Short update video with CFO Dmitri Tsvetkov:
I think
OPG is a very interesting risk /reward situation at 18p.
There are of course many risks which (I will outline at the end) but my strategy is looking for opportunities where the market is placing
too much emphasis on the risks and thus the price is too low and has a chance to rise.
I think that OPG have been increasingly clear about their debt reduction plans, and it is simple maths that as time goes by, they make
profits, they generate CASH, they pay down debt and this increases the value of the shares. There are bumps (operational, plant upgrading, coal prices, customer contracts etc..) but the strategy is quite simple and supported by the fact that India is a growing
economy.
OPG very helpfully lays out the actual impact of this in the presentation. Taking their figures this is c.5p of value added to the shares
this year and next year. That is equivalent to c.30% annual return! So even with a margin of safety there is a good chance of a 15% return per year (my strategy).
What I think is interesting with these forecasts though is the following year. Next year it is assumed that PLF will be down to c.70%
whilst upgrades are taking place but the following year it will be back to 75%+, turnover will be up and the EPS fcts for 4p for FY 2020 to c.5.5p for FY 2021. I note also that the Cenkos fcst makes no allowance for lower interest rates in FY 2020 so I think
their 3.9p fcst for 2020 leaves something in the tank. CASH flow in FY2021 would thus add closer to 6p to shareholder value in FY 2021.
On top of this there will be the CASH from the sale of the Solar assets (NBV = 15m, making 800k profit on 20% capacity. I have assumed
future profits of c.3m and a sales price of > 20m (of which OPG have 30% and an option to buy a further 30%) i.e. I expect c.6m to OPG from the sale. This is another dent into debt, which because of the high interest rates in India would have a disproportionate
impact on EPS.
So for all things being equal then at 18p I can see possible returns of 5p, 5p and 6p over the next 3 years which is very attractive.
The downside (for me) is the 15p support the price has seen over the last 4 months.
Looking at the variables....
India - economy growth expected to increase to 7% next year. this should support future electricity prices.
PLF - this year 75%-80%, next year with plant upgrade 70% (included in forecasts), medium term 80%+
Coal Price - most market forecasts are for lower longer term coal prices. For FY202
OPG have hedged 60% which means they can be certain of CASH flow to reduce debt levels.
Coal Price - they are talking to miners about long term supply arrangements. This will be announced later in the year. This reduces the
risk of market pricing and additionally gives even more certainty about debt reduction.
Environment - Coal is here to stay in India b/c it needs so much energy. India is no longer building thermal plants but it just cannot
afford to shut down the current ones. OPG has one of the lowest emission levels of thermal producers.
Customers - they had extra capacity this year as some customers had reduced demand but did not sell it to new customers as they want to
stick with their current client list and demand is expected to recover to normal levels in H2
Bad debt - this was a one off, long term dispute. It is notable that the PES of 2.0p for H1 is AFTER this bad debt charge.
Interest rates - these are falling in India which will be a big benefit for OPG
Tax Rates - India has reduced Corporation Tax Rate and indicated it will do so further
Solar - they are talking to several interested parties. Size is 63MW and normal prices are c.800kUSD per MW = 50mUSD so for OPG 30% stake
= c.12m GBP (my assumptions are OPG to only receive 6m)
So I do expect bumps and volatility but the variables generally seem to be in OPG favour. The big negative that it talked about much here
is Gupta and his 52% shareholding. Yes this exists but the other side of the coin is that he and the other directors (via LTIP) are very heavily incentivised to obtain a higher share price. In fact , I think it is reasonably obvious that at any time OPG could
be bought by a multinational. The asset to that multinational would easily be worth 10 times EBITDA ie.. 360m less say 60m of debt = 300m (75p a share). As a PLC with one major asset, and a 52% CEO the listed price will always be much much less than this but
as the debt is repaid the chance of a bid increases as the listed valuation is so much lower. This also puts a floor under the share price.
All IMHO, DYOR + BoL
OPG is in my top5 hldgs
