Company Overview: The AES Corporation (NYSE: AES) is a utility and power generation business. The company is focused on delivering sustainable energy via its diverse portfolio of renewable and thermal energy generation facilities and distribution businesses. The company is organized into four market-oriented segments, namely, US & Utilities, South America, MCAC, and Eurasia.

­­­­­­AES Details

Material Business Updates

Figure 1: Recent Material Publications

Source: Analysis by Kalkine Group

Historical Financial Trend:

Though AES illustrated high revenue fluctuations the operating efficiencies kept sustainable bottom-line levels. The gross profits have been growing from FY16 until FY19. A substantial rebound was illustrated in FY20 with operating profit growth at a 3.1% CAGR (FY16 – FY20).

Figure 2: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

Third Quarter FY21 Performance:

Figure 3: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 4: Annual Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~50.10% of the total shareholding. The Vanguard Group, Inc. and Capital International Investors hold a maximum stake in the company at ~­­­12.29% and ~9.41%, respectively.

Figure 5: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Consistent growth in operational efficiency across AES’ diverse portfolio of renewable and thermal energy generation facilities and distribution businesses has translated into long-term sustainable growth levels. In addition, continuous growth in definite PPAs exhibits a sustainable growth potential across years. As a result, AES’ profitability and return status remain stable despite recent market disruptions.

Figure 6: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Expanding Contract Size and Portfolios: AES is extensively focusing on closing definite PPAs with multiple regulatory bodies. The company expects to Sign 5 GW of renewables in 2021 under long-term PPAs. 9.2 GW backlog is already in place with 60% in the US market.

Long-Term Targets: For FY21, AES expected to deliver US$1.50 to US$1.58 in Adjusted EPS due to contribution from new renewable projects, rising demand recovery, and curtailed interest expenses. For FY25, AES targets an annualized Adjusted EPS growth rate of 7% to 9%.

Innovation and technology: Progress in AES Next innovation and technology businesses remains on track. Fluence, an energy storage JV, launched its IPO in October 2021 at an aggregate valuation of US$6 billion. Additionally, AES expanded its partnership with Google via the Nest Renew product to enable cost benefits to utility customers.

Key Risks:

Operational Sensitivity to Dry Hydrological Conditions: AES’ hydroelectric generation facilities are highly sensitive to climatic changes, specifically the water level inflows into generation facilities.

Trade Restrictions and Supply Chain: In recent years, the surged tensions between the US and China have turned into restrictive trade policies, increasing supply chain expenses, for instance, high tariffs and import restrictions.

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

Stock Recommendation:

AES has delivered 3-month and 6-month returns of ~-5.979% and ~-11.522%, respectively. The stock is trading below the average of the 52-week low price of US$22.60 and the 52-week high price of US$29.07, indicating an accumulation 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 the continuous increase in PPA contracts and decent operating metrics. For valuation, a few peers like Ormat Technologies Inc (NYSE: ORA), Vistra Corp (NYSE: VST), Brookfield Renewable Corp (NYSE: BEPC), and others have been considered. Given the continuous uptick in power purchase agreement count, high investment and strategic insight for technological growth, favorable long term EPS targets, the current trend in the equity market, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the closing market price of US$22.96, down by ~0.61%, as of 11 January 2022.

Technical Summary

AES Daily Technical Chart (Source: REFINITIV)

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 for 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 is 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 the uptrend may 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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