AES 2Q2017 Earnings: We feel the upside coming, but now we have to see it

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Market Price (8/8/2017): $11.38; ST-Target: $19/share; NIV: $46/share

Except Alto Maipo, things seem to be turning, and AES sees economies finally improving. We continue to think AEPS guidance through 2020 is conservative: We feel it’s closer to 11.6%, given organic growth should be some 4% and with 1% inflation, AES is already at 5% CAGR. Then new projects totaling some 4.6GW on base of some 27.0 net GW, about a 17.0% increase, should boost growth above 8%-10% guidance. But, AES is trading as if growth prospects are negative. We continue to look for Alto Maipo to be completed. Gas-to-power could be major LT growth source, particularly in Asia – reentry into China? AES seems close to reducing its risk profile to target levels, but look for more exits in Europe. And, to us, Asia/Europe combo signals exit from Europe. AES pointing towards its MCAC LNG strategy and energy storage projects to boost MT-to-LT growth. Focus on getting investment-grade-credit-equivalent is a telling and good strategy. Issues surrounding AES, include, but are not limited to: 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 view. But, 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.

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