ERM Power Ltd (AX:EPW) has issued a trading update that confirms its outlook for the Australian activities (in line or above for 2018 and in line for 2019) but downgrades the outlook for its US activities (slightly lower volumes and significantly lower gross margins). Our initial calculations suggest this could have a potential A$4m and A$13m negative effect on our 2018-19e net income forecasts respectively; we place our forecasts under review. Although the trading update for the US activities is disappointing, we see downside risks as limited for ERM Power as the US business is independently financed. Our valuation implies significant potential upside even if we attribute no value to the US activities.
On 25 May 2018, ERM Power issued a trading update. Although ERM Power expects the Australian activities (retail, generation and energy solutions) to perform in line or above expectations for 2018 (in line for 2019), it expects slightly lower volumes in the US and significantly lower gross margins. For the US business (17% of 2018e group revenues), ERM Power expects volumes of c 6.3TWh in FY18 (vs 6.5TWh previously), increasing to c 7.2TWh in FY19.
The US gross margin in FY18 is expected to be c A$3.70/MWh (vs A$4.50/MWh previously), reducing to A$3.30/MWh in FY19. ERM Power also said that although it sees a significant improvement in US gross margins in FY20 vs FY19, it will provide an update in FY19 regarding its guidance that the US business will be NPAT breakeven in FY20.
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