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Market Price (5/8/2017): $11.31/share; ST-Target: $19/share; NIV: $45/share
We feel AES is being conservative but given history not a bad idea
We’re more convinced AES is conservative with guidance through 2020. We estimate closer to 11.5%, given organic growth ought to be some 4% and with 1% inflation, AES is already at 5% CAGR. Then growth projects (including pending acquisitions) totaling some 4.1GW on base of some 27.0 net GW, an increase of some 15.2%, should boost growth over guidance of 8%-10%. However, AES is trading as if growth prospects are some minus-3.5%. Kazakhstan exit is in-line with expectations and sale or closure of OH coal plants doesn’t surprise us. We believe AES is close to reducing its risk profile to target levels, but look for further risk mitigation action in Bulgaria, Netherlands, and the UK. AES pointing towards its MCAC LNG strategy and energy storage projects to boost MT-to-LT growth trajectory. And, focus on attaining investment-grade-credit-equivalent is a telling and good strategy. 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) growth trajectory isn’t at potential, in our opinion. However, it appears that AES’s hurdle rates are moving towards a more rational level, which we believe should drive growth. Thus, we look for AES to reach our $19/share ST-Target and move towards our NIV of $45/share in MT-to-LT.