Report
Charles Fishman
EUR 850.00 For Business Accounts Only

Morningstar | AES Reports Flat Earnings but Increases Project Backlog and Begins New Cost-Saving Initiative

We are increasing our fair value estimate for AES to $16 per share from $15 after the company reported flat first-quarter adjusted earnings, reaffirmed earnings and parent cash flow guidance, and announced a new cost-saving initiative.

AES signed an additional 494 megawatts of renewable energy capacity in the first quarter, increasing its total project backlog to 6.2 gigawatts. The backlog includes thermal and renewable energy projects expected to achieve commercial operation by 2022.

Incorporating the additional renewable energy projects and cost-saving initiative increased our compound annual EPS growth rate by 60 basis points, to 8%. Our estimate of average annual EPS growth over the next five years is now at the midpoint of management’s 7%-9% target through 2022. The higher forecast earnings growth was the principal driver for the increase in our fair value estimate.

AES is initiating a $100 million incremental annual run rate cost-saving target to be realized by 2022. Based on the success of the 2012 cost-saving initiative that management increased and now expects to result in over $500 million of savings by 2020, we are confident that management will achieve its new target. We have incorporated the savings into our earnings estimates.

Although AES indicated this cost-saving initiative will be driven by incorporating digital technology into operations, we believe the retrenching of its global footprint is also a factor. On April 23, AES announced it had entered into an agreement to sell its interests in four thermal power plants, one solar plant under construction, and one battery storage facility in Jordan and the United Kingdom for proceeds of $211 million.

The exit from these countries reduces the countries where AES has operations to 13 from 28 in 2011. The smaller footprint gives us additional confidence in management’s new cost-saving initiative, and we believe the simpler story is a positive for investors.
Underlying
AES Corporation

AES is a holding company. Through its subsidiaries, the company operates a portfolio of electricity generation and distribution businesses. The first business line is generation, where the company owns and/or operates power plants to generate and sell power to customers, such as utilities, industrial users, and other intermediaries. The second business line is utilities, where the company owns and/or operates utilities to generate or purchase, distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial and governmental sectors within a defined service area. In certain circumstances, the company's utilities also generates and sells electricity on the wholesale market.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Charles Fishman

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