Overview
ContourGlobal PLC (GLO) is a London, United Kingdom-headquartered power generation company with operations in 18 countries across three core regions, namely Europe, Latin America and Sub-Saharan Africa. The company seeks to acquire wholesale power generation projects with a long-term contract diversified across fuel types and develop those through applying technical and management expertise in traditional and innovative technologies. In 2005, the group was founded by Joseph Brandt and Reservoir Capital Group and begin operations in 2006 with the development of a 25 MW run-of-river hydroelectric facility in Brazil. The company was listed on the London Exchange in November 2017 and is a constituent of FTSE 250 index.

The company is a growth platform for power generation projects and has a strong track record of creating value through developing greenfield assets. Where the group can deliver significant operational value and has a competitive advantage, it also seeks to integrate the acquisitions. With a proven track record of refurbishment and development expertise, the company is well-positioned to capitalize on market opportunities and its portfolio includes 101 powerplants which utilises a wide range of fuel types, technology and equipment. The company has a large global footprint diversified across geographies and technologies which is focused on wholesale contracted power generation producing low-risk, long-term cash flows.

Key Statistics


Management

Joseph C. Brandt is the co-founder, Chairman and Chief Executive Officer of the group. Karl Schnadt is the Chief Operating Officer and Executive Vice President of the company. The CEO is supported by Stefan Schellinger, who is the Global Chief Financial Officer.

Segments

The operations of the group are differentiated in two operating segments: Renewable Generation Group and Thermal Generation Group. Renewable Generation Group includes 9 assets which generate 1,808MW of electricity using wind, hydro, concentrated solar power and photovoltaic solar power. The plants include European and Brazilian plants, Spanish Concentrated Solar Power, Austria Portfolio 1 & 2, Vorotan, Inka, Chapada I, II, III, and Asa Branca. Thermal Generation Group also includes 9 core assets which generate 2,509MW of electricity using natural gas and biogas, liquid fuels and coal. The plants provide electricity and certain other services to beverage bottling companies, besides equity investments (primarily in Termoemcali and Sochagota), Bonaire, Energies Saint-Martin, Energies Antilles, KivuWatt, Cap des Biches, Kramatorsk (sold in February 2018), Kramatorsk, Arrubal, and Maritsa.

Top Shareholders


 (Source: Thomson Reuters)

On 14 June 2019 and 17 June 2019, Joseph Brandt acquired 18,185 shares of the company at an average price of 195.47 pence. Insiders purchased stock worth $5,612,683 in the last three months, which totalled to 28,270 shares.

Recent Developments

The company on 7 January 2019 announced that it had acquired combined heat and power portfolio in Mexico from Alpek S.A.B. de C.V, helping to expand the cogeneration Solutions business in an attractive growing power market. The company will pay $724 million for the assets.

Quarterly Update (Q1 FY 2019)

Reflecting the improved wind resource and availability as well as the acquisition of the 250 MW Concentrated Solar Power facilities in the southwest of Spain, adjusted EBITDA for the first quarter of 2019 rose by 23.5% compared to the prior year to $147.0m. Revenue during the quarter rose by 12.5% to $286.9m, from $255.1m in the corresponding period of FY 2018, while adjusted net income was reported at $13.3m, from a loss of $21.1m in Q1 FY 2018. Driven by the acquisition of Solar Power facilities in the southwest of Spain, funds from operations increased by 36.9% to $69m from $50.4m in Q1 FY 2018. The company declared the first quarterly dividend of $24.75 million corresponding to 3.6901 cents per share, as the company moved to a quarterly dividend payout, and it expects the annual dividend to increase by 10%. The growth in Adjusted EBITDA was in line with the expectations and guidance for the full year was kept unchanged at $720 - $770m.

Key Financial Highlights (FY 2018, in $m)

 
(Source: Company Filings)

Reflecting the increase in the revenue of Thermal power plants and contribution of newly acquired portfolios in Europe during the year, revenue continued to grow in 2018 to reach $1,253.0 million, resulting in an increase of 23% over the year. As increased revenue from Thermal power plants included passthrough revenue which does not impact margin, gross profit increased modestly by 4% from $306 million in FY17 to $320 million in FY18. The positive impact of the farm-down of the solar portfolio in Italy and Slovakia, and additional growth in Spain and Italy due to acquisitions helpedadjusted EBITDA to post a growth of 19% to $610 million from $513 million. Due to poor wind resource in the Brazilian and Austrian wind farms in 2018, significant acquisition costs and other one-off events, income from operations slightly decreased by 2.6% to $262 million, despite the positive impact of the acquisition of CSP Spain and Solar Italy roll up. A strong growth in adjusted EBITDA also helped in growth of funds from operations, which rose by 18% as compared to 2017 to $302.3 million. Net income after tax declined by 23% to $10 million, while adjusted net income rose to $63.1 million in FY18 from $35.7 million in FY17. As of 31st December 2018, the company had a total of $696.9 million of cash and cash equivalents, while current and non-current borrowings increased by $669.9 million to $3,560.0 million. Adjusted net Income attributable to shareholders rose to $67.7 million leading to an adjusted earnings per share of $0.10 while profit attributable to shareholders was $15.0 million in 2018 leading to an earnings per share of $0.02.

Key Performance Indicators

Net Leverage ratio is the key credit measure of the company and is measured as ratio of total net indebtedness to Adjusted EBITDA. Excluding the positive impact of the Spanish CSP farm-down, 2018 leverage ratio reached 4.4x compared to 4.1x in 2017. Lost Time Incident Rate (%) measures the recordable lost time injuries per labour hours and it remained very low at 0.03, corresponding to just one incident. Availability Factor (%) is usedin the industryto track the technical performance of power plants and for benchmarking and is the percentage of time a power plant was available to generate electricity over a set time period. It decreased to 92.9% in 2018. Equivalent Forced Outage Rate (%), whichis widely used in the industry to measure technical performance and is the ratio between hours of unit failure given as a percentage of the total hours in a set period, was principally impacted by technical issues in certain plants and increased significantly from 1.9% to 3.6% in FY18.

Financial Ratios


(Source: Thomson Reuters)

The profitability margins of the company are considerably lower than the industry median. The ratios have also not improved over the years, indicating a significant room for improvement. The liquidity ratio declined during the financial year 2018 but was still more than the industry median. As compared to its peers, the company is highly leveraged, but this is due to the aggressive acquisitions pursued by the group. The asset turnover is in line with the industry, suggesting optimal utilisation of resources.

Valuation Methodology
Method 1:EV/SalesMultiple Approach (NTM)


Method 2: Price/Earnings Multiple Approach (NTM)
 

To compare GLO with its peers, Price/Earnings multiple has been used. The peers are Plutus Powergen PLC (NTM Price/Earnings was 2.12), Good Energy Group PLC (NTM Price/Earnings was 12.65), Iberdrola SA (NTM Price/Earnings was 15.86),Solarpack Corporacion Tecnologica SA (NTM Price/Earnings was 22.19), and ERG SpA (NTM Price/Earnings was 22.64). The mean of Price/Earnings (NTM) of the company’s peers was 15.01x (approx.).

Share Price Commentary

Daily Chart as at July-22-19, before the market closed (Source: Thomson Reuters)

On 22 July 2019, at the time of writing (before the market closed, at 1:35 pm GMT), GLO shares were trading at GBX 178.40, up by 0.56 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 266.00/GBX 142.90. The outstanding market capitalisation was around £1.19 billion, with a dividend yield of 5.71 per cent.

Growth Prospects and Risks Assessment

The company continues to actively pursue both construction and acquisition projectsand is insulated from risks associated with volumes, commodity prices or merchant energy prices as it enters long-term contracts instead of market driven orders. The group seeks to expand through additional development and acquisition globally and deliver marked increases in earnings and capacity to achieve the target of 100% rise in Adjusted EBITDA by the end of 2022. According to the International Energy Agency, most of the increase in global demand will occur in developing markets, while lower economic growth, energy efficiency policies and stabilized energy consumption patterns will lead to lower growth in electricity demand in developed markets such as Europe and the United States. The company is well-established to capitalise the accelerated growth in developing markets, and its footprint would enable it to benefit from changes in global demand. However, the company is under the risk that its operational costs would increase, or it would face loss of business and growth opportunities due to macroeconomic and political conditions such as geopolitical uncertainty. The forecasted revenue from a project may turn out to be lower due to the risk of climate change.

Conclusion

The company has focused on the modernisation of its renewable, storage and thermal generation facilities and its pipeline remains robust, with other key projects remaining on track. Based on the decent prospects and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 177.40 (as on 19 July 2019) with lower double-digit upside potential based on 3.60x NTM EV/Sales (approx.) on FY19E Sales (approx.) and 15.01x NTM Price/Earnings Value (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on July-22-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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