Company Overview: The AES Corporation (NYSE: AES) is a holding company that operates a diversified portfolio of electricity generation and distribution operations through its affiliates and subsidiaries. The company’s business is segmented into four market-oriented strategic business units (SBUs): the US and Utilities SBU, South America SBU, MCAC SBU, and Eurasia SBU.

­­­­­­AES Details

Material Business Updates

AES Announced Quarterly Dividend: On 15 October 2021, AES’ board of directors declared a quarterly common stock dividend of US$0.1505/share payable on 15 November 2021 to shareholders at the close of business on 2 November 2021.

Partnership with Google: On 6 October 2021, AES announced its collaboration on Nest Renew, a new service for Nest thermostats, with Google. Initially, AES will offer Nest Renew via its US utilities – AES Indiana and AES Ohio. The consumers enrolling in Nest Renew with avail benefits from energy efficiency and cost-savings. The announcement is based on a 10-Year strategic alliance with Google.

Historical Financial Trend:

AES illustrated substantial operational efficiencies despite reduced sales in FY19 and FY20. As a result, gross profits have delivered significant bottom-line support, keeping EBITDA at elevated levels. Gross profits grew at a 3.1% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

First Quarter FY21 Performance:

Figure 2: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 3: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~56.39% of the total shareholding. In addition, the Vanguard Group, Inc. and Capital International Investors hold a maximum stake in the company at ~­­­12.54% and ~10.13%, respectively.

Figure 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Despite the recent slowdown in top-line growth, gross profits maintained the bottom-line at elevated levels. In addition, prudent working capital management, as manifested by sustainable current ratio and sequentially declining cash cycle days, has consistently contributed to stable operating cash flows.

Figure 5: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Received Regulatory Approvals: During Q2FY21, AES’ US Utilities – AES Ohio and AES Indiana – received regulatory approval allowing planned new investments of over US$2 billion, which includes:-

• Transition, Distribution, Storage Improvement Charge (TDSIC) and Hardy Hills solar project (195 MW) at AES Indiana
• FERC-regulated transmission rate and Smart Grid development at AES Ohio.

Completed Projects in Place: During the year-till date 4th August 2021, AES completed the acquisition or construction of 315 MW of renewables and energy storage projects, including Brazil’s Mandacaru and Salinas wind facility (159 MW) and AES Clean Energy’s solar and solar plus storage (75 MW).

Concrete Long-term Power Purchase Agreements (PPAs): During the year-till date 4th August 2021, AES signed renewables and energy storage of a total 1,824 MW under long-term PPAs.

Financial Guidance: AES reaffirmed 2021 Adjusted EPS in a range of US$1.50 to US$1.58. Moreover, AES strives to maintain a 7% to 9% average annual growth rate target through 2025.

Key Risks:

AES operates under a high price-sensitive environment, hence bears hedging costs and potential risk of top-line drifts from commodity price volatility. In addition, potential operational risks may prevail due to curtailed supply of semiconductors in the global market, raising risks of outages and equipment failures.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

AES has delivered 3-month and 6-month returns of ~+4.875% and ~-10.776%, respectively. The stock is trading above the average of the 52-week high price of US$29.07 and the 52-week low price of US$18.98, indicating a trailing opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering OGS’s most competitive advantage in supply proximity and low transportation costs. For valuation, a few peers like Ormat Technologies Inc (NYSE: ORA), Vistra Corp (NYSE: VST), Brookfield Renewable Corp (NYSE: BEPC) have been considered. Considering the concrete long-term PPAs, regulatory approval for US Utilities, development in renewables and energy storage projects, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the current market price of US$25.17, as of 25 October 2021, up by ~0.96%.

AES Daily Technical Chart (Source: REFINITIV)

Note: The Purple color line reflects the Relative Strength Index (14 Periods). The Green color line reflects the 21-period simple moving average (SMA). The Blue color line reflects the 50-period simple moving average (SMA).

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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