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Market Price (5/9/2016): $11.16/share; ST-Target: $20/share; NIV: $42/share
AES: Time to turn-up the growth volume
Outside of mild weather, it seems to us AES is back on track and on its way to achieving its 2016E AEPS guidance of $0.95-$1.05. AES is turning corner from restructuring-and-stagnant Street to growth-and-prosperity Road, but investors need to hold their breath for 2016 due to murky economic outlook. We’d like AES to stop wasting money on share repurchases, and dedicate more to reducing recourse debt. We believe AES should lower its risk premium across the board when evaluating investments in an effort to boost investments and AEPS CAGR. In concert with lower recourse debt, we believe this to be a prudent strategy, something that could have been started in 2014 before all of the capital wasted on share buybacks. At least, we’d encourage AES to drastically reduce the dividend, if not eliminate it, and use it for equity portion of investments. We’d encourage AES to rid itself of US T&D in exchange for generation assets, and look to expand its core competencies in global generation, especially in Brazil, and in general, any free-market country, which demonstrates distress asset valuations. We also look for AES’ success in Mexico through participation in Mexico’s restructuring of its state-owned electric utility. However, we’re less than thrilled with Bulgarian settlement, which we fear sets bad precedent.