The AES Corporation

AES Details

The AES Corporation (NYSE: AES) is a utility company engaged in electricity generation and distribution with customers in the US, South America, Europe, and Asia. AES caters to industrial, commercial, residential, and governmental sectors.  

Q3FY21 Performance Highlights:

• Healthy Pipeline: It has a backlog of over 9.3GW of renewable energy with 71% contracts signed and 29% under construction. Over 4GW of new Power Purchase Agreements (PPA) were signed during the period.
• Promising Topline: Clocked revenue growth of 19.29% to reach $3.04 billion in Q3FY21 over PcP driven by growth in renewables business and Southland portfolio in the US. It had partnered with Google through the Nest Renew product that provides cost-savings and energy efficiency features.
• A Surge in EPS: New contract wins, and healthy portfolio resulted in Adjusted EPS rising by 19% to reach $0.50. This was partly offset by a drop in contributions from South American business.
• Contract Extension: It had received approval for a two-year contract extension from the California State Water Resource Control Board through 2023 for the operation of the 876 MW Redondo Beach plant.
• Healthy Balance Sheet: It had closed the quarter with a cash balance of $1.14 billion as of September 30, 2021, up from $1.09 billion as of 31 December 2020. This translated to a healthy current ratio of 1.22x against the industry median of 1.05x.

Current Ratio Trend, Analysis by Kalkine Group

Key Risks and Challenges

The utility business is highly regulated, and revenue growth is impacted by changes in tariffs. Crude oil movement and its influence on coal price also affect the input costs. Shortage of semiconductors may impact solar business. With global customers, the company’s profitability is impacted to forex volatility risk.

Outlook

AES reaffirmed FY21 guidance with adjusted EPS to be in the lower end of the range of $1.50-1.58 owing to the non-cash impact from the equity issuances on March 2021. The company is confident of achieving 7-9% annualized growth in adjusted EPS and free cash flows to parent company through 2025 (from 2020 fiscal).

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock’s historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation

The stock of AES gave a negative return of ~6.39% in the past six months and ~12.31% in the past nine months. The stock is currently trading below to the 52-weeks’ average price level band of $20.27 - $29.07. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at a slight premium to its peers, given the deep portfolio in renewables and healthy backlogs. For valuation, a few peers like Edison International (NYSE: EIX), FirstEnergy Corp (NYSE: FE), Duke Energy Corp (NYSE: DUK), and others have been considered. Given the new contract wins, healthy Q3FY21 topline and EPS growth, decent cash balance, and strong ROE over the industry, valuation indicating upside potential, and key risks associated with the business, we give a “Buy” recommendation on the stock at the closing market price of $23.580, up by ~0.86%, as of 1 December 2021.

AES Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

EnerSys

ENS Details

EnerSys (NYSE: ENS) provides energy storage solutions with batteries, chargers, power equipment to utility and telecommunication sectors. Its speciality batteries catered to aerospace and defense and automotive and medical industries.

Q2FY22 Performance Highlights:

• Healthy Offtake: ENS witnessed strong offtake in all categories, with demand far exceeding pre-COVID levels. Revenue surged 11.71% in Q2FY22 to reach $791.4 million. It had posted a record backlog crossing over the $1 billion mark for the first time.
• Progress and Developments: The company made significant progress in 5G powering, strengthening its transportation and defense market share, and launching new products in next-generation Motive Power. It had witnessed orders to return to normalcy in its Motive Power and Broadband segments.
• Decline in Earnings: Adjusted earnings nosedived by ~7.2% to $61.4 million in Q2FY22 due to lacklustre performance by its Energy Systems. Nevertheless, reported net earnings almost remained unchanged at $35.6 million in Q2FY21 vs. $35.7 million in PcP.
• Cash Outflows: ENS witnessed operating cash outflows of $65.57 million in contrast to inflows of $217.27 million in PcP. This was mainly due to a spurt in inventories. Its cash balance reached $407.51 million as of October 3, 2021 as compared to $451.81 million as of March 31, 2021.
• Changes in Key Personnel: ENS recently announced that Michael J. Schmidtlein, Executive Vice President and Chief Financial Officer, plans to retire on March 31, 2022. The company also announced that Andrea J. Funk, who currently serves as Vice President, Finance, Americas, will be promoted to Executive Vice President & Chief Financial Officer effective April 1, 2022.

Net Sales Break-Up, Analysis by Kalkine Group

Key Risks and Challenges

Tariff regulation affects the pricing of products and alters the profit realization. Increased competition, rising component cost and cost of cobalt and Spodumene globally may affect the margin. Changes in the residential property market due to the recent price bubble and reversal of government stimulus may affect energy storage demand for residential customers.

Outlook

ENS is expecting increasing component costs to stabilize in the coming quarters, and the company is working towards open orders. It is expecting Q3FY22 EPS to be between $0.96 and $1.06. The company holds an optimistic view on the underlying demand for energy storage solutions.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock’s historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation

The stock of ENS gave a negative return of ~24.01% in the past six months and ~19.05% in the past nine months. The stock is currently trading below to the 52-weeks’ average price level band of $72.13 - $104.47. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at a slight premium to its peers, given the underlying demand for energy storage solutions and strong progress in the Motive Power segment. For valuation, a few peers like Flux Power Holdings Inc. (NASDAQ: FLUX), Hudson Technologies Inc. (NASDAQ: HDSN), Vertiv Holdings Co. (NYSE: VRT) have been considered. Considering the healthy topline growth, diversified revenue streams, a healthy current ratio over the industry, valuation indicating potential upside, and key risks associated with the business, we give a “Buy” recommendation on the stock at the closing market price of $72.84, down by ~1.69%, as of 1 December 2021.

ENS Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

EnerSys (NYSE: ENS) and The AES Corporation (NYSE: AES) is a part of Kalkine’s Global Fully Charged Report

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: - 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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