AES investor day and more on energy ?3

12:38 05-Mar-21

Just because someone will ask, I see this morning's big headline beat in the job reports as meaningless for the short-term market.  The ADP report was more meaningful and it's a no-brainer that services should be coming back with reopening.  Honestly, I can't imagine what the projections were based on, but the whole thing is such nonsense that I don't care to check.  Long term, the government data increases the chance of a taper tantrum somewhat sooner with wages rising somewhat, but the employment population ratio and participation rates didn't budge.  In an effort to get back to actionable relevance, I will offer some pricing notes to close out the week...

Further analysis on the AES convertible pricing seems instructive for what's going on in the market right now.  The company has manage to price them at 6.875% annual interest, redeemable on or after March 22, 2024.  For each $100 purchasers will receive warrants for up to 3.864 common shares, and a tenth of a preferred share.  Each preferred share functions as a warrant on the regular shares, with a 22.5% premium.  Thus, the initial conversion rate is 31.5428 common shares for each preferred, which equates to a $31.70 strike.  However, as the common shares sink, the conversion rate could rise as high as 77.2798 commons for each preferred.  This puts potential dilution in the 4.7 to 11.6% range. 

Although that may not happen, as AES Corp. can simply repay the principle instead, I think this will have a negative effect on the trading price of AES shares.  In support of this view, I point out the strong ex-dividend trade in LUMN shares, which are only appreciating toward the upper half of my range now that there is no opportunity left in the Qwest baby bonds (only CTDD & CTBB remain, trading well above par).  This is probably because investors were arbitraging by shorting the stock against them, and I fully expect the same to happen with AES, assuming the placement doesn't fall apart before the March 11th closing.

As ever, AES has timed its financing well, but that doesn't benefit ordinary shareholders.  As I've been predicting, everybody wants yield all of the sudden, but it remains to be seen for how long.  My call on PPL, below, offered comparable yield for the short term, and CWEN(A) offers better rising income potential.    I also see a potential return to single digits for CVA, since it no longer fits that profile, and metal prices (HMS $210, Aluminum $0.33) are tanking 30% & 40% below projections in the last report and investors realize the risk inherent in extended restructuring.

The corresponding massacre in GRoDT stocks even makes OEG interesting below $4 with a rebate rate still above 20%, even though it's exceedingly hard to have any precision in the valuation math.  RESN and XBC/XEBEF are even more of a gamble, below $4 and $5 respectively, with only a few percent of rebate rate left.

For growth, I'm still avoiding index dominating mega-caps, but HIMX looks very buyable to me with current pricing over 20% below my $12.50-$15 range.  I still see EBIX as having the most near and long term potential upside for those who are risk tolerant.  VIRT & BGCP look like safer values to me, but will require plenty of patience in what remains a very dangerous market. 

AES Corp. is selling convertibles which essentially pay the dividend and price the stock at $25, showing that the shares are at least fully valued.  AES is still trading a few percent above that level in the pre-market.

I've also been watching the decline in XBC/XEBEF shares below the $5.80 placement price.  That's reversing somewhat this morning on news of a Clean Energy JV with Total for carbon negative RNG.  Surprisingly, WPRT isn't catching the bid, not that I would buy it at even in retreat.  Xebec is a little more tempting, but most of the GRoDTs are under extreme pressure, and I am inclined to wait for earnings and a $5 or lower price point.

That also applies to RESN, which looks set to break that level today.  Amdocs announced a 5G billing wind with Dish, which should surprise nobody, and Akoustis got a CBRS infrastructure win.  As disclosed, I'm pleased to have been able to take profits on RESN above such levels and I will be cautious about re-entry.  Normally, I might look to Vodafone for value ahead of the Vantage float, but the IMF attempting to justify negative rates doesn't help that cause, and it makes the AES choice look that much more unappealing.

On 3/3/21 9:25 AM, Esekla wrote:

AES has published its Investor Day materials and the updated goals are in step with what we've been seeing elsewhere:

• Raising renewables growth target by 40% to 3 to 4 GW of long-term PPAs per year
• Increasing investments at US utilities to achieve annual rate base growth of 9%
• Accelerating goal to reduce coal generation to below 10% by 2030 on a proforma basis, five years earlier than the prior expectation, and achieve net-zero carbon emissions for the portfolio by 2040
  
• Schneider Electric acquiring 30% of Uplight along with other sales to private equity leaves the AES stake at $450M
• commissioning a feasibility study for the first large green hydrogen-based ammonia project in Chile with a possible project in the second half of this decade.
  

All of this increases my interest in PPL below the $27.76 pre-divestment 6% yield target.  Longer term, I have to wonder how long it will be before the U.S. and Europe accept the need to supplement renewables with new SMR nuclear designs.  My guess is that would come in America with a second Biden term.  Separately, I'm watching the domestic rebound in natural gas and intend to review the New Fortress Energy earnings report on the morning of March 16th due to its significance for GLNG.  The AES conference call is underway, but I am unlikely to write further.