax Profit EV/EBITDA (6/14E) at price target 6.5x Pre tax abnormals EV/EBITA (6/14E) at price target 9.3x Reported Pretax Profit Multiples (S/price at $0.500) 6/11A 6/12A 6/13E 6/14E Reported Tax P / E (reported, basic weighted) nm 169.3x 17.0x 10.6x Reported Profit to equity P / E (normalised, fully diluted, wgted) 22.2x 16.6x 14.1x 10.7x Normalised Tax P / E (full dil mkt cap / norm. NPAT) 22.1x 16.6x 14.1x 10.7x Normalised Tax Rate 25.0% 23.0% 25.0% 30.0% Dividend Yield 0.0% 0.0% 2.0% 4.7% Normalised NPAT Group Free Cash Flow (f.c.f) / EV 3.1% -6.0% -4.3% 6.8% Minorities Equity f.c.f. / Mkt Cap -1.3% -13.6% -12.5% 1.9% Normalised NPAT to equity Norm f.c.f. / Mkt cap -1.3% -13.6% -23.2% -6.5% Norm. Net Profit / Sales 31.0% 34.8% 30.0% 30.0% Mkt cap / operating cash flow 11.7x 8.2x 11.1x 5.9x EV/EBITDA multiple 11.2x 9.3x 6.7x 4.8x EV/EBITA multiple 15.7x 12.6x 9.7x 6.9x Reported EPS (basic, weighted) Price / Book Value 1.8x 1.8x 1.6x 1.5x Normalised EPS (dil, wghtd) Price / NTA 3.2x 2.8x 2.2x 2.0x DPS (cps) Franking 0% 0% 100% 100% Ratios 6/11A 6/12A 6/13E 6/14E Payout Ratio 0.0% 0.0% 28.2% 50.3% Return on Average Equity 11.4% 11.2% 12.1% 14.3% Return on Assets 6.8% 8.2% 8.2% 9.3% Cashflow Statement ($m) 6/11A 6/12A 6/13E 6/14E ROIC (EBITA / Work. Cap + fixed assets) 20.4% 17.6% 17.2% 19.2% EBITDA ND / ND + Equity 7.8% 17.7% 28.6% 30.4% Working Capital Change ND / ND + Equity adjusted 7.8% 17.7% 28.6% 30.4% Cash from Operations Net Interest Cover (EBIT) Net interest Paid Tax Paid Free Cash Flow Analysis 6/11A 6/12A 6/13E 6/14E Net Operating Cash Flow Net Operating Cash Flow Capital Expenditure Capex (Reported) Asset Sales Group Free Cash Flow (rep'ted) Other (inc Investments) Fixed Debt Repayments Net Investing Cash Flow Equity Free Cash Flow (rep'ted) Proceeds from Equity Issues HP Lease Capex (non-cash) Net Change in Debt & Leases Free Cash Flow (normalised) Dividends Paid Capex (inc HP) / depreciation 177% 594% 476% 251% Net Financing Cash Flow Movement in Cash Share Data 6/11A 6/12A 6/13E 6/14E HP Lease Capex (non-cash) Ord Issued shares (m) 350, , , ,006 Balance Sheet ($m) 6/11A 6/12A 6/13E 6/14E growth 87.3% 1.5% 2.3% 0.6% Cash Weighted ave shares (m) 269, , , ,881 Receivables growth 73.6% 31.6% 1.4% 1.5% Inventories Diluted shares wgted (m) 368, , , ,256 Other growth 0.0% 0.0% 0.0% 0.0% Total Current Assets Property, Plant & Equipment Unpaid Capital Intangibles Year Expires Number % ord Avg Price $m unpaid Other Total Non Current Assets Jun % $ - $ - Total Assets Jun-13 8,200, % $ 0.42 $ 3.5 Accounts Payable Jun-14 2,250, % $ 0.33 $ 0.7 Interest Bearing Liabilities Jun-15 1,250, % $ 0.40 $ 0.5 Other TOTAL 11,700,000 3% $ 0.40 $ 4.7 Total Current Liabilities Accounts Payable Directors & Senior Management Substantial Shareholders Interest Bearing Liabilities Cliff Lawrenson (Chairman) Ken Hall 51.8% Other Adam Boyd (CEO & MD) Pacific Road 23.8% Total Non Current Liabilities Stuart Foster Total Liabilities Louis Rozman Net Assets Ken Hall Net Asset Value / Share ($) CFO & Company Secretary: Adela Ciupryk NTA / Share ($) Net Debt (net cash) Analyst: Trent Barnett Last Earnings Estimate Changes: Phone: August 2012 Sources: IRESS, Company Information, Hartleys Research Buy Page 2 of 6

3 The Company continues to deliver very strong EBITDA margins. The long asset life means we believe EBITDA is a good measure of profitability for PEA Fig. 1: Half year P & L and Balance Sheet Profit & Loss ($m) Jun-10a Dec-10a Jun-11a Dec-11a Jun-12a FY13e Group Revenue sequential growth 31.4% 12.5% 1.6% 15.6% 4.5% 36.3% COGS ex Deprec. & Amortis Gross Profit margin 95.7% 92.7% 87.7% 92.4% 98.3% 92.0% Head Office Costs EBITDA - Group sequential growth 16.0% 32.1% 0.0% 19.7% 1.8% 38.5% EBITDA / Sales 56.9% 66.9% 65.8% 68.2% 66.4% 68.3% Depreciation EBIT EBIT / Sales 36.4% 48.0% 46.7% 50.3% 48.7% 47.2% Cash Net Interest Normalised Pretax Profit Pre tax abnormals Reported Pretax Profit Reported Tax Reported Profit to equity Normalised Tax Normalised Tax Rate 14.2% 29.4% 20.4% 29.8% 16.3% 25.0% Normalised NPAT Minorities Normalised NPAT to equity Norm. Net Profit / Sales 25.8% 29.8% 32.2% 32.4% 37.1% 30.0% Reported EPS (basic, weighted) Normalised EPS (dil, wghtd) DPS (cps) Franking 0% 0% 0% 0% 0% 100% Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0% 28.2% Net debt was $21.6m Balance Sheet ($m) Jun-10a Dec-10a Jun-11a Dec-11a Jun-12a FY13e Cash Receivables Inventories Other Total Current Assets Property, Plant & Equipment Intangibles Other Total Non Current Assets Total Assets Accounts Payable Interest Bearing Liabilities Other Total Current Liabilities Accounts Payable Interest Bearing Liabilities Other Total Non Current Liabilities Total Liabilities Net Assets Net Asset Value / Share ($) NTA / Share ($) Net Debt (net cash) Source: Company Data, Hartleys Estimates Page 3 of 6

4 Fig. 2: Free Cash Flow The Company continues to generate strong operating cash flows but is investing it in growth. Cashflow Statement ($m) Jun-10a Dec-10a Jun-11a Dec-11a Jun-12a FY13e EBITDA Working Capital Change Cash from Operations Net interest Paid Tax Paid inc GST Net Operating Cash Flow Capital Expenditure Asset Sales Other (inc Investments) Net Investing Cash Flow Proceeds from Equity Issues Net Change in Debt & Leases Dividends Paid Net Financing Cash Flow Movement in Cash HP Lease Capex (non-cash) Free Cash Flow Analysis Jun-10a Dec-10a Jun-11a Dec-11a Jun-12a FY13e Net Operating Cash Flow Capex (Reported) Group Free Cash Flow (rep'ted) Fixed Debt Repayments Equity Free Cash Flow (rep'ted) HP Lease Capex (non-cash) Free Cash Flow (normalised) Capex (inc HP) / depreciation 153% 158% 196% 294% 884% 476% Source: Hartleys Fig. 3: Earnings Changes 6/12a 6/13E 6/14E f'cast actual % chg Old New % chg Old New % chg KPS MW capacity (end) % % % KPS MW installed (avg) % % % - revenue / installed % % % - EBITDA / installed % % % Group Revenue % % % EBITDA - Group % % % EBITDA / Sales 65.8% 67.3% 71.8% 68.3% 75.1% 72.7% Depreciation % % % EBITA % % % EBITA / Sales 47.3% 49.5% 50.6% 47.2% 52.7% 50.6% Cash Net Interest % % % Normalised Pretax Profit % % % Pre tax abnormals % % % Reported Pretax Profit % % % Reported Tax % % % Reported Profit to equity % % % Normalised Tax % % % Normalised Tax Rate 30.0% 23.0% 30.0% 25.0% 30.0% 30.0% Normalised NPAT % % % Minorities Normalised NPAT to equity % % % Norm. Net Profit / Sales 29.0% 34.8% 19.9% 31.2% 30.0% -3.9% 32.9% 30.0% -8.9% Reported EPS (basic, wght) % % % Normalised EPS (dil, wghtd) % % % DPS (cps) nm nm % Franking 0% 0% 0% 0% 0% 0% Payout Ratio 0.0% 0.0% 0.0% 28.2% 50.3% 50.3% Capex (inc HP) % % % Net Debt (net cash) % % % Source: Hartleys Estimates Page 4 of 6

5 PRICE TARGET Our twelve month price target is $0.61 (from $0.68 previously). PEA Price Target Methodology Weighting Current 12 mth out DCF (WACC 10.8%, Terminal growth 0.00%) 40% $0.58 $ mth forward P/E (diluted) of 14x (Premium Micro Cap Comps) 45% $0.52 $0.69 1x nta 10% $0.18 $ mth fwd Div Yield of 3.6% (Gross up yield=bankbill +150bp) 5% $0.00 $0.61 Risk weighted composite $ Months Price Target $0.61 Shareprice - Last $ mth total return (% to 12mth target + dividend) 22% Source: Hartleys Estimate Fig. 4: Key assumptions and risks for valuation Assumption An average 195MW for FY13 and contracted power of 300MW by June 2013 Risk of not realising assumption Downside risk to valuation if assumption is incorrect Comment Moderate High Company has 245MW contracted already for FY14 MW grow 426MW by FY19 and no growth into perpetuity EBITDA margins peak at 74% in FY15 and subsequently decline Low High Given the outlook for the industry and PEA s track record this appears likely Moderate High Historic margins and fixed costs leverage suggest this is likely. Maintenance capex holiday for ten years Very low Very high The maintenance of equipment is high and we assume maintenance capex runs at 50-60% of depreciation. We are very confident there is a capex holiday for PEA Conclusion Source: Hartleys We believe the largest risk to our valuation is the assumption new contracts are awarded by year end. That said, we don t believe the risk is actually very high. Consequently, we view our assumptions as conservative (although it is also the assumption with the most downside risk). RISKS The key risks for PEA (like most industrial companies) is earnings disappointments given the industry is volatile and earnings can disappoint due to cost overruns, project delays, loss of contracts or slower than anticipated new project wins. Although some earnings disappointments can be short term and just a timing issue, other disappointments can be materially value destructive and can sometimes overhang stocks for a long period of time (for example contract disputes). Such disappointments can be very difficult to predict and share price reactions can be severe and immediate upon disclosure by the company. High financial leverage can add to the problem. Page 5 of 6

6 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst Ben Crowley Resources Analyst David Wall Energy Analyst Peter Gray Research Analyst Janine Bell Research Assistant Corporate Finance Grey Egerton- Head of Corp Fin Warburton Richard Simpson Director Corp. Fin Paul Fryer Director Corp. Fin Dale Bryan Director Corp. Fin Ben Wale Snr Mgr Corp. Fin Ben Crossing Snr Mgr Corp.Fin Stephen Kite Snr Mgr- Corp. Fin Scott Weir Mgr - Corp Fin Registered Office Level 6, 141 St Georges Tce Postal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname_lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Simon Andrew Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Travis Clark Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Georgiades John Goodlad Andrew Gribble David Hainsworth Neil Inglis Murray Jacob Bradley Knight Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Damir Mikulic Jamie Moullin Chris Munro Michael Munro Ian Parker Ian Plowman Margaret Radici Charlie Ransom (CEO) Brenton Reynolds Conlie Salvemini David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Jayme Walsh Samuel Williams Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 6 of 6