RY 172.93 -0.271% SHOP 157.86 0.7274% TD 75.22 0.2532% ENB 59.74 0.5216% BN 81.36 0.9429% TRI 234.42 0.5404% CNQ 43.01 1.2% CP 104.55 0.7225% CNR 146.44 0.7568% BMO 139.17 0.2377% BNS 77.04 -0.0649% CSU 4487.8101 0.7917% CM 91.94 -0.6054% MFC 44.04 1.1716% ATD 80.33 -0.5694% NGT 54.77 -0.635% TRP 66.14 0.532% SU 50.335 1.4819% WCN 245.2 -2.104% L 191.84 0.64%
Company Overview: NRG Energy, Inc. (NYSE: NRG) is an integrated electricity generation company. In addition, the company provides energy solutions and natural gas to small businesses, residents, and commercial & industrial customers through its diversified portfolio of retail brands. The company’s segments include Texas, East, and West/Other.
NRG Details
Material Business Updates
Figure 1: Recent Announcements from NRG
Source: Company Publications, Analysis by Kalkine Group
Historical Financial Trend:
NRG illustrated sustainable historical growth until FY20 due to the COVID-19 impact. Despite depressed sales in FY20, gross profits exhibited consistent growth. NRG sought a consistent decline in the cash conversion cycle due to prudent working capital management. Gross Profits grew at a 3.3% CAGR (FY16 – FY20).
Figure 2: Historical Financial Overview
Source: Company Reports, Analysis by Kalkine Group
Third Quarter FY22 Highlights:
Figure 3: Summary of Quarterly Performance:
Source: Company Reports, Analysis by Kalkine Group
Full-Year FY20 Performance:
Figure 4: Annual Performance Summary
Source: Company Reports, Analysis by Kalkine Group
Top 10 Shareholders:
The top 10 shareholders together form ~52.13% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A., hold a maximum stake in the company at ~12.26% and ~7.05%, respectively.
Figure 5: Top 10 Shareholders
Source: Analysis by Kalkine Group
Key Metrics:
With rising electricity prices, growth potential in power generation has translated into long-term sustainable growth levels. As a result, top-line and gross profits manifested synchronised growth attributed to steady margins. Eventually, NRG’s profitability and return status remain stable. The current ratio has maintained sustainability with a reduced cash conversion cycle, manifesting favourable cash flow movements.
Figure 6: Key Financial Metrics
Source: Analysis by Kalkine Group
Outlook:
Figure 7: Guidance
Source: Company Reports, Analysis by Kalkine Group
Advancements in Consumer Services Strategy: NRG is focused on optimising core operations as follows –
Disciplined Capital Allocation Plan: NRG achieved a robust credit metric (net debt to Adj. EBITDA) of 3.0x in FY21. NRG targets 2.50x– 2.75x by FY23. Further, the programmatic share repurchase plan has already commenced.
Key Risks:
High Financial Impact from Exogenous Factors: The forecasted financial stands are in the preliminary phase due to customer settlement and the finalisation of meter data. Moreover, potential counterparty and customer risks are sustained.
Power Price Volatility: Considerable movements witnessed in electricity prices suggest the effective use of hedging strategies to curtail commodity price risks.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
Stock Recommendation:
NRG has delivered 3-month and 6-month returns of ~-13.394% and ~+7.795%, respectively. The stock is trading below the average of the 52-week low price of US$31.94 and the 52-week high price of US$46.10, indicating an accumulation opportunity. The stock has been valued using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/EBITDA (NTM trading multiple), considering favourable movements in electricity prices and consistent gross margins. For valuation, a few peers like Edison International (NYSE: EIX), PG&E Corp (NYSE: PCG), PPL Corp (NYSE: PPL), and others have been considered. Considering the continuous involvement in renewable energy PPAs, strategic divestiture strategies for decarbonisation, improving capacity, and potential upside as indicated by the valuation, we give a “Buy” recommendation on the stock at the current market price of US$38.63, as of 07 December 2021, at 10:17 AM Eastern Time.
NRG Daily Technical Chart (Source: REFINITIV)
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
Disclaimer
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