ContourGlobal PLC (LON: GLO) – Resilient business model with a decent dividend yield

ContourGlobal is an FTSE 250 Index listed Company, which is engaged in the power generation business. Moreover, it operates thermal and renewable energy plants across three key geographic regions – Europe, Latin America, and Africa. The business can be classified into two broader segments – Renewable Generation Group and Thermal Generation Group. Furthermore, GLO operates around 6,306 MW in 117 thermal and renewable energy plants across 20 countries and four continents. The Company had begun operations in 2006 with the development of a 25 MW run-of-river hydroelectric facility in Brazil.

On 12 May 2021, GLO will release the Q1 FY21 Trading Update and Annual General Meeting statement.

  (Source: Company presentation) 

Recent Trend of Dividend Payments

(Source: Company presentation)

The Company had a progressive dividend policy of making regular dividend payments four times a year. GLO will pay a final quarterly dividend of 4.06 US cents per share (equivalent to USD 26.6 million) on 19 April 2021, with an ex-dividend date of 01 April 2021. It will take the total FY20 dividend to 16.24 US cents per share, which is around 10% higher than the 14.76 US cents per share paid during FY19. Moreover, the total dividend stood at USD 107.5 million for FY20. The growth in dividend was driven by stable and consistent cash flow generation. 

Growth Prospects and Risk Assessment

The Renewable energy segment uses hydro, solar, biogas and wind to produce around 1,808 MW of electricity, while the thermal energy segment uses gas, coal, and oil to produce approximately 2,509 MW of electricity. Moreover, GLO had maintained 95% of the combined Equivalent Availability Factor (“EAF”) during 2020. Furthermore, GLO is an industry leader regarding Health & Safety with an LTI (“Lost Time Injury”) rate of 0.07 during 2020. The Company had produced steady performance in Wind and Solar fleets. However, the hydro performance was impacted by the refurbishment in Armenia. The Company would continue to seek selective growth opportunities in the renewable energy sector and invest with the objective of fetching lucrative returns. The Company had added renewable MW in Bonaire, Armenia, and Austria during the past year.

(Source: Company presentation)

The Company had completed the acquisition of 1,502 MW flexible gas-fired generation in the United States and the Caribbean on 18 February 2021. This acquisition would increase the installed capacity by almost 30% and would provide significant opportunities in the key markets.

However, certain potential risks can impact the business, such as interest rate risk, foreign currency risk, credit risk related to risk arising from customers, liquidity risk arising from the Group unable to pay short-term obligations.  The Company may suffer a loss of business and growth opportunities due to the macroeconomic and political disruptions. Meanwhile, climate change may cause a reduction in the forecasted revenue from a project.

Industry Outlook Dynamics

According to Grand View Research’s latest report, the market size of the global thermal energy storage industry was USD 4.38 billion during 2019. Furthermore, the industry is expected to grow at a CAGR of 12.6% from 2020 to 2027. The rising demand for thermal energy storage systems and shift in preference towards renewable energy generation would bolster the industry in the coming years. However, the economical storage of energy would remain the primary challenge for the thermal energy storage industry.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of ContourGlobal Plc.

A Glimpse of Business Segments (FY20)

Financial and Operational Highlights (for the year ended 31 December 2020 (FY20), as on 19 March 2021)

(Source: Company Website)

• The Company delivered a strong financial and operational performance, with an increase in revenue of 6% YoY and adjusted EBITDA of 3% YoY. It was also in line with previous guidance.
• The increase in FY20 performance was driven by the impact of the Mexican CHP acquisition.
• As per the segment, the Renewable business saw a good performance of the Wind assets in Austria and Peru, and a performance in Brazil in line with 2019. In the Thermal segment, the adjusted EBITDA surged 25% YoY and improved its operational performance during the year.
• The gross margin stayed strong at 27% in 2020. The income from operations rose in 2020 by 5% YoY.
• The Company witnessed a strong cashflow generation, with funds from operations increased by 12% YoY and a cash conversion rate of 53%.
• The net debt position was in line with the previous year.
• In December 2020, the Company completed a €710 million senior secured bond offering, placing €300 million of 2028 notes at 3.125% and €410 million of 2026 notes at 2.750%.
• Share buy-back programme was completed with USD 314 million of cash dividends returned to shareholders since listing.
• There was no meaningful operational or financial impact due to COVID-19, while it also focused on low carbon growth.
• Integration of Western Generation acquisition was on track, with a visible pipeline of high-quality future growth opportunities focused on low carbon technologies.
• In 2021, the Company expects adjusted EBITDA to be in the range of USD 770-800 million. It maintains the 10% annual dividend growth target and a Target Zero LTI (lost time incident) for 2021.
• The Company made firm commitments to decrease CO2 emission intensity by 40% (against 2019 levels) by 2030 and become CO2 neutral by 2050.

Financial Ratios (FY2020)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 26 March 2021, at 8:30 AM GMT, ContourGlobal PLC’s shares were trading at GBX 199.60, up by 1.11% against the previous day closing price. Stock 52-week High and Low were GBX 223.00 and GBX 134.60, respectively.

From a technical standpoint, 20-day SMA (GBX 198.95) supports an upside potential, and 14-day RSI (47.93) is currently in an oversold position. 

In the last two years, ContourGlobal PLC’s stock price has delivered a return of ~31.10% return as compared to ~13.41% return of the FTSE 250 index, which shows that the stock has outperformed the benchmark index.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook Scenario

GLO had anticipated adjusted EBITDA to fall between USD 770 million and USD 800 million during FY21, driven by the contracted & regulated revenues and synergies anticipated from the “Western Generation” acquisition. Furthermore, GLO would maintain a target of 10% dividend growth for the medium term. Moreover, it had a high-quality pipeline of future growth opportunities with a focus on low carbon technologies. The Company would accelerate the progress on key sustainable strategic priorities through the reduction of CO2 intensity. It would aim to reduce the CO2 emission intensity by 40% in 2030 and become CO2 neutral by 2050. The Company had anticipated expanding its business further in the United States through the natural gas generation and combined heat & power.

Meanwhile, GLO had not experienced any meaningful disruption due to the emergence of the Covid-19 pandemic during 2020, and it had expected negligible material disruption during 2021 as well. The Company would expect to keep the LTI rate at zero during 2021. Overall, GLO would like to maintain the highly cash generative model for the coming years to generate returns and fund growth.

Considering the decent track record of dividend payments, no meaningful operational or financial impact due to COVID-19, deploying capital in low-carbon growth pipeline, more than $500 million equity invested in growth projects since listing, continued growth in Adjusted EBITDA, strong cash conversion rate, continued commitment to the policy of 10% dividend growth per year, resilient & proven business model, and support from the valuation as done using the above method, we have given a “BUY” recommendation on ContourGlobal at the current market price of GBX 199.60 (as on 26 March 2021 at 8:30 AM GMT) with lower double-digit upside potential based on 20.57x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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