ERM Power has issued a trading update that confirms its outlook for the Australian activities (in line or above for 2018 and in line for 2019) but downgrades the outlook for its US activities (slightly lower volumes and significantly lower gross margins). Our initial calculations suggest this could have a potential A$4m and A$13m negative effect on our 2018-19e net income forecasts respectively; we place our forecasts under review. Although the trading update for the US activities is disappointing, we see downside risks as limited for ERM Power as the US business is independently financed. Our valuation implies significant potential upside even if we attribute no value to the US activities.
Written by
ERM Power |
US outlook downgraded; Australia in line or better |
Trading update |
Utilities |
29 May 2018 |
Share price performance
Business description
Analyst
ERM Power is a research client of Edison Investment Research Limited |
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ERM Power has issued a trading update that confirms its outlook for the Australian activities (in line or above for 2018 and in line for 2019) but downgrades the outlook for its US activities (slightly lower volumes and significantly lower gross margins). Our initial calculations suggest this could have a potential A$4m and A$13m negative effect on our 2018-19e net income forecasts respectively; we place our forecasts under review. Although the trading update for the US activities is disappointing, we see downside risks as limited for ERM Power as the US business is independently financed. Our valuation implies significant potential upside even if we attribute no value to the US activities.
Year end |
Revenue (A$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/17 |
78 |
15 |
(0.11) |
0.07 |
N/A |
4.5 |
06/18e |
89 |
15 |
0.04 |
0.07 |
38.8 |
4.5 |
06/19e |
109 |
31 |
0.09 |
0.07 |
17.2 |
4.5 |
06/20e |
130 |
49 |
0.15 |
0.07 |
10.3 |
4.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, share-based payments.
On 25 May 2018, ERM Power issued a trading update. Although ERM Power expects the Australian activities (retail, generation and energy solutions) to perform in line or above expectations for 2018 (in line for 2019), it expects slightly lower volumes in the US and significantly lower gross margins. For the US business (17% of 2018e group revenues), ERM Power expects volumes of c 6.3TWh in FY18 (vs 6.5TWh previously), increasing to c 7.2TWh in FY19. The US gross margin in FY18 is expected to be c A$3.70/MWh (vs A$4.50/MWh previously), reducing to A$3.30/MWh in FY19. ERM Power also said that although it sees a significant improvement in US gross margins in FY20 vs FY19, it will provide an update in FY19 regarding its guidance that the US business will be NPAT breakeven in FY20.
We see the updated US outlook as disappointing although we believe downside risks for ERM Power are limited as the US division is independently financed. Our initial calculations suggest a potential negative impact on our FY18 and FY19 net income forecasts of A$4m and A$13m respectively. Even attributing no value to the US (and energy solutions), our DCF-based sum-of-the parts valuation is A$2.6/share, 58% higher than the current share price. We place our estimates under review.
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Disclaimer
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Disclaimer
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ASIT biotech is an allergy immunotherapy (AIT) discovery and development company leveraging its proprietary ASIT+ platform. The lead product, gp-ASIT+ for grass pollen allergy, has already been tested in a Phase III trial. Although the study missed the predefined percentage difference in primary efficacy endpoint between placebo and the treatment group, a statistically significant reduction in allergy severity was demonstrated in the study. Having learnt the lessons and been encouraged by the opinion of the German regulatory authority, ASIT is now recharging for a confirmatory Phase III trial. Our valuation is €119.6m or €7.3/share.