AES 3Q2016 Earnings Note

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Market Price (11/4/2016): $12.23/share; ST-Target: $19/share; NIV: $39/share

At precipice of demonstrating its LT potential

Despite promise of 12%-16% CAGR in AEPS thru 2018, AES is trading as if its growth prospects are next to none. But, based on existing construction projects, CAGR in net MW through 2021 is about 4%, plus 5% organic growth thru contract escalations would deliver CAGR of 9% through 2021. Add to this, cost cuts, and debt repayments, and 12% CAGR in AEPS through 2021 is achievable. From our view, 2016 is bottom and forward prospects look far better than before, AES: 1) is out of many of the riskier or no-growth-prospect countries, 2) has sold or vastly reduced its interests in non-performing plants, riskier businesses, or assets that have no growth potential, 3) has begun accelerating its investment program, 4) significantly reduced parent debt and continues to do so, 5) has businesses in stable countries or in stable regulatory regimes, and 6) even troubled assets such as Maritza in Bulgaria seem to have turned the corner. This isn’t to say there aren’t issues, AES: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) stubbornly clings to an inexplicably high investment hurdle rate. Regardless, given its investment program we look for it to overshadow our reduced $19/share ST-Target and march towards our reduced NIV of $39/share in the MT-to-LT.

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