If we had included Monday’s share price movements we’d have seen...

If we had included Monday’s share price movements we’d have seen the Origin (ORG)share price up 9% and the ERM Power (EPW) share price down a sickening 25%. The jump in the ORG share price doesn’t appear related to any public news (minor move in oil price, no asx announcements) but the fall in EPW is explained by management’s advice to the market about the profit outlook for FY16 and FY17.

When companies issue profit advice to the market (“guidance”) it can be an upgrade or a downgrade to expectations. It’s the downgrades that are subject of some wry amusement to analysts. Invariably the downgrades, no matter how severe, are accompanied by many positive statements about how well x or y is going. Then somewhere near the end of the announcement typically there is something that would be in small print were that allowed, generally put in obscure fashion that when properly read amounts to a downgrade. So it was in this case.

EPW stated that while it would meet guidance for FY16 (ebitdaf = 81-$85 m) the company went on to say how well the USA segment is going but then stated that the gross margin for FY17 in Australia was expected to be around $3 MWh. The company doesn’t explicitly point this out but when you multiply the gross margin in Australia by the “guided” Australian volume of 18.5 TWh you get to $55 m of ebitdaf and with the USA earnings roughly cancelling out the head office overheads you don’t have to be Warren Buffet to see that FY17 will likely be well down on FY16.

In this analyst’s view EPW does a good job but retailing into the wholesale market with no natural generation hedge is tough.  Management also stated that FY16 has benefitted from running down the book of RECs. Of course selling your back inventory at good profit can only be done once. EPW has never, to our knowledge, sponsored a single renewable project, never signed a renewable PPA, despite being the 4th largest retailer in the NEM by volume.

It simply shifts the obligation for organizing renewable certificates onto its customers. Other retailers with access to ongoing renewable PPA’s can, if they wish, use some of the inbuilt profits currently available to win market share. Its no wonder that much of the time investors prefer “gentailers” to either retailers or generators.

Finally management stated that the Oakey power plant (an open cycle gas generator) in QLD will underperform expectations in the June quarter. It/s not immediately clear why this should be case as pool prices were quite strong in Qld in the June quarter.