Business Overview
ContourGlobal Plc (LON: 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



Top Shareholders 
 

(Source: Thomson Reuters)

Business Highlights


(Source: Company Presentation, Company Website)

The company has a focussed business model which benefits the company in its long term contracted power generation assets. Its business generates stable and high cash flows with significant risk mitigation. The company has a diversified portfolio with proven track record of value accretive growth.  The Group has an efficient capital structure which benefits its growth and expansion.

Principal Risks Mitigation

The company has adopted various techniques which would mitigate its principal risks and would help in sustainable growth and development of the business of the Group.


(Source: Company Presentation, Company Website)

Strategy

The company’s strategy is divided into three main categories which helps in creating long term cash flows:

(a) Organic development: The Group signs long term contracts with governments and utilities. It operates in the area with a need of power infrastructure and with insufficient capital and expertise.

(b) M&A: Mergers and Acquisitions where the company has a competitive advantage and the Group’s operating capabilities which could drive higher margin.

(c) "Greenfield" M&A: The Group purchases operating assets without contracts. This would reduce the contracted risk profile and the company could benefit from operating assets.

 
Competitive Advantages
 

(a) The Group is focused on long term contracted power generation which lowers the risk and generates long-term cash flows.
(b) Its operations capabilities and focus on safety.
(c) Its diversified portfolio across geographies and technologies.
(d) Recent industry transformation benefits the ContourGlobal.
 

Business Diversification (in terms of Adjusted EBITDA)


(Source: Company Presentation, Company Website)

Technology Based Diversification

The Group generates 45 per cent of adjusted EBITDA through renewable energy. 38 per cent of the adjusted EBITDA generated through thermal energy and 17 per cent of the adjusted EBITDA constitute from the High Efficiency Cogen Technology.

Geography Based Diversification

Europe contributes 53 per cent of the company’s adjusted EBITDA while Latin America contributes 36 per cent. 11 per cent of Group’s adjusted EBITDA generates from the Africa.

Currency Based Diversification

The company’s 54 per cent of the total adjusted EBITDA is generated in Euro while 31 per cent of the adjusted EBITDA is generated in USD.

Operating Performance


(Source: Company Presentation, Company Website)

The company has witnessed a decent operating performance during the past years. In all the segments i.e. Thermal, Wind, Hydro and Solar, the Group’s Equivalent Availability Factor is well above the minimum availability requirement with continuous improvements with respect to time.

High Growth Performance


(Source: Company Presentation, Company Website)

The Group performance has improved over the years. CFADS increased to USD 251 million in the first half of the fiscal year 2019 as compared to USD 232 million and USD 203 million in FY2017 and FY2018 respectively. In the first half of the fiscal year 2019, the company’s Net debt to EBITDA ratio has improved to 4x against 4.4x in the fiscal year 2018.

Recent News
On 20^th January 2020, the company announced that it would report its annual results on 17^th March 2020.

Trading Update - Nine Months FY2019 (30^th September 2019)
The company’s adjusted EBITDA surged by 19% to $531.6 million for the period, driven by improved renewable generation, cash gain realized from selling CSP assets’ stake and ownership impact of the Spanish Concentrated Solar Power. The group proposed a dividend of USD 3.6901 cents for the quarter. The company witnessed a robust generation of cash flow, and its FFO (Funds from Operations) stood at $285.4 million in Q3 YTD 2019, with strong cash conversion rate at 54%. The company’s Income from operations stood at $231.0 million, reflecting an increase of 10%.

Financial Highlights - H1 FY2019


(Source: Interim Reports, Company Website)

Revenue surged in H1 FY2019

For the six months ended 30 June 2019, due to the full year of ownership impact of the CSP assets and the higher dispatch in the Thermal portfolio, revenue was 15% higher than in the same period of last year to $617.40 million.

Robust Adjusted EBITDA in H1 FY2019

In H1 FY2019, the Group’s adjusted EBITDA rose by 36% to $357.20 million against the $261.8 million in H1 FY2018. Profit before tax for the first half of 2019 increased by 236% to $23.20 million as against $6.90 million in H1 FY18.

Net Profit & EPS grew in H1 FY2019

The net profit for the period stood at $6 million in H1 FY2019 and surged from $2.7 million in the first half of the financial year 2018. The earnings per share stood at 2 cents in H1 FY19 as compared to the 1 cent in H1 FY2018.

The company will announce its annual results on 17^th March 2020.

Key Performing Indicators

Total Revenue


(Source: Thomson Reuters)

The total revenue of the company grew to USD 1,253 million in FY2018 from USD 802.2 million in FY2014, reflecting a growth of 11.79 per cent on a CAGR basis.

Operating Income


(Source: Thomson Reuters)

The operating income of the company grew to USD 261.50 million in FY2018 from USD 111.5 million in FY2014, reflecting a growth of 23.75 per cent on a CAGR basis.

Financial Ratios

 

The reported EBITDA margin in H1 FY19 was 45.30 per cent against the industry median of 49.30%. The reported operating margin was 23.10 per cent for the H1 FY19. Net margin reported was 1 per cent for the first half of 2019, higher from the net margin in the same period last year of 0.5%. Return on equity for the current first half stood at 3.1 per cent. On the liquidity front, ContourGlobal Plc current ratio stood at 1.63x. On leverage front, the debt-equity ratio of the ContourGlobal Plc’s was 8.43 i.e. the company is more leveraged than the industry with debt-equity ratio of 1.4.

Share Price Performance


Daily Chart as on 9^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 9, 2020, at the time of writing (before the market close, at 8:45 AM GMT), ContourGlobal Plc shares were trading at GBX 164.3635, down by 2.78 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 226.50/GBX 155.80. Stock’s average traded volume for 5 days was 87,577.40; 30 days – 99,048.17 and 90 days – 155,218.98. The outstanding market capitalisation was around £1.12 billion, with a dividend yield of 7.33 per cent.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering in the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare ContourGlobal Plc with its peers, EV/EBITDA multiple has been used. The peers are KSK Power Ventur Plc (NTM EV/EBITDA was 0.02), ABO Wind AG (NTM EV/EBITDA was 6.70), John Laing Group Plc (NTM EV/EBITDA was 9.17) and Severn Trent Plc (NTM EV/EBITDA was 13.50). The Average of EV/EBITDA (NTM) of the company’s peers was 7.35x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare ContourGlobal Plc with its peers, P/E multiple has been used. The peers are Drax Group Plc (NTM P/E was 7.59), John Laing Group Plc (NTM P/E was 8.93), ABO Wind AG (NTM P/E was 11.60), Good Energy Group Plc (NTM P/E was 12.55) and United Utilities Group Plc (NTM P/E was 19.23). The Median of P/E (NTM) of the company’s peers was 11.60x (approx.)

Valuation Metrics
 

(Source: LSE)

The company’s EV/EBITDA multiple is 8.7x which was lower as compared with the industry which shows that the company is underpriced than the industry.

ContourGlobal V/S FTSE-250 Price – 1 Year


(Source: Thomson Reuters)

In the last one year, ContourGlobal Plc share price has delivered negative 10.43 per cent return as compared to negative 17.20 per cent return of FTSE-250 index, which shows that the stock has outperformed the index during the last year.

Dividend Yield


(Source: Thomson Reuters)

ContourGlobal Plc has a dividend yield of 7.33 per cent which is higher than the industry dividend yield of 5.96 per cent and in line with a sector dividend yield of 7.33 per cent.

ContourGlobal Total return - 1 year


(Source: Thomson Reuters)

In the last one year, ContourGlobal Plc has delivered a total return of 4.58 per cent while the FTSE All share index has delivered a total return of negative 4.66 per cent.

Growth Prospects and Risks Assessment
The company continues to actively pursue both construction and acquisition projects and 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 a 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 reported a decent financial performance in the first half of the fiscal year 2019. The Group has completed the acquisition of two natural gas-fired combined heat and power ("CHP") plants which would benefit and help in the growth of the business of the Group. 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 current price of GBX 162 (as on 9th March 2020 at 10:11 AM GMT) with lower double-digit upside potential based on 7.35x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 11.60x NTM Price/Earnings Value (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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