Religare Hichens Harrison says ‘buy’ Rurelec as operational outlook transforms with capacity additions

Stockbroker Religare Hichens Harrison reiterated its “buy” stance on Rurelec (AIM: RUR), saying that the Latin America operating power producer’s operational outlook has been transformed with capacity additions and a new revenue stream from carbon credit.

The group is currently emerging from an 18 month long period of corporate and debt restructuring with the debt position having improved “beyond recognition” following the sale of 50% of EdS (Energia del Sur) and the bond issue in Bolivia last year. The debt restructuring could come closer to completion if EdS receives a rating from Moody’s, enabling it to place its bond in Argentina, which would also help the company reacquire part of the 50% stake it sold last year, the broker said in the report.

Rurelec’s 60 MW (megawatt) combined cycle capacity in Argentina is now operational, with another 96 MW of CCGT (combined cycle gas turbine) due to be commissioned in Bolivia in the first half of the current year to take the group total to 719 MW, or 359 MW on a net basis by Q2 2010.

Further growth opportunities in Bolivia and the wider region are being pursued with about 248 MW of potential capacity, excluding the additional EdS stake.

Religare upheld its target valuation of £71 million, or 35 pence per share implying potential upside of 95% form the current share price of 17.75 pence. The stock is currently trading on EV (enterprise value)/EBITDA (earnings before interest, taxes, depreciation and amortisation) of 3.9x 2010E (estimate) and 3.1x 2011E, PERs (price to earnings ratio) of 11x 2010E and 7.4x 2011E and an EV/MW of US$0.38 million. The broker noted that the company’s dividend payout suggested a yield of 8.5% for this year and 13.5% for 2011E.

The report highlighted the announcement of the commissioning of Guaracachi’s CCGT capacity in H1 2010, the expected registration of CER (certified emission reductions) certificates at EGSA (Empresa Guaracachi SA), the confirmation of any further capacity additions and the debt rating and bond issue by EdS in Argentina.

Religare added that while the valuation was based on a ten year discounted cash flow model, incorporating the expansions of both Guaracachi and EdS, it did not include any further expansions as the timing cost and financing of them are still unclear.

Sales growth at Rurelec are expected to slow after rising 22% this year on the back of the EdS expansion and improving 31% in 2010 after the EGSA capacity increase. Capex (capital expenditure) is also expected to decline after this year as there currently are no expansion plans despite a number of potential projects.

http://www.proactiveinvestors.co.uk/companies/news/13539/religare-hichens-harrison-says-buy-rurelec-as-operational-outlook-transforms-with-capacity-additions-13539.html