Since merging with GDF-Suez’s non-European generating assets in February, International Power is living up to its name. The enlarged entity now owns an array of gas (62% of installed power capacity), coal (16%), hydro (9%) and other power stations located across the globe, split 54% emerging and 46% mature markets in terms of earnings before interest, tax, depreciation and amortisation (EBITDA). The most profitable region is Latin America where it is constructing the world’s largest hydro plant (called Jirau) in Brazil. This is set to come on stream in late 2013. Developing countries are where all the action is to be found.
Electricity demand in Brazil is soaring by 5% to 7% per year and the Jirau project has already pre-sold 73% of its output under long-term contracts. In south-east Asia, the average person consumes 1MW/hr of electricity per year, compared with six in Britain.
The firm’s emerging market focus is now starting to show up in the numbers. In the first half of 2011, emerging markets delivered double-digit profit increases that helped offset a contraction in Europe. Synergies from the merger were also ahead of schedule, with 2011 savings expected to be €103m, rising to €215m in 2016. In the six months to 30 June, pro forma turnover rose from €7.7bn to €8.1bn, while total EBITDA climbed 10% to €2.17bn. An interim dividend of 4.4 cents was declared, three times covered.
The upshot for investors is that you are paying utility-style multiples for a secular growth story. The City is forecasting 2011 sales and underling earnings per share (EPS) of €16bn and 28 cents respectively, rising to €17.2bn and 32 cents a year later. That puts the shares on frugal price/earnings (p/e) multiples of 12.1 and 10.5, together with a 3.3% yield.
International Power (LSE: IPR), rated a BUY by Investec
But I value the group on an eight-times EBITDA multiple. After adjusting for net debt of €12.5bn (equivalent to 2.9 times EBITDA), that produces an intrinsic worth of over 400p a share.
So what are the potential black-outs? Well, like its peers, the firm is exposed to volatile foreign exchange and commodity markets. Moreover, around half of its revenues are derived from short-term supply contracts. Overall, emerging markets carry greater geopolitical risk than their more mature Western cousins, plus there is a chance of mishaps or delays during the construction of new facilities.
Nonetheless, the company has no exposure to nuclear power and possesses an excellent international footprint in a world that is structurally short of electricity. The next trading statement is scheduled for 2 November. Watch out too for the firm’s ‘investor day’ (when management meets with investors) on 14 September, which could act as a catalyst for a positive re-rating. Investec has a target price of 423p.
Rating: BUY at 295p