Shares in ERM Power Limited, the electricity producer and retailer, fell out of bed yesterday after the company reaffirmed its previously lowered earnings guidance for 2015-16, but gave a very strong hint that the results for 2016-17 could be lower.
ERM Power (EPW) has mopped up the minority interest in the Oakey power station and will repay the operation’s debt. Full ownership makes life simpler for the power retailer and, despite the expensive price, enables faster utilisation of tax losses and the absorption of Oakey’s franking credit balance. Brokers envisage the acquisition, and the announcement that ERM will take part in the bidding for Macquarie Generation assets, puts the company on a path to becoming the fourth largest vertically integrated power provider in the Australian market.
ERM Power has mopped up the Oakey minority stake. The company has raised $75m to cover the stake and repay $41m of Oakey’s outstanding debt. The deal simplifies the company’s capital structure and affords greater flexibility to pursue vertical integration opportunities, in CIMB’s view.
No changes made to target or rating as analysts at RBS reiterate their confidence in the Buy rating for this stock. The analysts continue to see the bias to the upside as their estimates have been set conservatively. But even then, this stock is cheaply valued, they argue.