Clearway out of residential solar and more value +3

06:25 20-May-20

I promise that this is the last time I will update this particular note, but this fits with everything else here that is only slightly important:  A fund whose board includes and AES Director purchased half a million shares at an average price of $11.67 last Friday, thereby increasing its stake by 11.5%.  I still see AES shares as undervalued, but I leave it to the reader to decide whether or not this counts as a true OMIB.

Virtu is selling its MATCHNow dark pool system to Cboe for an undisclosed sum, which will go toward further paying down Virtu's term loan, which stands at $1.769b after the company just repaid $188M as projected.  That will generate $7.3M in annual interest savings, or about 6 cents per share.  I expect the MATCHNow transaction will be less trivial as its Canadian market share by volume has declined to the mid single digits with the continued rise in market volumes.  My checks indicate that volume around the world remains elevated by about a third, and that's more important to Virtu than anything else here.  Although the volume won't repeat last quarter's blow out results, the business should easily exceed historical norms, and I expect some market aftershocks.  Thus, I continue to find current VIRT prices appealing.

Similarly, Vodafone is retiring debt €1.75b a little early, and inking a partnership to distribute Oppo devices.  The broader trend, though, is increasing debt as Germany offers southern Europe a €500b olive branch.  Clearway is also increasing its refinancing by an additional $200M of green bonds at 4.75% due in 2028.  Over the decades to come relative debt levels will reshape global trade as we head toward the more balkanized world that I feared.  In that note, I cast doubt on the notion that the Federal Reserve will always be able to manage the market and economy simultaneously.  It has now clearly chosen the market, which means the short term gains we are seeing and, as I wrote then, real world pain by 2025.

In such a world, I think utilities like AES, are the place to be, despite the rampage of COVID-19 in Brazil.  Those interested in Ebix should note that India is also confirming my fears.  In this environment, telecommunications are a particular sweet spot, and so I continue to see CTL as cheap, as the market correctly blows off this morning's network build-out press release.  Conversely, though I like what Nokia is acheiving from a business and technological standpoint, I think current prices are still not a good entry point.  It should come as no surprise that Taiwan is leading in either 5G deployment or agitating against China, but timing is the important part of Taiwan Semiconductor's recent factory and Huawei announcements.  The former won't involve any real commitment until after the election and the latter does affect current production and thus embraces a similar event horizon.  How one chooses among the values discussed here is largely a matter of one's own investment horizon, and I am always available for discussion.

On 5/16/20 8:42 AM, Esekla wrote:

PG&E has cleared another minor hurdle in-line with my Clearway outlook, and AES pricing of 3.3 and 3.95% on its new 5 and 10 year secured bonds shows that credit markets are far from closed for the big fish.  The up-sized refinancing of existing notes should save AES Corp in the neighborhood of $10-15M per year in interest, depending on the mix.  While that is only 1% of net earnings, it shows the disconnect between the market's media-driven perception of safety versus the smart money's assessment.  This reinforces my reasons for cheering Clearway's growth plan and departure from one of the riskier segments of American power generation.

The same disconnect is happening all across the market.  G17 Industrial production numbers from the Fed show declines that dwarf previous records, especially in transportation.  That speaks to the lasting demand destruction for fuels that I've projected, and the IMF has interesting current analysis showing that, while China has restarted, we're looking at trade decline of around 10% from peak levels, with about 30% drop in new vehicle imports.  This is at odds with WTI approaching $30, and nothing underscores that point more than seeing tax payer money meant to prop up the industry going to exiting oil executives.  On the global front, Shell is only honoring contracts and getting paid for dubious carbon capture technology as governments step away from hydrocarbons.  I will continue ignoring media from the White House and expecting more trade tension and volatility in the months to come.  Thus, I think investors should also keep VIRT on this impending dividend value list.

On 5/15/20 10:13 AM, Esekla wrote:

AES confirms that it will proceed from the talks below to offer secured bonds in order to refinance $1.485b of debt maturing over the next three years.  Given the improving balance sheet and deteriorated credit environment, It will be more interesting than ever to see what interest rate the company gets on the new 5 and 10 year notes.

On 5/14/20 4:56 PM, Esekla wrote:

Clearway has sold its residential solar operations for $75M and closed on the previously announced wind Repowering 1.0 project for $70M.  I'm quite glad to see the first part of this, since my own research and conversations with other technical experts indicates that residential solar simply doesn't compete with utility scale projects.  I'm buying the dip CWEN(A) shares.

Speaking of utilities, the Dayton unit of AES announced that its CEO is resigning as of June 5th.  This wouldn't be worth mentioning except as a segue for pointing out that I see AES shares as having over 20% upside to fair value in advance the month-end dividend.  I don't know if the market (wrongly, in my opinion) fears expansion in Brazil, or if it is misinterpreting talks on bond sales.  More likely, it is simply responding to more bad media with the bias that the regulated American assets are safe, and all else is not. 

Though its dividend has not been formally announced yet, CTL is in a similar situation, as the press keys on non-payment, mobile competition, and bailout requests, all of which are becoming less and less relevant to CenturyLink's operations, though the industry transformation will be relevant to its future.  First we'll have to see to what extent the government keeps playing favorites.

Which leads me to a final point that I would not bother to write about separately: eMagin's earnings results this morning.  The company lost of 3 cents per share from $6.7M of revenue.  Although it is classified as an essential business, margins decreased due to equipment breakage and COVD-19 related repair delay.  However, the positive news was on second helicopter helmet contract to be fulfilled throughout the year.  This isn't nearly enough to rekindle my interest in EMAN, but it's one more thing to keep in mind come elections.  Invest in value.