Tag Archives: alternative

New Hope Looks Good, But Is Free Cash Flow Negative

Summary New Hope is one of Australia’s companies focused on coal. It says it wants to acquire new projects with its A$1B working capital position, but it’s spending cash like there’s no tomorrow. The dividend is 7 times higher than the free cash flow is. If New Hope is serious about its expansion plans, it should reduce its dividend payments right now. Introduction After identifying Whitehaven Coal ( OTCPK:WHITF ) as a great coal company, I continued to look for other companies and was waiting for New Hope’s ( OTCPK:NHPEF ) financial results to see whether or not this is another coal company I should add to my list. Source: company presentation New Hope has a more liquid listing at the Australian Stock Exchange where it’s listed with NHC as its ticker symbol. The current market capitalization is approximately US$1.05B, so this isn’t your average micro-cap company. The company is still flowing cash Everybody knows the entire coal sector is suffering due to low prices, but fortunately the Australian producers have one advantage; the extremely weak Australian Dollar. As the Australian currency has lost in excess of 30% of its value in just one year time, the Australian companies are doing much better than their competition as even though they are still selling the coal in USD, the local expenses are a few dozen percents cheaper than one year ago, protecting the margins. (click to enlarge) Source: financial statements And yes, this seems to be proven in the company’s financial statements as even though the revenue decreased by 11%, the cost of sales fell by 17% and this would have resulted in a pre-tax profit of A$73M ($52M), if New Hope would have been able to avoid an A$97M impairment charge. This pushed the pre-tax profit in the red and even after a small tax benefit the bottom line was still showing a net loss of almost A$22M ($16M). Fortunately an impairment charge never has any influence on a company’s ability to generate cash flows, so I would think the cash flows of New Hope would remain pretty decent but the only way to find out is by checking the cash flow statements. That’s why I waited for New Hope to publish its annual report, as (unlike the quarterly reports), the company has to provide a cash flow overview as well. (click to enlarge) Source: financial statements The operating cash flow was A$88.5M ($63M) (after taxes), and whilst that’s still pretty good, considering the worsening circumstances on the coal market, you shouldn’t forget the total capital expenditures were A$115M ($82M), so New Hope was free cash flow negative. Again, that’s nothing to worry about because a) the negative cash flow is still limited and b) New Hope has a substantial amount of cash on its balance sheet. The negative free cash flow was A$26.5M ($18M), but in the next part of this article I’ll explain why I’m not really worried about this cash shortfall. But is spending more than it receives, and I don’t like that Indeed, that’s New Hope’s strength. It has a working capital position of in excess of A$1B ($700M) and a current ratio of in excess of 11 and that’s extremely high. This strong working capital position will also allow New Hope to indeed pursue the acquisitions it has been eying as this must be the only coal company in the world with such a financial flexibility. (click to enlarge) Source: financial statements The majority of its cash is being held in term deposits, and this resulted in a total interest income of A$38M in FY 2015. This was sufficient to cover the shortfall of the operating cash flow to fund the capital expenditures, but despite the free cash flow increasing to A$11.5M, it’s quite annoying to see the company has spent A$79M on paying dividends. And it won’t stop there. Together with the presentation with the company has announced a final dividend of A$0.025 and a special dividend of A$0.035 to bring the total dividend for the financial year at A$0.10 ($0.07). Using the current amount of 831M outstanding shares, this means New Hope will be paying A$83M in dividends based on its FY 2015 results. And that’s a pity. The adjusted free cash flow was a positive A$11.5M, but paying A$83M in dividends is definitely weakening the company’s financial situation. Of course, it still has in excess of one billion of Australian Dollars in working capital, but I have a firm opinion the company should NOT pay out more cash than it’s taking in from its operations. Investment thesis The shareholders will be happy with a 6% dividend yield, but I believe not a single company should pay out more cash than it’s generating. New Hope has publicly declared it wants to acquire more projects, to paying out almost A$100M ($71M) in dividends probably is one of the most stupid things the company could do. I like coal, and I like New Hope’s strong and solid financial status, but it’s not helping the company at all to spend cash on dividends instead of keeping the cash in its treasury. The working capital decreased from almost A$1.2B to A$1.1B in the past year, and that seems to be a bit contradictory to the company’s public claims it’s looking for acquisition targets. If New Hope is really serious about becoming a major player in the coal space, it should cut the dividend and cash up. Now. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Review Of NRG’s Business Update Conference Call

Summary NRG held an analyst call last Friday to provide a strategic update. NRG will create a GreenCo, including its Home Solar business. The remaining exposure to GreenCo is $125M. NRG committed to an additional $1.3B in share repurchases and debt reduction through 2016. The company also announced its performance in the latest PJM capacity auction. Last Friday, NRG Energy (NYSE: NRG ) held a conference call to present an update to its strategic direction and to present a business update. The big item in this call was the plan for simplifying NRG by creating a new “GreenCo.” The GreenCo will contain three of NRG’s current business units: NRG Home Solar, NRG EVgo, and NRG Renew. The creation of the GreenCo is expected to be complete on January 1, 2016. Part of the reason for this move is that investors have been concerned that these businesses were money pits that would just suck away the cash generated by its main wholesale power business. NRG said that these businesses are showing progress and that the time had come to increase the financial rigor and make them more self-supportive. NRG has put a limit of $125M in additional support to GreenCo from the parent. It is also pursuing potential strategic partners. NRG feels that the GreenCo business will be self-sufficient by the middle of 2016. NRG provided an update on how the Home Solar business has been doing this year, and presented the following chart: Exhibit 1 Source: NRG 9/18/15 presentation NRG felt that the solar business got off to a slow start in 2015, but that it has achieved some momentum as the year has progressed. 2015 sales are up 103% year-to-date, even after the slow start, and the 2,500 bookings in August are a monthly record for NRG. That level puts it with Sunrun (NASDAQ: RUN ) in the competition for third place in domestic market share, behind SolarCity (NASDAQ: SCTY ) and Vivint (NYSE: VSLR ). Installations and deployments are still lagging, but NRG feels this lag will be addressed by year-end. Getting the installations and deployments figured out is obviously a big thing for its solar business. It is one thing to be able to take orders, but it is another to actually deliver a product, and this is what NRG needs to prove to investors. (Reminds me of this old Seinfeld episode .) Of course, one of the advantages of solar deployment being behind schedule is that it has burned less cash in the business. At January’s investor day, NRG estimated $250M in cash being spent at Home Solar in 2015, but now its estimate is only $168M. Other reasons for the decrease are a partnership with NRG Yield (NYSE: NYLD ) and better terms from tax equity providers. It really makes sense for NRG to make the move to break out the GreenCo businesses. You can see how small these GreenCo businesses really are compared to the older NRG businesses by looking at the YTD EBITDA table: Exhibit 2 (click to enlarge) Source: NRG Q2 2015 Earnings Presentation Management is spending significant time involved with these businesses, even though there is a small effect on the bottom line. Yes, there is the potential for high growth if these work, but there are lots of risks as well, and with management spending all of their time on the small businesses, they risk missing opportunities at the big businesses that could really impact the bottom line. Management does not want to quickly sell the GreenCo business at this time. They think that as the business continues to grow and as the IPO market improves, they could extract a lot of value. One example they gave is that the Texas market has been very slow to embrace solar. They feel that if Texas takes off, the GreenCo would really be a big beneficiary, and they would like to keep exposure to this upside. NRG said it thinks it could eventually realize a significant multiple above the $125M commitment it is making today. RUN, the company with a similar-sized solar business, has an enterprise value of about $1.7B, so there may be hope that NRG can extract value from this endeavor. The call reviewed a number of other topics besides the GreenCo announcement. Over the last six months, NRG has been examining ways to optimize its generating portfolio through deactivations, fuel conversions, or other means. On Friday, NRG announced that non-strategic asset sales would also be part of its portfolio optimization. The company feels that there are a number of valuable assets that could be sold, simultaneously reducing its need for CAPEX and providing capital to be used elsewhere in the company. NRG mentioned that there is a good chance a number of these sales would be in the PJM region. If transactions do take place in PJM, it could give investors some nice data on values for similar assets that would help in estimating the value of other companies with big nearby portfolios (Dynegy (NYSE: DYN ) and Talen (NYSE: TLN ) for example). NRG also plans to reduce development, marketing, and G&A spending by $150M in 2016. It estimates that it will cost $60M to put these expense reductions in place. NRG expects that over the next six to nine months, cost reductions, CAPEX reductions, non-recourse financings, and asset dispositions will free up $1B in capital. By the Q3 conference call, NRG will announce the details of where the first 50% of this $1B will come from. The final 50% will most likely take place through asset dispositions, which it expects to happen in 2016. This $1B will be used for stock repurchases and debt reduction. NRG also committed to an additional $300M of stock repurchases and debt repayments from cash flow it expects to receive this year. All of these balance sheet reductions are on top of the remaining $251M of stock buybacks that NRG has already committed to for 2015. Also, don’t forget that in 2016, NRG’s operations will produce additional cash flow that could be used for further reductions to the balance sheet and dividends to shareholders beyond this current plan. NRG also mentioned that maintenance and environmental CAPEX is expected to go from about $725M in 2016 to $400M in 2017, which will continue to help its cash flow over the long run. The call also provided updates regarding NRG Yield. The big item was that an agreement has been reached to move the Edison Mission Wind portfolio to NRG Yield. This is going to bring $210M of cash to NRG, and the entire deal was completed at an implied enterprise value of $452M. The implied EV/EBITDA of the deal was approximately 11x. It was also announced the NRG Yield would not be looking to raise any equity until the markets for Yieldcos improved. This could impact its ability to obtain more assets, but stated that NYLD can still grow its dividend at a 15% CAGR without any further asset dropdowns from NRG. Exhibit 3 (click to enlarge) Source: NRG September 18 presentation The big update about NRG’s traditional generation business was the review of last month’s PJM capacity auction. (My Seeking Alpha article discussing the auction can be found here .) Exhibit 4 (click to enlarge) Source: NRG 9/18/15 presentation The company’s 2018/19 results give about $225M of extra revenue compared to the results of the original 2017/18 auction. If you assume a 40% tax rate, and then take NRG’s 331M shares, you get an almost 41¢/share impact to earnings. NRG did not break out the specific units that cleared the auction, but it did show some data by zone. I have totaled the cleared capacity data NRG gave in Exhibit 4 above, and compared it to the available capacity in the different regions. Exhibit 5 (click to enlarge) Source: NRG and Garnet Research estimates It should be noted that NRG’s numbers include imports, which explains why the total of NRG generation that cleared in the RTO is above the amount located in that zone. If all of NRG’s assets in PJM (not including imports) had cleared at the CP price, it would have received about $1.1B in revenue, instead of the $950M level it achieved. According to page 16 of PJM’s report on the auction results, the COMED zone (the area around Chicago) had 23,320 MW of capacity clear the auction. This means that NRG had about 18% of the cleared capacity. PJM’s report also shows that 26,275 MW were offered in the auction for that zone. Exelon (NYSE: EXC ) has already stated that its 1,800 MW Quad Cities nuclear plant did not clear in COMED, and it now appears, assuming NRG offered all of its capacity, that the remaining capacity that didn’t clear was entirely owned by NRG. This should be a sign that if things continue to tighten around Chicago, NRG has a good chance of benefiting. With the new auction results, expect an update of this slide from the Q2 results presentation when NRG presents Q3 results. Exhibit 6 (click to enlarge) Source: NRG Q2 2015 Earnings Presentation NRG now has about $950M from the latest auction that will be split between 2018 and 2019 in the above chart. The recent PJM transitional capacity auctions for the 2016/17 and 2017/18 planning years will add $125M to be split between 2017 and 2018, and an additional $105M to be split between 2016 and 2017. Friday’s announcements should be pretty positive for NRG, but the initial reaction has not been that enthusiastic. Exhibit 7 (click to enlarge) Source: SNL NRG did take a big hit on Friday after the conference call. But most of this was giving back that gains from earlier in the week that came when it announced it would hold the call. The market also had a down day on Friday, so NRG was likely carried along with everyone else, further worsening performance. So far this week, the stock has continued down, even with Friday’s positive news. Most of the other independent power producers were down significantly as well, so NRG’s fall has not been isolated. Conclusion This was a positive call for NRG. It is simplifying its business and will be returning significant capital to investors. The stock market has driven NRG’s shares down further since the announcement, on top of an already tough year. If NRG can execute this plan, it should at least stop the relentless decline it has been experiencing. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

VTTVX: This Is A Great Option For The Investor Nearing Retirement

Summary The Vanguard Target Retirement 2025 Fund has a simple construction and a low expense ratio. Despite being a very simple portfolio, they have covered exposure to most of the important asset classes to reach the efficient frontier. This is quite simply one of the best constructed portfolios I’ve seen for a worker nearing retirement. Lately I have been doing some research on target date retirement funds. Despite the concept of a target date retirement fund being fairly simple, the investment options appear to vary quite dramatically in quality. Some of the funds have dramatically more complex holdings consisting with a high volume of various funds while others use only a few funds and yet achieve excellent diversification. My goal is help investors recognize which funds are the most useful tools for planning for retirement. In this article I’m focusing on the Vanguard Target Retirement 2025 Fund Inv (MUTF: VTTVX ). What do funds like VTTVX do? They establish a portfolio based on a hypothetical start to retirement period. The portfolios are generally going to be designed under Modern Portfolio Theory so the goal is to maximize the expected return relative to the amount of risk the portfolio takes on. As investors are approaching retirement it is assumed that their risk tolerance will be decreasing and thus the holdings of the fund should become more conservative over time. That won’t be the case for every investor, but it is a reasonable starting place for creating a retirement option when each investor cannot be surveyed about their own unique risk tolerances. Therefore, the holdings of VTTVX should be more aggressive now than they would be 3 years from now, but at all points we would expect the fund to be more conservative than a fund designed for investors that are expected to retire 5 years later. What Must Investors Know? The most important things to know about the funds are the expenses and either the individual holdings or the volatility of the portfolio as a whole. Regardless of the planned retirement date, high expense ratios are a problem. Depending on the individual, they may wish to modify their portfolio to be more or less aggressive than the holdings of VTTVX. Expense Ratio The expense ratio of Vanguard Target Retirement 2025 Fund is .17%. That is higher than some of the underlying funds, but overall this is a very reasonable expense ratio for a fund that is creating an exceptionally efficient portfolio for investors and rebalancing it over time to reflect a reduced risk tolerance as investors get closer to retirement. In short, this is a very solid value for investors that don’t want to be constantly actively management their portfolio. This is the kind of portfolio I would want my wife to use if I died prematurely. That is a ringing endorsement of Vanguard’s high quality target date funds. Holdings / Composition The following chart demonstrates the holdings of the Vanguard Target Retirement 2025 Fund: (click to enlarge) This is a fairly simple portfolio. Only four total funds are included so the fund can gradually be shifted to more conservative allocations by making small decreases in equity weightings and increases in bond weightings. The funds included are the kind of funds you would expect from Vanguard. The top 4 which carry almost all of the value are extremely diversified funds. The Vanguard Total Stock Market Index Fund is also available as an ETF. The ETF version is the Vanguard Total Stock Market ETF (NYSEARCA: VTI ). To be fair, Vanguard has a great reputation for running funds but not for coming up with creative names. I have a significant position in VTI because it carries an extremely low expense ratio and offers excellent diversification across the U.S. economy. Volatility An investor may choose to use VTTVX in an employer sponsored account (if their employer has it on the approved list) while creating their own portfolio in separate accounts. Since I can’t predict what investors will choose to combine with the fund, I analyze it as being an entire portfolio. Since the fund includes domestic and international exposure to both equity and bonds, that seems like a fair way to analyze it. (click to enlarge) When we look at the volatility on VTTVX, it is dramatically lower than the volatility on SPY. That shouldn’t be surprising since the portfolio has some very material bond positions. Investors should expect this fund to retain dramatically more value in a bear market and to fall behind in a prolonged bull market. Because the S&P 500 has been significantly outperforming international equity markets and 26.4% of the fund is currently in international markets, there has been an additional source of drag on the portfolio. Since October 2003 the international mutual fund is up 102.8%, just under the total return for VTTVX. Had international markets been doing better relative to domestic markets, this fund would’ve been able to stay closer to SPY while still delivering the significantly lower levels of volatility. Conclusion VTTVX is a great mutual fund for investors looking for a simple “set it and forget it” option for their employer sponsored retirement accounts. It is ideally designed for investors planning to retire around 2025, but can also be used by younger employees with lower risk tolerances or older workers with higher risk tolerances. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VTI over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.