Company Overview: Vistra Corp. (NYSE: VST) is engaged in electricity generation, retail, and wholesale energy sales. The company caters to about 4.5 million customers in 20 states with a generation capacity of about 38,700 MW covering a portfolio of natural gas, nuclear, coal, solar and battery energy storage facilities. It caters to residential, small businesses, and commercial and industrial establishments through brands, namely, TXU Energy, Ambit Energy, Dynegy Energy Services, Homefield Energy, TriEagle Energy, Public Power and U.S. Gas & Electric.

VST Details

Transition to Zero-Emission: To pursue its net-zero emission by 2050 target, the company announced the retirement of ~7,500 MW of coal-fuelled assets and ~350 MW of gas assets. VST plans to retire such assets from its entire fleet in Midwest before 2027-end. On the growth side, VST plans to ramp up its exposure in renewables assets. The company is advancing in the development of 850 MW renewable generation projects in Texas. Vistra has earmarked an investment of $500 million per year for setting up renewable resources, energy storage systems and enhancing electricity retailing business. It had launched Vistra Zero containing a generation portfolio of ~4,000 MW of carbon-free generation resources, including nuclear, solar, and energy storage facilities. As detailed out in the below picture, VST intends to increase the capacity share of renewables from 1.2% in 2021 to 18% in 2030.

Figure 1. Increasing Share of Carbon-Free Resources: 

Source: Company Reports

Vistra currently operates 10 MW battery energy storage systems at its Upton facility. In Texas, VST plans to establish a 260 MW of battery storage facility and 668 MW of solar photovoltaic power generation facilities, and both are expected to enter the commercialization phase between Summer 2021 and Fall 2022. In California, VST is looking to set up 1,000 MW of energy storage expansion at existing sites.

Historical Financial Trend:

VST operates in six segments – Retail, Texas, East, West, Sunset, and Asset Closure. It caters to national grid operators in addition to providing electricity directly to customers. Through electricity generation, retailing, and wholesale commodity risk management businesses, the company’s operations are well integrated. VST can offset price volatility in the wholesale market and able to bypass bid-ask spread. The company continue to expand in Texas with the acquisition of retail customers from Infinite Energy and Veteran Energy in November 2020.

Figure 2. 3-Year Financials Trend of VST:

Source: Company Reports

VST realized ~$400 million in EBITDA from the Operations Performance Improvement (OPI) plan. It had achieved close to $750 million in synergies from the acquisition of Dynegy, Crius Energy, and Ambit Energy during the year. It had posted EBITDA above the guidance for five consecutive years. The OPI had paved the way for a $1.15 billion investment opportunity in solar and storage projects in 2021 and 2022. VST identified about $1.5 billion in cost savings opportunity for the next four years. Through lower generation costs and an increase in customer base, VST clocked increased adjusted EBITDA from $3,325 million in FY19 to $3,685 million in FY20.

Figure 3. Segment-wise Profitability for FY20:

Source: Company Reports

The Uri winter storm in February 2021 recalls as the force majeure event, which crippled the company’s operations with a spike in load levels and shortage of gas supply. In Q1 FY21, VST executed a new $1.25 billion term loan agreement to tie over the crisis along with other financing arrangements, which is expected to increase the leverage profile of the company with net debt/ EBITDA to reach 3.5x in Q1 FY21 (vs. 2.5x in FY20).

Figure 4. Debt Profile of VST as of December 2020:

Source: Company Reports

Top 10 Shareholders: The top 10 shareholders together form ~43.79% of the total shareholding. The Vanguard Group, Inc. and Fidelity Management & Research Company LLC hold a maximum stake in the company at 9.42% and 6.38%, respectively.

Figure 5. Top 10 Shareholders

Key Metrics: VST posted stable revenue growth in the past three years on the back of a growing customer base, integrated business lines, and strong commitment to renewables that helped to post consistent operating income. Its current ratio remains stable with a cash balance of $406 million and nearing debt obligations of $395 million as of December 2020, implying adequate liquidity.

Figure 6. Key Financial Metrics

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: The winter storm event affected the company to the tune of $1.6 billion. VST has cut down its earnings estimates due to losses associated with the event. It is expecting adjusted EBITDA for FY21 in the range of $1,475-$1,875 million as compared to the earlier estimate of $3,075 - $3,475 million. VST to deleverage its balance sheet with debt reduction by $1,250 million in the last-three quarters of FY21. The company is expecting to pursue phase 2 of the renewables project in Texas and accelerate the pace for storage projects in California with an expected capex of $683 million in FY21.

Key Risks: VST is exposed to extreme cold weather and natural disaster events such as the Uri winter storm to significantly influence the operations. The volatile wholesale electricity prices and natural gas prices is expected to impact the electricity generation costs and margins. The planned or unplanned outage has a material impact on the capacity availability of power plants. The company hedges the natural gas prices to mitigate the wholesale price risk. It had recognized losses on hedging activity in the past.

Valuation Methodology: EV to EBITDA Multiple Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: VST has delivered 3-month and 6-month negative returns of ~21.76% and ~11.42%, respectively. The stock is trading below the average of the 52-week high price of $24.20 and 52-week low price of $16.20, indicating a decent accumulation opportunity. We have valued the stock using EV to EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a discount compared to its peer median EV/EBITDA (NTM Trading multiple) considering the impact of the Uri winter storm on EBITDA forecasts which have been revised downwards for FY21, while debt level is expected to increase in Q1 FY21. For the purpose of valuation, we have taken peers such as AES Corp. (NYSE: AES), Nextera Energy Partners LP (NYSE: NEP), Clearway Energy Inc. (NYSE: CWEN). Considering the vertically integrated operations, strong commitment in transition to renewables, stable EBITDA generation, and financing flexibility, we give a “Buy” recommendation on the stock at the current market price of US $16.29, down 3.04% on May 04, 2021.

VST Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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