ContourGlobal PLC

ContourGlobal PLC (LON: GLO) is an FTSE-250 listed Power Generation Company with operations in 18 countries across three core regions, namely Europe, Latin America, and Sub-Saharan Africa.

On 18 March 2022, GLO expects to release its preliminary results for FY21. The fourth-quarter dividend will be paid on 14 April 2022 (Ex-dividend Date: 31 March 2022).

Investment Rationale – BUY at GBX 181.00

• Disposal: The disposal of Brazil’s hydroelectric generation business for 1.73 billion BRL should strengthen GLO’s balance sheet and enable effective capital allocation.
• Upgraded Guidance: On 6 December 2021, GLO raised its FY21 adjusted EBITDA guidance up to US$30 million to US$810-US$840 million.
• Stable Fundamentals: GLO has robust and predictable cash generation which reflects in the Group’s target of 10% dividend growth on a year-on-year basis.
• Technical Indicator: From a technical standpoint, 14-day RSI (~41.70) is around the oversold zone, while the stock price is hovering around the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis, key valuation multiples (EV/Sales and EV/EBITDA) are quite lower than the average of the Utility industry, while its Dividend Yield is higher.

Key Risks

• Inflation Concern: Due to the inflationary pressure, the Bank of England increased the Bank Rate by 25 basis points to 0.50%. It can keep the equity market under pressure amid the rising US Dollar index.
• Sluggish UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.

Recent News

Acquisition: On 24 November 2021, GLO completed the acquisition of Green Hunter Group SpA, in partnership with Energy Infrastructure Partners AG. The transaction was completed for €45.6 million on a debt-free, cash-free basis.

Trading Update (for the period from 1 January 2021 to 30 September 2021, as on 25 October 2021)

(Source: Company Website)

• Financial Growth: During 9M FY21, GLO reported a 14% year-on-year growth in Adjusted EBITDA to US$622 million and delivered strong operating cash flows.
• Cash Conversion: With 56% of Cash conversion (FFO/Adjusted EBITDA) in 9M FY21, the Company has the potential to maintain higher distribution to shareholders.
• Financing: At the end of September 2021, GLO completed the financing of its 277 MW (megawatt) portfolio of Caribbean power plants.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

*Peers: Atlantica Sustainable Infrastructure PLC, Drax Group PLC, and Renew Energy Global PLC.

*All selected peers are LSE-listed Companies from the Utility sector.

* 1.00 US Dollar = 0.73664268 British Pounds.  

Conclusion

GLO witnessed strong trading momentum and expected a robust performance from its natural gas-fired power plant based in Spain. Moreover, the acquisition of Green Hunter Group is likely to contribute nearly €8 million of Adjusted EBITDA on an annual basis.

Also, it has a solid pipeline of attractive opportunities to unlock additional intrinsic value for shareholders. Moreover, the integration of US and Trinidad & Tobago assets is likely to further support the adjusted EBITDA. The stock made a 52-week High and Low of GBX 213.00 and GBX 175.87, respectively.

Based on the decent fundamentals, stable dividends, stronger balance sheet, and valuation conducted above, we have given a “BUY” recommendation on ContourGlobal PLC at the closing price of GBX 181.00 (as of 9 February 2022), with a lower double-digit upside potential based on 25.75x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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