This has been a special situation for the past three years but we think that now is finally the time to buy the stock given i) the emergence from bankruptcy closes the door on the Tubbs and Camp Fire uncertainty and ii) AB 1054 gives some level of confidence in the go-forward risk profile of the business.
Lastly, we believe there was a technical overhang of reflexivity that dissipated last week. Because PCG had to raise a specific dollar amount of equity, regardless of price, there was an interesting game theory dynamic that existed – there was little incentive to buy in the open market ahead of the deal. The lower the stock went, the more shares that would have to be issued and therefore, assuming constant net income, the lower the pro forma EPS.
The reflexivity risk from the capital raise is now in the rearview mirror which allows an investor to have confidence in the pro forma share count and EPS. Despite all these developments, the stock remains much lower than many investors would have predicted.
What is the current capital structure?
The company will have approximately 2.1 billion shares. Based on the closing price of $9.13, the market cap is $19.1 billion. The company will have $38 billion in debt and $1 billion in cash. The company also has $252mm of preferred stock. Thus, the EV is $56 billion.
What will the go forward entity earn?
The projections from the Disclosure Statement are attached below. The non-GAAP core earnings for 2021 are projected to be $2.04 billion. The company raised exit financing at tighter than expected yields for their debt which should add further to the above projections.
For the sake of using round numbers, let’s just say they will earn $1.00 in 2021. Wells Fargo lowered their estimates last week to $1.03 for 2021. They also highlight a $.06 cash payment into the securitization which they exclude from EPS. Based on the projections, the earnings are projected to grow quickly from 2021 to 2024 at 17%, 10% and 10% respectively. This is driven by projected growth in the rate base of 8% over this time frame.
What is the right multiple to pay for these earnings?
The overall regulated utility group trades at 18.5x earnings according to the same Wells Fargo note mentioned previously. We believe it is reasonable to think the multiple can expand to north of 12x.
Pros vs comparable group:
Faster rate base growth at 8% for the next few years
Solid allowed ROE
Fast EPS growth
Next rate case is effective year 2023
Demand from re-additions to indices
Negatives vs comparable group:
Untested wildfire construct
California political risks
Lack of common dividend for 3 years
Lack of demand from dividend investors
As shown below, the current multiple is below the multiple that sophisticated, well-respected investors expressed an interest in backstopping the offering:
(Please note the below was subsequently amended to allow for the recently completed public offering.)