EUR 850.00 For Business Accounts Only

Morningstar | Evergy Reports Strong Results Following Merger; Raising FVE to $55

We are increasing our fair value estimate to $55 from $52 per share after Evergy reported strong pro forma earnings, reaffirmed post-merger share repurchase plans, and issued guidance of 6%-8% EPS growth through 2021. Although favorable weather contributed more than half of the strong results in the quarter, the merger-related tax benefits were larger than we anticipated.

Pro forma 2018 second-quarter EPS was $0.90 versus $0.59 in the same period last year. Warm weather (cooling degree days were 73% higher) was responsible for $0.18 per share of the year-over-year improvement. However, the composite tax rate change following the merger drove $0.19 of the benefit. Evergy indicated that it will not be a material cash taxpayer until after 2022. The cash tax guidance drove the majority of our fair value increase.

Management reaffirmed that they expect to repurchase 60 million shares over the next two years, consistent with our expectations. However, no repurchases have occurred to date and, as one would expect, management declined to provide details on the exact timing of the buyback. Cash at June 30 was almost $1.3 billion, but we estimate it will take an additional $2 billion to complete its buyback. Evergy has the balance sheet to take on the additional debt as it rebalances its capital structure following the merger.

Evergy's dividend was adjusted to $0.46 per share for the third quarter, resulting in an annualized rate of $1.84 per share, as the Westar and Great Plains management teams had indicated before the merger. This provided a 15% increase for former Westar shareholders and made former Great Plains shareholders whole. We think Evergy’s board will probably raise the dividend 7% with its fourth-quarter payment. We are forecasting 7% annual dividend increases for the next five years, in line with management’s target of 6%-8%.