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EPW - ERM Power

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System

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Founded in 1980 as a specialist energy advisory firm, ERM Power has grown into an integrated energy company with businesses spanning electricity sales, generation and gas procurement.

ERM Power is one of Australia’s largest private energy companies and is one of the leading electricity suppliers to the business customer market in Queensland and a growing presence in other states.

http://www.ermpower.com.au
 
What's everyone's thoughts on EPW sitting back on this support line @ ~2.84? - The data is EOD and delayed so going by Google its currently at 2.89 which isn't far to go.

Anyway think there will be a bounce potentially Friday?
Also note that its high there is its all time high.

And do we have anyone fundamentally following ERM Power?

EPW.JPG
 
We do now.

I think it's worth a second look, especially for anyone with a position in AGK.

Firstly, that chart is pretty uninspiring, with the share price now hovering only 20% above its $2 issue in 2010. That's not great, but not horrible either, and the timescale makes me comfortable that the company has become settled-in as a listed entity. Some new listings seem to take far too long to get used to the disclosure requirements, so we get clumsy announcements, ad hoc guidance and other niggling admin/compliance problems. EPW doesn't seem to suffer from that, even though it's 40%+ held by the MD/CEO.

The history of the company and its credentials are on their website, so I won't waste space regurgitating all that here. Suffice to say it's all pretty impressive both for consistency and strategic focus. I particularly like the fact that they publish the names and phone numbers of the broker analysts covering their stock:- how many companies do that?

Now to the numbers. The Accounts look a bit of a mess in some regards, especially if you try to apply conventional ratio analysis to some of them. In this case it doesn't bother me. As a small player, they are still in the development stage, even though the company has been around for 30 years. And "small" is relative:- being #4 isn't so bad in a specialised and guaranteed market. Just ask NAB.

That development imperative has seen them move into new businesses from scratch, as well as acquiring strategic stakes in others (like Oakey) for above market prices. So be it:- smaller companies usually have to pay over the odds to get "skin in the game". The question is not how much they spend at that level [within reason], but what they do with it. Anyone starting a new division from scratch obviously needs to invest in it.

And therein lies the reason why I'm prepared to forgive several anomalies in the numbers, including:-

  • A bizarre and non-recurring tax & franking situation due to the acquisition of Oakey,
  • Lack of headroom in the quick ratio
  • Declining ROA/ROE based on the adjusted statutory profit
  • Timing effects in accounting for their hedging

Use your choice of fundamental research providers for the numbers, but make sure you read the published accounts alongside them.

Now, the prospects. NSW are in the middle of divesting their power generation assets. ERM already have ACCC approval and AGK does not.
There is a Japanese suitor involved too, but I'll ignore him because I can't do anything about him. Origin and Energy Australia have already had their bite of the cherry. ​

Now, if AGK finds no regulatory hurdles, it ought to be in the box seat for MacGen. Even if ERM wins the bid, it will have no end of trouble financing it, which will mean a JV partner, diluting the long-term benefit to ERM. However, if ERM can finance the deal with itself as lead manager, it will be a game-changer for it, changing its business significantly.

Continuing with that thought, if ERM loses MacGen, that should put it top of the list for the final piece of the jigsaw:- Delta Coastal (again discounting foreign players). it's hard to believe the ACCC would let Delta go to either ORG or AGK if there's another viable local bidder, and this issue has just enough echoes of the Graincorp/ADM fiasco to stir up some political hurdles for the Japanese, imho.

To round out the ACCC's likely position, they must at some stage consider that both AGK (via their shenanigans in SA) and MacGen itself (via admissions from their ex-CEO) have blotted their copybooks on pricing creativity in the wholesale market. From memory, it had to do with peak supply too, which just magnifies the problem for AGK. Although none of it can be directly tied to consumer losses, I'm pretty sure some little old lady in the Adelaide hills paid a few dollars more on her 2010 power bill than she should have done. I'm just as sure that the ACCC will have drawn the same conclusion.

Finally, what's the business case?

As I said up front, buying into ERM makes some sense to me as an AGK shareholder. It makes me indifferent as to which of the two end up with the NSW generation assets and reduces my risk of not owning them to the possibility that foreigners get one or both.

If this was priced into EPW now, I would forget the whole thing and move on, but I don't think it is. That makes EPW a buy for me, and the resolution of the NSW privatisation will mark the catalyst to either exit or hold long term.

Before closing, I know that buying state assets is not a guarantee of instant wealth in the same way as (for example) a Russian oil company was in the 1990s. Just ask any shareholder of Brisconnect or the Sydney Cross City Tunnel or Airport Link rail line. However, I see this as different because electricity is very different to a dedicated transport corridor in so many ways:- not least of which is that it can be sold anywhere in the country.

Markets are made of competing opinions, but that's mine :)

Enjoy
Snap
 
Frankly, I don't think a power generating and distributing company would do that badly. Its all-time low was 84cts hit on June 23rd. this year, when it fell off a cliff (June 16th., $1.45). The price has slowly recovered to $1 + after that.
 
ERM is primarily a retailer with their generation being limited to two power stations, only one of which is in the NEM (National Electricity Market - Qld, NSW, ACT, Vic, Tas, SA) and the other in WA.

Wholesale prices in the NEM are rising with the imminent closure of Hazelwood power station (Vic) and that's going to benefit generators but not in general retailers. Whilst ERM does generate, the vast majority of their operation is simply a case of retailing power generated by others with their own generation being relatively high cost to operate since it's all gas-fired and the gas price has roughly doubled in recent times.

What I don't know is the extent to which there's any mismatch between ERM's hedging of energy purchase costs versus their future retail commitments. If, hypothetically, they have retail obligations larger than their hedged position in the wholesale electricity market then they'll take a decent hit with rising prices. That's a hypothetical however since I haven't looked into them to that extent.

Those in the opposite position, low cost generation on a scale equal to or larger than their retail operations, are the obvious winners in the coming situation of rising prices.
 
Smurf1976 said:
ERM is primarily a retailer with their generation being limited to two power stations, only one of which is in the NEM (National Electricity Market - Qld, NSW, ACT, Vic, Tas, SA) and the other in WA.

Wholesale prices in the NEM are rising with the imminent closure of Hazelwood power station (Vic) and that's going to benefit generators but not in general retailers. Whilst ERM does generate, the vast majority of their operation is simply a case of retailing power generated by others with their own generation being relatively high cost to operate since it's all gas-fired and the gas price has roughly doubled in recent times.

What I don't know is the extent to which there's any mismatch between ERM's hedging of energy purchase costs versus their future retail commitments. If, hypothetically, they have retail obligations larger than their hedged position in the wholesale electricity market then they'll take a decent hit with rising prices. That's a hypothetical however since I haven't looked into them to that extent.

Those in the opposite position, low cost generation on a scale equal to or larger than their retail operations, are the obvious winners in the coming situation of rising prices.
Click to expand...

Tq Smurf for the invaluable insights. The reason why they are taking big steps to expand into the US mkt is because of the above events that you have mentioned hitting them in the local mkt. The latest reports and guidance a few weeks ago mentioned that their US operations would soon boost their earnings in the coming seasons.

I wonder if they are going to be right, this time,...
 
Starting to show signs of life on both the weekly and the daily charts. Weekly chart below but not valid or complete unless it holds above about 1.21 on Friday.

(click to expand)
 

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WRiley said:
Mr Trump's making America great again will, hopefully, bring in more good seasons ahead !
Click to expand...

Boggo said:
Starting to show signs of life on both the weekly and the daily charts. Weekly chart below but not valid or complete unless it holds above about 1.21 on Friday.

(click to expand)
Click to expand...

Fundamentals pointing well, Technicals pointing well too if the Weekly holds above 1.21 tomorrow,... so, it should be well,....
 
Boggo said:
Starting to show signs of life on both the weekly and the daily charts. Weekly chart below but not valid or complete unless it holds above about 1.21 on Friday.

()
Click to expand...

Can you explain why $1.21 Boggo? I thought it would be $1.30.
 
roland said:
I must be the only one that has ERM.
Down 13% today :(
Click to expand...
Probably just some impatient holders taking profits because the Trading Update released today wasn't as positive as they'd hoped. Also, it looks like it was having trouble getting through $1.85.

Don't know how long you've been holding but ERM Power has been having a pretty good run since July 2016. This is probably just a temporary downturn.

big.chart-EPW.gif
 
Don't worry I have it - been whacked by the market several times in the last week or so!

[x] good looking set up
[x] on market buy back occurring to naturally support the stock
[x] big seller at 1.80 gone

I loved this trade and it's going to hurt my P & L :)

Funny how it works some times.
 
greggles said:
Probably just some impatient holders taking profits because the Trading Update released today wasn't as positive as they'd hoped. Also, it looks like it was having trouble getting through $1.85.

Don't know how long you've been holding but ERM Power has been having a pretty good run since July 2016. This is probably just a temporary downturn.

View attachment 87513
Click to expand...
Been holding for 1 year and 339 days :)

Average is $1.19 so I am OK - holding for dividend return really - SP doesn't bother me much!
 
Australian business is performing strongly. However, their US volumes have decreased and margins have eroded significantly from indicated $4.50 mW/h to $3.70 mW/h in FY 18 and to $3.30 mW/h in FY19 (down weighted average of circa 21%).

The US business is circa 25% of the total electricity retail sales volume for the company 25 TW/h.

Their operating expenditure for the US business is circa $3.50 mw/h so their US business is will not be NPAT breakeven to after 2020.

The announcement was very ambiguous and didn't actually announce an earnings downgrade, which in fact it really is.

TRADING UPDATE: ERM POWER AFFIRMS AUSTRALIAN BUSINESS OUTLOOK & UPDATES US OUTLOOK

It doesn't mention what impact the US business has on its earnings, but Mr market and the analysts do not need to read between the lines.
 

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