What if the poor execution and weak CERs trend reverse?
Greenko postponed the publication of its H1 results due in August. Then, four months later, on December 14 it reported a breathtakingly disappointing H1 performance. Needless to say the stock dropped like a piano.
The drop of nearly 30% to below £1.00 (to a low of £0.98) is especially difficult to digest for management, who paid £2.20 in 2010 for part of a private equity stake, and institutional investors who paid £2.25 in the capital raising in June 2011.
While disappointing, if reassessed on a comparable basis — and assuming CERs are a ‘bonus’ (accounting for 30% of PBT last year) and not part of the operations of the company–the six month report didn’t justify such a big sell-off. In fact, Ebitda was flat (11.2M€ vs. 11.4M€ ) on revenue reported down 24%. But in fact, corrected for 3M € of CERs last year revenue would have been down 11% and Ebitda up 33%.
The only black mark against management’s execution was not rolling out wind projects as promised last April. The company explained it had fallen victim to a host of negative one-off exogenous factors including:
–The 9% fall in the rupee against the euro, though it only impacted translations of accounts and not margins or cashflow;
–CERs value falling to 5€ versus 12€ in 2010, leading to a management decision to ‘warehouse’ these certificates and sell when they reach 8-10€); and
–Delayed development of wind power concessions won in April in India blamed on a lack of infrastructure to move GE’s giant wind turbine-gwnerators through rural areas (for which the supplier GE might share responsibility).
Plus, one would have thought that good news of full financing for the build-out of 1 GW of power production in 2015 with partners like GE and Standard Charter would have limited the downside.
But the publication occurred simultaneously with the closure of a Scottish fund (Ignis), which was forced to sell 500,000+ shares into an illiquid market, and the EUAs sell-off subsequent to the outcome Durban climate conference only one week ago.
Following the share price overreaction, there is scope for Greenko to rebound for two reasons:
1–EUAs/CERs news flow suddenly turned positive yesterday. Following a sharp fall in the value of EAUs/CERs due to worries about a full-blown recession in the EU and an absence of political will to support the carbon tax, and with institutions leaving the market completely, on Dec 20th the EUA price had its biggest move in two years. The environmental committee in the European Parliament voted to support an aggressive position to push forward legislation to tighten the ETS cap. While there will be a long waiting period before the other Parliamentary groups (the industrial committee and then the full Parliament) reach a final decision (not before April 2012), this vote was a first step in an encouraging direction.
Even the anticipation of a final directive should lift EUAs/CERs off their lows and enhance the likelihood that Greenko will be able to sell at a better price in the future.
2–Execution should improve. The market may wait for signs in early 2012 that the rollout planned for wind is real. Greenko and turbine supplier GE promise the wind project will be built in Q1 2012. Once wind generation begins, some analysts like Edward Hugo (Daniel Stewart & Company) anticipate better growth prospects for the new combination of businesses and higher group margins from the new mix (over 90% wind and hydro in future versus hydro, biomass, natural gas today). Thanks to $50M from GE Energy Financial Services (for wind projects only) and $70M from Standard Charter (for all types of renewable projects), Greenko’s developmental portfolio is now 1.6GW dominated by hydro and wind assets.
Management and institutional shareholders owning stock at 225p will therefore be relieved if they average down but only if the company delivers in Q1 2012 and if CERs begin to rebound.