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Market Price (1/29/2016): $94.75/share; ST-Target: $140/share; NIV: $211/share
SRE: So Much More to Come
In our view, key to SRE valuation is its Cameron liquefaction facility starting operations on time and on budget. Also, adaptation of Rockies Express (REX) pipeline may deliver unexpected upside to investors. California’s utility regulatory framework is among best in country and should help sustain valuations. We view SRE’s utilities as stable base from which to launch contracted growth projects, while its other operations deliver higher risk/return growth; proper balance of both is another key to valuation. Additional factors to SRE’s future is management’s strong and proven ability to evaluate risks/rewards, especially with regards to non-utility projects, in our opinion. We don’t believe that SRE needs financing structures to boost shareholder value and would be cautious about its involvement with oil & gas businesses, even as rate-based projects. We look for new liquefaction project at Energia Costa Azul (ECA) in Mexico, but unlikely at other sites. We believe that steady delivery of both utility and non-utility projects at budget and on-time will propel SRE to our ST-target of $140/share, while long-term projects such as Cameron and REX have the potential to propel the stock to our NIV of some $211/share.