Bolivian compensation clears path to growth
Rurelec (LONDON:RUR) has emerged from four years of uncertainty as its arbitration claim against the Bolivian government for the forced nationalisation of its local power assets has concluded. Compensation of US$31.5m (£19.0m) has now been received, less than half the minimum management originally expected. Some of the proceeds will be used to fund the remaining equity for 296MW of new capacity in Chile and the first phases of 65MW of projects in Peru. Approximately US$25m will be employed to reduce short-term debt. Given the investment required in new capacity, the compensation is not quite the transformative event that was expected, but at least uncertainty has been removed, giving way to a focus on growth prospects.
Strategy: Redeploy arbitration cash in new capacity
The proceeds from the arbitration claim will enable Rurelec to fund the remaining equity for an increase in its own capacity to 381MW by 2016. Rurelec has also reduced short-term debt by US$25m. Following the acquisition of the power consultancy IPC, the second element of the strategy will be to exploit the synergies with Rurelec in project management and plant operations worldwide. Rurelec is also planning a secondary listing on the Santiago stock exchange in 2014, to enable the company to attract investors from the region where it operates, thereby geographically diversifying its shareholder base.
Financials: Growth expected to resume from 2015
With the cash flow from the arbitration process, Rurelec will reduce debt and fund part of the US$40-50m (£25-30m) equity for its investment projects, until it sells stakes of 50% in those projects. Consolidated gearing is thus expected to increase in 2015-16, before falling from 2017 after the largest plant is commissioned. The payment of dividends has been postponed until after the proposed sale of stakes in Chile and Peru. The new capacity is forecast to increase generating turnover from £10m in 2013 to £39m by 2016 and EBITDA from £1.7m in 2013 to £9m in 2016.
Valuation: Discount to peers, given lower profitability
We have valued Rurelec in a range of £60-74m using a DCF model, with a WACC range of 10-12% and a terminal growth rate of 3%. The mid-point of £67m would imply ratings of 1.2x P/BV for 2014e and 5.5x 2016e EV/EBITDA when capacity is fully operational. These ratings would be a discount to peers in London and Chile, which currently trade at premiums to book value of 30% and 50% respectively.
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