The following segment is taken from this funding letter.
The AES company
Approximately 11% of the portfolio is allocated to US utilities AES (New York stock market :AES) and Canadian independent power producer Polaris Renewable Energy (FIP). Both positions have had modest performances this year. The AES was much more stable and traded in a tighter range, but is also down 5.4% for the year, including the reinvestment of dividends in Treasury bills.
AES continued to build its strong portfolio of energy projects and its significant backlog of signed Power Purchase Agreements (PPAs). Currently, AES has 3.8 GW of renewables with signed PPAs under construction, 6.7 GW of signed PPAs for which construction has not yet begun, and a total development pipeline of 59 GW in beginning of 2022. It should be noted that energy storage projects now represent 18% of this pipeline, with approximately 50% of PPAs including a storage component.
While we are generally cautious about construction operations in today’s labor and materials market, AES sensibly approached its purchases by locking in material prices when it signed PPAs, removing the majority of current and future price volatility. Company management has maintained its target of a compound growth rate of 7% to 9% in earnings through 2025. We see no reason to question these targets based on current operations.
AES continues to lag some of its peers on a multiple basis, which offers the possibility of relative and absolute outperformance, but raises questions about market concerns. Solar supply chain issues are the best explanation for the short-term underperformance, but on a two-year basis, AES is trading around 30% off its peers, as measured by the P/E and a discount of 27% measured on an EV/EBIT basis. .
Balance sheet concerns may drive the downgrade, but AES has seen several years of steadily improving credit and investment grade ratings across the board over the past 24 months. Nonetheless, forward-looking debt levels remain high relative to their peers. This can be the corner keeping a lid on relative performance.
|The views expressed herein by Massif Capital, LLC (Massif Capital) do not constitute investment advice and should not be relied upon in making investment decisions. The opinions of Massif Capital expressed here relate only to certain aspects of a potential investment in the securities of the companies mentioned and cannot replace a complete investment analysis. Any analysis presented here is limited in scope, is based on an incomplete set of information, and has limitations as to its accuracy. Massif Capital recommends that potential and existing investors conduct their own thorough investment research, including a detailed review of regulatory documents, public statements and company competitors. Consulting a qualified investment advisor can be prudent. The information on which this material is based has been obtained from sources believed to be reliable but has not been independently verified. Consequently, Massif Capital cannot guarantee its accuracy. Any opinion or estimate constitutes Massif Capital’s best judgment at the date of publication and may be modified without notice. Massif Capital expressly disclaims any liability that may arise from the use of this material; reliance on the information contained in this publication is at the sole discretion of the reader. Further, this posting does not constitute an offer to sell or a solicitation to buy any of the securities or services discussed herein.|
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.