Investing in the core business
Privately negotiated long-term contracts underpin Albioma's, (ABIO) key thermal generation business and provide financial visibility. The proposed investment plan, designed to expand the business in areas of core expertise, should lead to an acceleration of growth beyond 2014. In the meantime, the shares trade at a discount to €20/share, the average of our peer group analysis and DCF.
Core expertise offers opportunity to expand
Albioma enjoys strong competitive positions in its major markets and is protected by long-term contracts in its thermal generation business. The company has an ambitious capital expenditure programme, which is targeted to take advantage of the expected demand growth in electricity in its core markets, and in particular the need for renewable energy. Its accumulated expertise in bagasse-fired generation will enable Albioma to enter the Brazilian market, where there is a plentiful supply of bagasse that is currently underutilised for the generation of electricity, and where we expect there to be strong growth in bagasse-fired generation.
Thermal generation the key to profitability
Beyond 2014 the success of the investment in Brazil could have a positive effect on the valuation of the business. In the near term, the key driver of profitability will be the performance of the thermal generation business. This business is protected by long-term contracts with EDF, under the terms of which the profitability is determined by the level of plant availability and output. Although smaller in scale, the solar and AD output is also sold under long-term contracts at guaranteed prices. Collectively these contractual arrangements provide good visibility of the business’s profitability.
Valuation: Upside to €20/share
Our peer group analysis, using a range of market multiples, produced a valuation for Albioma ranging from €15.3 per share based on yield, to €28.5 per share using a P/E approach. We also constructed a long-term DCF valuation for Albioma using our published forecasts for 2013 and 2014 and based on Albioma’s capital expenditure programme. The overall DCF indicates a valuation for Albioma of just over €22/share, and when added to the peer group analysis, provides an average valuation of c €20/share.
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