AUS REMAINS CORE, US IS A FREE OPTION One of the key takeaways from ERM’s 1H15 result was the margin improvement across C&I customers, with unit gross margin up 13% to $4.06/MWh. Management maintained a full-year target of ~$4.50. ERM also announced completion of the sale of its WA gas assets to Empire Oil & Gas (EGO). Oakey could surprise on the upside Oakey appears well placed to leverage cheap ramp gas in QLD over the coming years and to help balance the market once the LNG projects are up and running (less supply, increased volatility). Spot revenues in January and February are up more than 200% ($18m vs $6m last year), suggesting to us that if Oakey is dispatched opportunistically, it could make some serious revenues during peak times. Spot revenues in January/February are equal to ~80% of our full-year revenue forecast in FY16 for Oakey. US should be viewed as a free option ERM’s expansion into the US has hardly been met with a wave of support. Many investors remain sceptical about the upside ERM could achieve. While we currently sit in this category, we note the US financing structures are different and potentially ERM could set up a sleeve facility that would cover all of its prudential requirements, as well as a working capital facility. This should mean that over the coming years, very little capital would need to be allocated to this division. Maintain Overweight and $2.90ps price target We have increased our earnings forecasts 2% in FY15 and ~8% in FY16-17 to reflect the 1H15 result. Our price target remains unchanged at $2.90ps. We believe ERM offers investors an attractive growth profile on the back of its SME expansion, with a (conservative) forecast three-year EPS CAGR of 10%. ERM continues to win market share within the C&I space and, at the same time, margins have been improving. The sale of its WA assets should help clean up ERM’s portfolio and return the focus to its core expertise, electricity retailing, which should help restore the market’s confidence in the ERM story.
EPW Price at posting:
$2.14 Sentiment: Buy Disclosure: Held
