We do now.
I think it's worth a second look, especially for anyone with a position in AGK.
Firstly, that chart is pretty uninspiring, with the share price now hovering only 20% above its $2 issue in 2010. That's not great, but not horrible either, and the timescale makes me comfortable that the company has become settled-in as a listed entity. Some new listings seem to take far too long to get used to the disclosure requirements, so we get clumsy announcements, ad hoc guidance and other niggling admin/compliance problems. EPW doesn't seem to suffer from that, even though it's 40%+ held by the MD/CEO.
The history of the company and its credentials are on their website, so I won't waste space regurgitating all that here. Suffice to say it's all pretty impressive both for consistency and strategic focus. I particularly like the fact that they publish the names and phone numbers of the broker analysts covering their stock:- how many companies do that?
Now to the numbers. The Accounts look a bit of a mess in some regards, especially if you try to apply conventional ratio analysis to some of them. In this case it doesn't bother me. As a small player, they are still in the development stage, even though the company has been around for 30 years. And "small" is relative:- being #4 isn't so bad in a specialised and guaranteed market. Just ask NAB.
That development imperative has seen them move into new businesses from scratch, as well as acquiring strategic stakes in others (like Oakey) for above market prices. So be it:- smaller companies usually have to pay over the odds to get "skin in the game". The question is not how much they spend at that level [within reason], but what they do with it. Anyone starting a new division from scratch obviously needs to invest in it.
And therein lies the reason why I'm prepared to forgive several anomalies in the numbers, including:-
- A bizarre and non-recurring tax & franking situation due to the acquisition of Oakey,
- Lack of headroom in the quick ratio
- Declining ROA/ROE based on the adjusted statutory profit
- Timing effects in accounting for their hedging
Use your choice of fundamental research providers for the numbers, but make sure you read the published accounts alongside them.
Now, the prospects. NSW are in the middle of divesting their power generation assets. ERM already have ACCC approval and AGK does not.
There is a Japanese suitor involved too, but I'll ignore him because I can't do anything about him. Origin and Energy Australia have already had their bite of the cherry.
Now, if AGK finds no regulatory hurdles, it ought to be in the box seat for MacGen. Even if ERM wins the bid, it will have no end of trouble financing it, which will mean a JV partner, diluting the long-term benefit to ERM. However, if ERM can finance the deal with itself as lead manager, it will be a game-changer for it, changing its business significantly.
Continuing with that thought, if ERM loses MacGen, that should put it top of the list for the final piece of the jigsaw:- Delta Coastal (again discounting foreign players). it's hard to believe the ACCC would let Delta go to either ORG or AGK if there's another viable local bidder, and this issue has just enough echoes of the Graincorp/ADM fiasco to stir up some political hurdles for the Japanese, imho.
To round out the ACCC's likely position, they must at some stage consider that both AGK (via their shenanigans in SA) and MacGen itself (via admissions from their ex-CEO) have blotted their copybooks on pricing creativity in the wholesale market. From memory, it had to do with peak supply too, which just magnifies the problem for AGK. Although none of it can be directly tied to consumer losses, I'm pretty sure some little old lady in the Adelaide hills paid a few dollars more on her 2010 power bill than she should have done. I'm just as sure that the ACCC will have drawn the same conclusion.
Finally, what's the business case?
As I said up front, buying into ERM makes some sense to me as an AGK shareholder. It makes me indifferent as to which of the two end up with the NSW generation assets and reduces my risk of not owning them to the possibility that foreigners get one or both.
If this was priced into EPW now, I would forget the whole thing and move on, but I don't think it is. That makes EPW a buy for me, and the resolution of the NSW privatisation will mark the catalyst to either exit or hold long term.
Before closing, I know that buying state assets is not a guarantee of instant wealth in the same way as (for example) a Russian oil company was in the 1990s. Just ask any shareholder of Brisconnect or the Sydney Cross City Tunnel or Airport Link rail line. However, I see this as different because electricity is very different to a dedicated transport corridor in so many ways:- not least of which is that it can be sold anywhere in the country.
Markets are made of competing opinions, but that's mine