BAC/ Merrill Lynch has underperform rating on this name. It is good to understand the bear thesis. Here are some of their concerns.
- Execution risk, getting permits and interconnect issues
- Planning to triple its renewals, i.e., 40-45 GW by 2027, only 3.6 GW in 2024, so significant ramp-up in the next 3 years or backend loaded growth
- This will lead to non-linear growth, taking hit next year and then growing in 26 and 27
- Policy issues
- Inflation Reduction Act changes, we all know incoming administration doesn’t believe in renewables or climate change.
- Other tax credits could be at risk
- Financing issues
- Selling fossil assets, as PPA (power purchasing agreement) nearing may result in not able to sell at attractive valuation; AES plans to raise $3.5 B
- These are fully depreciated assets, thus earning higher margins, being replaced by newer assets
- Potential for impairment charges for asset write-downs, if shutdown or sold at lower prices
- There is $1.5 B funding gap, which could impact investment grade
- AES can issue equity to keep the IG, but that would be dilution
- Also, funding issues could limit dividend growth
- Higher leverage means stock multiples could suffer
My comments. The report has listed the concerns clearly and very well. They are projecting $2.05 $2.11 $2.16 EPS for 25, 26, 27. This is below consensus and the lowest projection amongst the analysts. So, let us assume they are able to $2.2 and get 9x PE and $20 share price by Dec 2027, that would give 15.75% CAGR return and add to that 5.5% dividend would give you 20% CAGR return.
I am not dismissing the risks listed, there are additional risks emerging with the current administration picking international fights, or other policy fights, and there is a potential for higher interest costs, etc. OTOH, the company may slow the transition or elongate it on the positive side. Any stock rally could provide an opportunity to sell some shares and reduce the financing risks.