AES - Massif Capital - AES Corp.: Trading At A Discount To Peers
Summary
- Roughly 11% of the portfolio is allocated to U.S. utility AES and Canadian independent power producer Polaris Renewable Energy.
- AES has been far more stable and traded in a tighter range but is also down for the year by 5.4%, inclusive of reinvesting the dividends into treasury bills.
- AES trades at a roughly 30% discount to peers as measured by P/E and a 27% discount measured on an EV/EBIT basis.
- Forward-looking leverage levels remain elevated relative to peers.
The following segment was excerpted from this fund letter .
The AES Corporation
Roughly 11% of the portfolio is allocated to U.S. utility AES ( AES ) and Canadian independent power producer Polaris Renewable Energy ( PIF ). Both positions have had modest performance this year. AES has been far more stable and traded in a tighter range but is also down for the year by 5.4%, inclusive of reinvesting the dividends into treasury bills.
AES has continued to build its robust pipeline of energy projects and its strong backlog of signed power purchase agreements (PPAs). Currently, AES has 3.8 GW of renewables with signed PPAs under construction, 6.7 GW of signed PPAs for which building has yet to start, and a total development pipeline of 59 GW as of the start of 2022. Of note is that energy storage projects now make up 18% of that pipeline, with roughly 50% of PPA's including some storage component.
Although we are generally cautious about build operations in today's tight labor and materials market, AES has thoughtfully approached its purchasing by locking in hardware prices when it signed PPAs, removing a majority of current and forward price volatility. The firm's management has maintained its targeted 7% to 9% compounded growth rate in earnings through 2025. We see little reason to question these targets based on current activities.
AES continues to lag some of its peers on a multiple basis, which offers the opportunity for relative and absolute outperformance but raises questions about what the market may be concerned by. Solar supply chain issues are the best explanation for short-term underperformance, but on a two-year basis, AES trades at a roughly 30% discount to peers as measured by P/E and a 27% discount measured on an EV/EBIT basis.
Balance sheet concerns may drive the discount, but AES has enjoyed several years of steady credit improvement and notched investment grade ratings across the board in the last 24 months. Still, forward-looking leverage levels remain elevated relative to peers. This may be the wedge keeping a lid on relative performance.
| Opinions expressed herein by Massif Capital, LLC (Massif Capital) are not an investment recommendation and are not meant to be relied upon in investment decisions. Massif Capital’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is limited in scope, based on an incomplete set of information, and has limitations to its accuracy. Massif Capital recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies’ regulatory filings, public statements, and competitors. Consulting a qualified investment adviser may be prudent. The information upon which this material is based and was obtained from sources believed to be reliable but has not been independently verified. Therefore, Massif Capital cannot guarantee its accuracy. Any opinions or estimates constitute Massif Capital’s best judgment as of the date of publication and are subject to change without notice. Massif Capital explicitly disclaims any liability that may arise from the use of this material; reliance upon information in this publication is at the sole discretion of the reader. Furthermore, under no circumstances is this publication an offer to sell or a solicitation to buy securities or services discussed herein. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Massif Capital - AES Corp.: Trading At A Discount To Peers