Tag Archives: management

Dynegy: Below $20 It Is Once More Highly Attractive

Summary For 2016, it expects EBITDA to fall between $1,100 to $1,300 million. For 2016, management expects Free Cash Flow to fall between $300 million to $500 million. Management has impressed me over time with opportunistic acquisitions and its PRIDE initiative. No need to worry about dumb acquisitions, instead expect debt retirement and stock repurchases. Over the next several years, I expect Dynegy, with its strong insider ownership, to surprise to the upside. My previous contribution to Seeking Alpha regarding Dynegy (NYSE: DYN ) dates back to May 6, 2014. It is part of the Seeking Alpha PRO library Dynegy: With The Market Appreciating The Ameren Assets, No Reason To Hold , but it is also available to Off The Beaten Path subscribers . Since that time, there has been only one piece of analysis and that is a shame really because this is a very interesting company. After the stock was recently sent back down to the mid-twenties, I bought some shares and, of course, it continues to decline and is now perhaps an even better opportunity. DYN data by YCharts To bring you up to speed to the recent results, these are not very good and management lowered its guidance for the year. Dynegy’s management now expects a 2015 Adjusted EBITDA range $825 million to $925 million and a Free Cash Flow guidance range at $140 million to $240 million. For 2016, it expects EBITDA to fall between $1,100 to $1,300 million (previously, the company guided for $1,600 million) and Free Cash Flow to fall between $300 million to $500 million. The company’s results have disappointed due to mild summer temperatures. On top of that, commodity producers have sold off. Something I am painfully aware off. Finally, there is Dynegy’s downward revision of guidance, which is a disappointment, although we should take into account that management tends to be conservative with its guidance. With the current guidance in place, Dynegy is still attractive at just 7.75x EV/EBITDA. Recent developments The company is shutting down its Wood River facility that is not producing good returns in a market that is distorted because of the presence of regulated utilities. The company is continuing with its very successful PRIDE cost-cutting program that has worked very well so far in making the company a leaner and meaner operation. Management deserves some credit with Flexon coming on board in 2011 under very difficult circumstances. In 2012, Dynegy left its corporate headquarters in the Wells Fargo Plaza in Houston pictured below and went to occupy much more modest digs at 601 Travis Street. (click to enlarge) Source: Gabor Eszes More importantly, under Flexon, operating cost per megawatt has declined by 70%, primarily by wheeling and dealing to build economies of scale by picking up assets opportunistically but also through cost cutting. Insiders hold approximately $28 million of shares and are buyers. Flexon himself holds about 2x his salary in shares, which I would love to see him increase by open market purchases. My general impression of the management team, garnered from earnings calls, K-10 and investor presentations, is quite favorable. They appear to be capable, straightforward and often stress the importance of shareholder value creation. An attitude evidenced by the company recently accelerating its share repurchase program. With the recent weakness in the shares, this program, and the PRIDE initiative over delivering this, was stepped up, and the company is now quickly closing in to having utilized the entire $200 million authorized amount of share repurchases. Given the Free Cash Flow that is being thrown off by the operation, a strong team is quite relevant. Over 2016, there will be between $250 million to $450 million of capital, which has not been committed yet, to allocate. Flexon is talking to the board about the capital allocation decision but went ahead and told us where his priorities lie on the recent earnings call : Steve, I said I want to talk to the board about. I think what they will need to be looking at is looking at our leverage, looking at our share price, looking at our various opportunities. But I would certainly say that one of the things that’s clearly on the table is part of that it’s maybe more so than what we looked at this year is making sure we have got the balance sheet positioned the right way and we are continuing to trend in the right direction. So, I would say it’s a combination of looking at where is our high yield debt trading in the marketplace? There are some opportunities for some open market repurchases. They have potentially, potentially some more share repurchases. I mean, I think probably the main two priorities, because anything else around the portfolio tends to be – we are not a buyer of single assets, that’s kind of the way that I view that for this company. We bring the ability to integrate platforms into our platform in a very cost effective measure. Buying a single asset does not create synergies and I think it actually puts pressure on the balance sheet ends up using liquidity, putting incremental leverage. Next thing you know, you are refinancing down at the project level or asset level creates a balance sheet with cash traps. So, I would view it’s really a decision between – at this point, my main two priorities for that was probably between the right balance between debt and equity. The way I read this, Dynegy is most likely to start retiring debt but may opportunistically buy back shares. However, Flexon is acutely aware that sending liquidity from the parent holding down into IPH to pay off debt is not necessarily in the best interest of Dynegy’s shareholders or bondholders and does not appear to be interested in taking that road: Bob Flexon – President and Chief Executive Officer When talking earlier about the – any potential repurchases up at – with the available cash that’s at the Dynegy level. So that would be Dynegy level, parent level, decisions around debt versus equity would not be at the Genco level. We continually say that the parent company is not sending cash down into the IPH complex. So then the solutions for Genco and IPH will come from within IPH and Genco. I previously found little to like at Dynegy after the Ameren acquisition had been fully priced in; the price per share even topped $35 for a while, but the risk/reward is now much more compelling at below $20 per share. If you put in management guidance, the company trades at 7.74x EV/EBITDA. However, management tends to guide conservatively, capital is likely to be directed towards debt retirement and share purchases, and the likelihood of value-destructive acquisitions is very low. Therefore, I think even that low multiple understates the value that can be found in Dynegy.

The Global X FTSE Portugal 20 ETF: The Case Of The Double Edged Sword

Portugal may have decided to end its EU support too soon. The domestic corporate structure is too diversified, involving many holding companies. The private banking system has remained weakened by a 2014 default. For Europe’s smaller economies, European Union membership, as well as adopting the Euro has been a double edged sword. The idea was for commerce to have the same ease of access similar to the United States of America. Imagine, if you will, what it would be like if goods in Pennsylvania had to make border stops, use passports or visas and pay tariffs as they crossed the New Jersey, then New York, then Connecticut state’s borders! It’s difficult to imagine, but that’s essentially how European nations conducted cross border business before the EEC. Without those ‘technical, legal and bureaucratic barriers’, smaller European economies, such as Portugal, not only had an unimaginably large market for its products, but now had a new employment opportunities for its citizens as well as the potential to expand its manufacturing and financial services base. The ‘icing on the EU cake’ was being able to do away with unstable legacy currencies and adopt the Euro, further leveling the playing field. Indeed, the EU economy expanded pulling along the smaller economies but at an unsustainable rate. When the global credit market collapsed in 2008, the other edge of the sword cut smaller economies to pieces, causing a deep recession, high unemployment and unsustainable debt to GDP ratios, literally putting many governments on the edge of bankruptcy. Since then, the EU has had a slow, uneven recovery. However, having the support of the larger community, many smaller economies have pulled back from the brink of disaster. This is the point: is this the right time to establish a position in the smaller EU economies, such as Portugal? If the investor wished to, there seems to be one available ETF: the Global X FTSE Portugal 20 ETF (NYSEARCA: PGAL ) . The premise for risking your hard earned savings is based on the old Wall Street premise to ” buy low and sell high .” The question is whether the worst is over for Portugal and what the potential is, versus the risk. If a picture is worth a thousand words, the potential for capital appreciation might be interpreted by the fund’s chart since inception in November of 2013. (click to enlarge) The fund closed its first day of trading at $15.05. Within four months the ETF gained 22.8%. At that time, the entire EU economy was struggling with deflation. At the June meeting, ECB President Draghi imposed negative interest rates. Portugal was experiencing a nascent recovery. Portugal’s sovereigns had also recovered. Now able to finance the government on its own to meet its budget the government passed on a scheduled final EU bailout tranche. German Finance Minister Wolfgang Schaeuble noted that: Portugal is now managing without European aid and can stand on its own two feet. That’s a big success. However, within months, a subsidiary of one of Portugal’s major financial institutions missed a debt repayment. Banco Espirito Santo ( OTCPK:BKESY ) , the parent company, had its shares suspended from trading. The Portuguese stock market fell sharply. The default put the entire Portuguese banking system into question. This is an important issue to understand before investing in Portugal through the fund. However, Portugal’s economic stability goes further than the banks. It’s worth examining the fund’s holdings. First, it’s difficult to separate the fund into sectors. For example although classified as a Telecommunications services company, Sonacom (OTC: OTC:SOVTY ) also provides IT services with software and system information services. Sonae Capital (OTC: OTC:SGPMY ) is listed separately as a Consumer Discretionary company and also as a Consumer non-cyclical. Sonae is in the Hospitality and Recreation industry as well as retail food services, superstores, supermarkets, and drug stores. The Sonae brands fall under the management of one holding company. On a larger scale this is not out of the ordinary. However, this seems typical in Portugal’s small economy. Consumer non-cyclical and Discretionary Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Jeronimo Martins OTCPK:JRONY $7.520 1.86% NA 26.97 13.38 23.84 Retail food, distribution; supermarkets, drug stores. Portugal and Poland Sonae SGPMY $2.00 3.30% 38.03 11.46 6.04 61.62 Retail food; superstores, supermarkets, franchise outlets; sporting goods, fashion and electronics Sonae Capital SGPMY $0.101 0.00% 0.00% 150 6.49 42.82 Tourism and Hospitality; resorts, marina, catering, fitness and golf courses Second, the quality of the Financial Services metrics indicates the underlying weakness in the sector. It was difficult to determine any metrics of Banif Banco Internacion do Fuchal (Lisbon: Banif) as it is a privately held company. The bank provides a broad range of banking services from retail to corporate, as well as asset management and insurance. Another of the holdings is Banco Espirto Santo ( OTCPK:BKESF ) , the bank which triggered Portugal’s banking crises shortly after the government had successfully restored its credibility in the sovereign debt market. Financial Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Banco BPI OTCPK:BBSPY $1.46 0.00% 0.00% 82.27 9.54 57.63 Banking Services; corporate, institutional, retail, insurance, credit cards. Subsidiaries in Angola and Mozambique Banco Commercial Portugues OTCPK:BPCGY $2.85 0.00% 0.00% 67.95 11.94 149.69 Privately owned; financial services; asset management, mortgages, consumer credit, insurance Banco Espirito Santo Lisbon: BES $0.613 0.00 0.00 NA NA 237.84 Domestic, corporate and retail banking; credit cards, debit cards, savings accounts, management and insurance One bright spot is the Utilities sector, two of the holdings having respectable yields and one of those has a sustainable payout ratio. Utility Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Energias de Portugal OTC:ELCPF $9.64 5.39% 17.64% of cash flow 11.69 3.62 225.55 Electric and gas in Portugal and Spain Renovaveis OTC:EDRVF $5.22 0.61% 47.56% 34.57 7.25 81.00 Spain based; renewable energy; hydro, wind, solar, tidal and biomass; EU, Brazil, Canada and US Redes Energeticas Naciona OTC:RENZF $0.810 6.14% 14.6% of cash flow 9.52 2.47 206.08 High voltage transmission; electricity; natural gas transmission and storage Portugal’s Basic Materials is concentrated in cements and cement related products. What is a very interesting feature of Portugal’s industrial Sector is its presence in Africa as well as South America, particularly in Brazil. On one hand this is a ‘plus’ as these companies provide their services in regions with a high growth potential like Egypt and South Africa. On the other had the investments in Brazil presents a problem for the fund as Brazil’s economy has recently been brought to a halt, along with a sharp currency devaluation, because of the collapse of commodity prices as well as a political scandal. Basic Materials Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Portucel Lisbon: PTI $2.68 11.26% 104.94 14.42 9.26 47.89 Paper pulp, craft pulp Cimpor-Cimentos De Portugal OTC:CDPGY $0.320 0.55% nil 17.10 1.58 503.71 Cement and aggregate (clinker); ready-mix; Portugal, Egypt, Cape Verde, Angola, Mozembique, South Africa, Brazil, Argentina and Paraguay The Telecom Services are run-of-the-mill as far as the Telecom Sectors go. However it does present another example which lends to the confusion of how some holdings should be classified. Pharol (OTC: OTCPK:PTGCY ) is described as a ‘capital management company’ with a 27% holding interest in Brazilian Telecom Oi (Brazil: OIBR4) . Pharol seems to be more of a hedge fund specializing in the Telecommunications Services Sector, while also investing in other holding companies. Telecom Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business NOS SGPS OTCPK:ZONMY $3.53 1.86% 72.07% 45.12 8.81 98.06 Cable, Satellite, movies, series sports and children programming, mobile and landline voice, data Pharol SGPS PTGCY $0.338 24.10% NA NA NA 0.00 Capital management of Brazilian and Portuguese Telecoms Sonacom SOVTY $0.598 2.13% 30% of cash flow 14.15 12.63 0.94 Telecom mobile and landline; voice, data, television; also some IT software and system information Portugal’s industrials are focused on paper-pulp manufacturing. There are three paper-pulp manufactures in the fund, two of which fit into the Industrials Sector and one in Materials. There’s one major construction company, Mota Engil (OTC: OTC:MTELY ) providing engineering and construction including transportation infrastructure and then managing those projects after completion. Industrials Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business Correios de Portugal OTC:CTTPY $1.295 4.89% NA 18.95 14.70 0.57 Courier services, parcel delivery; financial services, transfers, money orders, digital mail Altri SGPS OTC:ASGSY $0.890 1.68% 74% of cash flow 9.87 6.56 192.25 Paper pulp; generates electricity from waste biomass Semapa-Sociedade de Investimento e Gestao OTC:SEMMY $0.967 2.88% 40.50 14.29 3.18 NA Paper pulp, cement, pre-casts, recycling of cooking oil. Tunisia, Angola, Poland, France Mota Engil SGPS OTC:MTELY $0.445 5.02% 12.8% of cash flow 15.26 2.50 485.19 Engineering, Construction; Environment and Transportation construction and management Lastly, there’s one position in the energy sector, a holding company, GALP Energia (OTC: OTC:GLPEF ) . Galp Energia produces, refines and markets gasoline and petroleum products. Another segment provides oil exploration services in 40 countries. Energy Symbol Market Cap (USD Billions) Yield Payout Ratio P/E Price to Cash flow Total Debt to Equity Primary Business GALP Energia GLPEF $7.06 3.78% N/A N/A 12.74 65.61 Holding Company, energy exploration, production As far as the fund metrics, management fees total 0.61% compared to the industry average of 0.44%. It’s a small fund with about $37.5 million in net assets. Since its November 2013 inception its cumulative return is -26.85% and an average annualized return of -14.70%. The price to earnings for 2015 is 15.37 and price to book 1.35. When referring back to the price history chart, it looks like the fund might be a really good opportunity for a capital appreciation investment. However, upon closer inspection, it was really too far out in front of its potential when it reached its all-time high of $18.48. Further, the private banking sector really needed a restructuring before the government ended the EU restructuring program, as Portugal’s domestic banking crises demonstrates. Some events of the banking crisis are noted on the chart. The price earnings ratio of the holdings weren’t all that bad. Excluding from the count any holding for which the data wasn’t available, and any extreme numbers, it averaged out to 26.20 which doesn’t seem too bad. However, many holdings would not be marginable in US equities markets, in particular, being priced below $5.00 per share. This raises another point. The combination of a low P/E and a low stock price may be an indication of ‘fair value’. Hence, the fund may be close to fair value at this level. It’s unlikely that Portugal’s economy can generate enough investment interest in the foreseeable future in order for the fund to work its way back to the 2014 high. On the bright side, this is a situation where the EU benefits the smaller economies, as it’s a potential safety net for the economy, if it’s necessary. In the current situation, Portugal is now attempting to restructure a weak banking system without direct EU support. An analogy may be made here between Portugal’s economy and the Greek economy. They are in similar straits; however the Greek government has (with difficulties) stuck with the EU bailout program. Portugal may have to reestablish its commitment to the EU restructuring plan. This would be a good fund to ‘bookmark’, and follow the news and events; however, it might not be the right time to establish a position.

How Much Allocation To CEFs Is Too Much For An Income Investor?

CEFs provide a great income source for retirees and income investors. A past performance screen with 10, 20 and 40% allocation of 4 CEFs in combination with VTI is presented. The portfolio with a 40% allocation to CEFs had the highest return for the given period. It has been become a ritual for me when rebalancing my portfolio to make sure that I am not over-allocated to high yield asset classes. However, I have been adding more Closed End Funds to the portfolio due to the attractive discounts especially last month. Adding high yield CEFs in a rising interest rate environment is generally not considered very safe. I therefore set out to see how three portfolios with 40%, 20% and 10% allocations to a set of 4 CEFs would have performed since January 2008. Investing in CEFs is certainly not appropriate for everybody, but it can be a great vehicle for investors in or near retirement who would like to have a higher income from dividends. It is important to keep a sizable portion of a portfolio in stocks or ETFs like the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) for growth especially for long retirement time horizons. This analysis tried to shed light on the performance impact of a larger allocation to CEFs. There are certainly plenty of CEFs to choose from for this analysis and the selection chosen is solely based on the fact that I own each of them (with the exception of MGF) in my personal portfolio. I included MGF since it is a taxable bond CEFs with a long history of data available. I hold the PIMCO Dynamic Income Fund (NYSE: PDI ) in my personal portfolio for taxable bond CEF investment exposure. However, since the inception date for PDI was May 2012 vs May 1987 for MGF, I included MGF in the analysis. My aim was to get a representative set of CEFs with investments in preferred securities, equity and bonds. Overview of CEFs included: The Flaherty & Crumrine Preferred Securities Income Fund (NYSE: FFC ): Invests in preferred securities. At least 80% of the preferred securities are investment grade quality. Leverage ratio 34.6%. I consider this one of the best available Preferred CEF funds. It currently trades at a premium of 5%. The Nuveen Tax-Advantaged Dividend Growth Fund (NYSE: JTD ): Equity CEF using 31.6% leverage. This CEF has historic data going back to June 2007 and currently trades at a 11% discount The Eaton Vance Tax-Managed Global Diversified Equity Income Fund (NYSE: EXG ): International Equity CEF using an option income strategy. I included EXG for its international equity exposure. EXG currently trades at 7.9% discount. The MFS Government Markets Income Trust (NYSE: MGF ): A taxable Bond CEF that invests at least 65% of its assets in US Government securities and may invest up to 35% of its total assets in foreign government securities. MGF trades currently at 5.7% discount. Here are the hypothetical portfolio allocations: Portfolio 1 2 3 VTI 60% 80% 90% FFC 10% 5% 2.5% JTD 10% 5% 2.5% EXG 10% 5% 2.5% MGF 10% 5% 2.5% I used VTI as the non CEF part of the portfolio since it is a largely diversified ETF. So here are the results as analyzed using portfoliovisualizer.com . I included the SPDR S&P 500 Trust ETF ( SPY) for reference: # Initial Balance Final Balance CAGR Std.Dev. Best Year Worst Year Max. Drawdown 1 $100,000 $185,521 8.21% 15.45% 38.14% -31.16% -42.42% 2 $100,000 $178,894 7.71% 16.13% 33.52% -34.07% -45.19% 3 $100,000 $175,342 7.43% 16.66% 31.21% -35.52% -46.68% SPY $100,000 $167,266 6.79% 16.77% 32.31% -36.81% -48.23% The individual returns for the selected funds are listed below: Year VTI FFC JTD EXG MGF Total Return 2008 -36.98% -44.86% -40.22% -30.87% 26.22% -31.16% 2009 28.89% 108.42% 49.32% 49.11% 1.24% 38.14% 2010 17.42% 27.46% 22.61% -1.98% -2.05% 15.06% 2011 0.97% 18.52% 2.78% -11.59% 10.51% 2.60% 2012 16.45% 22.77% 27.14% 19.95% 5.76% 17.43% 2013 33.45% -2.21% 16.22% 25.60% -9.62% 23.07% 2014 12.54% 18.31% 11.37% 4.44% 6.95% 11.63% 2015 (until Oct) 1.90% 10.26% -3.66% 4.78% 1.45% 2.42% Conclusions: The allocation to a set of CEFs seems to have helped the portfolio return for the selected time period. FFC had the biggest positive impact on the portfolio performance. This is by no means a guarantee that the future results will be similar. However, I personally feel a bit more comfortable that a set of equity, preferred and bond CEFs can enhance the overall portfolio returns while providing nice income.