ContourGlobal PLC (LON: GLO) – Successful acquisition of Western Generation portfolio completed on 18 February 2021

ContourGlobal PLC 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 has a total gross capacity of 6,306 MW in 117 thermal and renewable energy plants across 20 countries and four continents.

On 06 August 2021, GLO expects to release half-year results for the six months ending 30 June 2021.

(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 had announced a quarterly dividend of 4.465 US cents per share for Q1 FY21 to be paid on 11 June 2021, while the ex-dividend date will be 20 May 2021. Moreover, GLO had already paid a total FY20 dividend of 16.24 US cents per share, which is around 10% higher than the 14.76 US cents per share paid during FY19. The growth in dividend was driven by stable and consistent cash flow generation.

Growth Prospects and Risk Assessment

• Robust near-term pipeline – GLO had identified 4.8 GW (“Gigawatt”) gas opportunities primarily located in North America and Caribbean regions with a long-term need for reliable supply. Moreover, it had also identified 2.4 GW opportunities with a focus on both gas and renewables with particular emphasis on platform expansions.
• Western Generation portfolio – GLO had completed the acquisition of 12 thermal and combined heat & power assets with a gross capacity of 1.50 GW in the US and Trinidad & Tobago on 18 February 2021. Since then, the portfolio had contributed around USD 11 million to adjusted EBITDA during Q1 FY21.
• Ongoing reduction of CO2 intensity– 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.
• Wind Repowering in Austria – GLO had a 72 MW wind portfolio in Austria repowered into two phases. The first phase had gotten completed with a total new capacity of 31 MW. The second phase would be expected to complete between September 2022 and January 2023, ahead of the initial schedule.

 (Source: Company presentation)

The dividend yield and return on equity of GLO remained higher than the corresponding multiples of the Electricity industry, illustrating the Company’s ability to generate higher returns for shareholders as compared to the industry.

Key Risks

• Geopolitical uncertainties and social instability - geopolitical instability, increased social pressure on politics & increasing activism would enhance the uncertainty for the multinational business operation and deteriorate the financial performance.
• Government Regulations – GLO is exposed to the risk of inability to obtain, maintain, or renew required governmental permits/licenses. Moreover, the business would be hampered in case the Company got unable to receive permits for the extension of existing capacities.
• Disruptive innovation in power generation and storage technologies – The lack of technological advancement may result in the loss of revenue and a significant reduction in the operating cash flow.

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of ContourGlobal PLC.

Q1 FY21 Trading Update (for the three months ended 31 March 2021, as of 13 May 2021)

(Source: Company result) 

• GLO had reported a significant rise in total revenue as it grew by 19.9% from USD 356 million during Q1 FY20 to USD 427 million for Q1 FY21.
• The Company had a zero Lost Time Incident Rate ("LTIR") during Q1 FY21.
• On the profitability front, GLO had shown a growth of around 4.6% in the adjusted EBITDA from USD 172.7 million during Q1 FY20 to USD 180.6 million for Q1 FY21, illustrating strong contribution from the Western Generation portfolio.
• With regards to the financial position, the Company had delivered robust cash generation as Funds from Operations ("FFO") remained USD 102.2 million during Q1 FY21, up by around 37.2% from Q1 FY20. Moreover, the increase was because of growth in adjusted EBITDA and increased distributions from minority interests in Colombia.

Financial Ratios (FY20)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 14 May 2021, at 08:34 AM GMT, GLO’s shares were trading at GBX 195.48, down by around 0.06% from the previous day closing price. Stock 52-week High and Low were GBX 223.00 and GBX 145.97, respectively.

GLO stock is trading above an upward sloping trend line for almost a year and currently taking support of GBX 185 level. On a daily chart, the momentum indicator RSI (14-period) is trading at ~43 levels, suggesting a neutral direction for the stock.

In the last one year, GLO’s stock price has delivered a positive return of ~26.72%, and it has outperformed the FTSE All-Share Utilities index with a return of about 9.20%.

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

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

Business Outlook Scenario

The Company had begun 2021 on a remarkable note with the upbeat financial performance shown during Q1 FY21. GLO had anticipated adjusted EBITDA to fall between USD 770 million and USD 800 million during FY21 as it would get benefit from the contracted & regulated revenues and synergies anticipated from the “Western Generation” acquisition. The integration of the US and Trinidad & Tobago assets had progressed well during the quarter. Furthermore, GLO would maintain a target of 10% dividend growth for the medium term. Meanwhile, the Company had anticipated expanding the business further in the United States through the natural gas generation and combined heat & power. Looking forward, the Company would restart the process to monetize the renewables business in Brazil, which got suspended due to the Covid-19 pandemic during FY20. GLO 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 driven by the resilient business model.

Considering the successful integration of Western Generation assets, strong balance sheet, progressive dividend policy, robust low-carbon pipeline, strong financial performance, and support from the valuation as done using the above method, we have given a “BUY” recommendation on ContourGlobal at the current price of GBX 195.48 (as on 14 May 2021 at 08:34 AM GMT), with lower-double digit upside potential based on 22.44x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

*The dividend yield is subject to change as per the stock price movement.

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