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Geregu Power PLC Initiation of Coverage - Playing in an industry with strong potentials

Geregu Power PLC
Playing in an industry with strong potentials
We initiate coverage of GEREGU Power PLC with a BUY recommendation and a target price of ₦131.15. Our valuation was done using the Discounted Cash Flow methodology. We see immense growth potential for the business, given the massive demand-supply imbalance present in the power market today. Thus, we believe there exists strong potential for an upward movement in the market price of Geregu stock.
Geregu Power PLC has delivered double-digit growth in the last 5 years, driven by strong demand and increased output. The company has seen consistent y/y improvement in power output over the 5-year period, indicating increased efficiency and improved utilization of its power plant. This, coupled with strong demand, has bolstered topline expansion, with revenue expanding at a CAGR of 14% in the last 5 years, while EBITDA margin has also shown a consistent rise, increasing from 41% in 2017 to 48% in 2021. Looking ahead, given that demand for power has historically never been met, and with current generation data suggesting that supply remains far less than demand, we see the company’s turnover maintaining a positive growth trajectory in the medium term, as Geregu races to continually increase its capacity utilization, although this is subject to the grid being able to receive the same.
Also, with the wide supply deficit present in the market today, we believe the ongoing infrastructural development that includes upgrading the transmission line is a positive for the company, as there is a huge prospect of significantly increasing supply. The Federal government has struck a deal with SIEMENS to upgrade the transmission capacity to 7000MW, and implementation is already ongoing, evidenced in the July purchase of 10 mobile transformers and sub-stations. What this means for Geregu is that raising generation capacity in the mid-long term is very feasible. Conclusively, with an expected uptick in demand given the rising urbanization rate (world-bank projects 4.23% annually), an expanding population (World-bank projection of 2.7%), and the prospects of an improved grid, we believe the company’s prospects of delivering strong growth in the mid-long term is solid.