ZEN vs PEA, page-6

Thanks PGen - always interesting to see what the professionals think.

For this capital-intensive business a key question is what proportion of capex is "maintenance / stay-in-business" and what is "growth". I take cues from its historic performance.

PEA has not been a prolific generator of free cash flow in recent years. Between 2011 and 2018FY it has:

- produced $209m net operating cash flow

- paid $181m for PPE and other assets

- spent $106m on acquisitions (dominated by $95m last year on Contract Power).

On the positive side, it has more than doubled installed capacity over the same period from 180MW to 371MW (of which Contract Power is worth 82MW).

This begs the question as to why this growth is beneficial to shareholders. We might ask whether size translates to a benefit in terms of revenue and/or cost synergies.

Despite the great increase in generating capacity there has been no material reduction in any of the PEA's input costs over this period.

 

Nor is it apparent that the revenue side of the equation has improved - that is, the company's new business does not seem to be any more lucrative than what it previously had. Revenue per MW installed has bumped around $0.20-0.22m for the past 5 years and operating margins are relatively static.

I conclude that the value of this growth is dubious and that PEA is correctly priced for what it is - a company that simply treads water and where earnings growth (or perhaps even static earnings) are entirely reliant on Shareholder or Banker generosity.

In the outlook slide, the AGM presentation notes that PEA is both "well funded to pursue growth with circa $60m facility headroom" and set for "early recommencement of dividends".

I hope their attention is on the latter.