BAILLIEU HOLST RESEARCH 11 August 2016 INTERNAL ONLY Pacific Energy (PEA) RECOMMENDATIONS INITIATION OF COVERAGE Rating BUY ▲ Risk High Powering up Price Target $0.73 Share Price $0.64 . We initiate coverage of PEA with a BUY rating: Pacific Energy (PEA) has a significant presence in the remote power generation market in SNAPSHOT Australia and a good track record of delivering steady earnings growth. Monthly Turnover $2.1mn Management is looking to leverage its decades of experience in the sector Market Cap $235mn by pursuing growth offshore and in the broader energy infrastructure Shares Issued 370.2mn market. If it succeeds, we believe that there is strong potential upside to 52-Week High $0.65 our current 12-month target price of $0.73. 52-Week Low $0.36 . Delivering solid long-term growth: PEA has been a leading player in the Sector Utilities market since 1981, being involved in the construction and operation of 40 power stations. Revenue is generated under long-term contracts of 5-15 years, delivering good earnings visibility and steady growth, with bonuses BUSINESS DESCRIPTION for outperformance. Since 2009, PEA has grown its generation capacity Pacific Energy builds, owns, operates and from 100MW to 239MW, with EBITDA growing from $17m to $35m. maintains remote power stations and generation-related infrastructure, primarily . Pursuing multi-faceted expansion strategy: PEA is seeking to leverage serving the mining sector. The vast majority its strong operating base into adjacent areas in search of additional of its assets are gas, diesel and dual fuel growth. Its strategy includes: 1) expanding offshore into African projects generators, with hydro facilities making up the remainder. The company is now looking to with ASX-listed owners; 2) increasing its presence in renewable energy, by expand its activities into Africa and the partnering with suitable companies; and 3) reviewing opportunities for renewable energy space. investment or acquisition in the broader energy infrastructure market. Remote, renewable power expanding rapidly: Industry research . 12-MONTH PRICE & VOLUME suggests that the remote power market will double by 2024, implying a 10% CAGR. Most of the growth will be in Asia-Pacific and Africa/Middle East and PEA is moving to capitalise on this. Similarly, renewable energy investment in the mining sector is forecast to grow by a 20% CAGR in Asia-Pacific to 2022. PEA recently signed an alliance with a German wind and solar power specialist to participate in this expansion. Good 1H16 result; 2H16 to be better: PEA reported 1H16 revenue up 6% to $24.4m, Adjusted EBITDA up 17% to $17.6m and Adjusted NPAT up 24% to $8.7m. The result was driven primarily by cost reductions, but PEA is expecting a stronger 2H16 due to a number of additional projects coming online and we are forecasting it to beat guidance of $35m. Investment view: Our 12-month price target is in line with our valuation of $0.73. This is based on the average of valuations calculated using a DCF RESEARCH ANALYST analysis ($0.71) and a P/E multiple ($0.75). We believe PEA is a solid Luke Macnab, CFA growth stock with a decent yield of 4.8% (fully franked) and significant + 612 9250 8930 upside potential if its growth strategy is successful. [email protected] Nicolas Burgess, CFA INVESTMENT SUMMARY + 613 9602 9379 Year End: 30 June 2014A 2015A 2016E 2017E2018E Revenue $mn 47.9 45.8 50.6 55.6 58.9 [email protected] EBITDA $mn 34.4 30.8 36.0 40.0 42.6 Josh Kannourakis EBIT $mn 23.4 19.4 23.6 26.6 28.1 + 613 9602 9265 Reported Profit $mn 14.7 12.0 14.8 17.5 19.4 [email protected] Adjusted Profit $mn 16.4 13.5 16.5 19.2 21.1 EPS (Reported) ¢ 4.0 3.3 4.0 4.6 5.0 Disclosure EPS (Adjusted) ¢ 4.5 3.7 4.4 5.0 5.5 The author owns no shares in PEA. EPS Growth % 0.7 -17.9 19.6 13.9 9.4 PER (Reported) x 15.8 19.5 16.1 13.9 12.6 PER (Adjusted) x 14.1 17.2 14.4 12.7 11.6 Dividend ¢ 2.5 2.5 2.5 3.0 3.3 Yield % 3.9 3.9 3.9 4.8 5.2 Franking % 100 100 100 100 100 Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 1 BAILLIEU HOLST RESEARCH Pacific Energy Limited (PEA) Financial summary PACIFIC ENERGY Code: PEA Rating: BUY Analyst: Luke Macnab Price Target: $0.73 Date: 11 August, 2016 Upside/downside: 15% Share Price: $0.64 Valuation: $0.73 Market Capitalisation: $237m Valuation method: DCF/Multiple Financial Year End: June Risk: High PROFIT & LOSS (A$m) FY14A FY15A FY16E FY17E FY18E EARNINGS FY14A FY15A FY16E FY17E FY18E Operating revenue 47.9 45.8 50.6 55.6 58.9 EPS - Underlying (cps) 4.5 3.7 4.4 5.0 5.5 COGS -2.6 -3.4 -3.7 -3.9 -4.1 EPS Growth - Underlying 11% -19% 21% 16% 10% Gross profit 45.3 42.4 46.9 51.7 54.8 EPS - Reported (cps) 4.0 3.3 4.0 4.6 5.0 Expenses -10.9 -11.6 -10.9 -11.7 -12.2 Diluted shares (m) 365.0 367.5 375.4 382.5 385.1 EBITDA 34.4 30.8 36.0 40.0 42.6 DPS (cps) 2.5 2.5 2.5 3.0 3.3 Depreciation -8.5 -9.2 -9.9 -10.9 -12.0 Dividend Yield 3.9% 3.9% 3.9% 4.8% 5.2% EBITA 25.8 21.6 26.1 29.0 30.6 Payout Ratio 62% 77% 50% 50% 50% Amortisation -2.4 -2.3 -2.4 -2.4 -2.4 Franking 100% 100% 100% 100% 100% EBIT 23.4 19.4 23.6 26.6 28.1 Net Interest expense -2.2 -2.2 -2.4 -2.5 -2.1 VALUATION FY14A FY15A FY16E FY17E FY18E Minorities 0.0 0.0 0.0 0.0 0.0 P/E - Underlying (x) 14.1 17.2 14.4 12.7 11.6 Underlying PBT 21.2 17.2 21.3 24.1 26.1 EV/EBIT (x) 11.3 13.3 11.5 10.0 9.3 Tax -6.5 -5.2 -6.5 -6.6 -6.6 EV/EBITA (x) 10.2 11.9 10.5 9.2 8.5 Underlying NPAT 14.7 12.0 14.8 17.5 19.4 EV/EBITDA (x) 7.7 8.3 7.6 6.7 6.1 Underlying NPATA 16.4 13.5 16.5 19.2 21.1 Price/Book (x) 1.8 1.8 1.8 1.7 1.7 Price/NTA (x) 2.4 2.3 2.2 2.1 1.9 Significant items (net of tax) 0.0 0.0 0.0 0.0 0.0 Price/FCF 22.5 15.1 -38.2 15.0 13.1 Reported profit 14.7 12.0 14.8 17.5 19.4 GROWTH FY14A FY15A FY16E FY17E FY18E BALANCE SHEET (A$m) FY14A FY15A FY16E FY17E FY18E Revenue growth 10% -4% 10% 10% 6% Assets COGS growth 0% 29% 8% 6% 6% Cash 15.6 16.3 5.8 5.5 5.9 Expenses growth -16% 6% -6% 7% 4% Receivables 6.6 5.5 7.3 8.1 8.5 EBITDA growth 23% -10% 17% 11% 7% PPE 128.8 129.2 155.8 158.8 161.5 PBT growth 45% -19% 24% 13% 8% Goodwill & Intangibles 29.4 27.2 25.0 22.5 20.1 Underlying NPAT growth 12% -19% 24% 18% 11% Investments 0.0 0.0 0.0 0.0 0.0 Reported NPAT growth 12% -19% 24% 18% 11% Other assets 1.1 1.0 1.4 1.4 1.4 Total Assets 181.4 179.2 195.3 196.3 197.4 MARGINS & RETURNS FY14A FY15A FY16E FY17E FY18E Liabilities EBITDA Margin 71.7% 67.3% 71.2% 71.9% 72.3% Payables 1.8 2.0 1.9 2.0 2.1 EBITA Margin 53.9% 47.3% 51.6% 52.3% 51.9% Debt 42.9 36.6 42.0 36.1 30.1 NPBT Margin 44.2% 37.5% 42.1% 43.4% 44.2% Provisions 1.9 1.9 1.9 1.9 1.9 ROIC 11.7% 9.9% 11.3% 11.9% 12.5% Tax payable 2.2 1.0 1.7 1.9 2.1 ROE 23.4% 9.3% 11.2% 12.8% 13.5% Deferred Revenue 1.0 1.0 0.8 0.8 0.8 ROA 28.5% 12.0% 13.9% 14.8% 15.5% Other liabilities 5.7 6.5 7.4 7.4 7.4 Effective Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% Total Liabilities 55.6 49.0 55.8 50.2 44.6 Equity GEARING FY14A FY15A FY16E FY17E FY18E Share capital 108.4 110.1 110.3 110.3 110.3 Net Debt 27.3 20.3 36.2 30.6 24.3 Retained earnings 18.1 20.9 23.6 29.7 36.6 Enterprise value 263.9 256.9 272.7 267.1 260.8 Other equity -0.7 -0.9 0.1 0.1 0.1 Net Debt/EV (%) 10.4% 7.9% 13.3% 11.4% 9.3% Total shareholders equity 125.8 130.1 133.9 140.1 147.0 Net Debt/EBITDA (x) 0.8 0.7 1.0 0.8 0.6 EBITDA/Net Interest (x) 15.5 14.1 15.3 16.1 20.6 BV per share (cps) 34.5 35.4 35.7 36.6 38.2 NTA per share (cps) 26.4 28.0 29.0 30.7 33.0 SEGMENT REVENUES (A$m) FY14A FY15A FY16E FY17E FY18E Kalgoorlie Power Systems 47.0 44.8 49.5 54.4 57.7 CASH FLOW (A$m) FY14A FY15A FY16E FY17E FY18E Other - 1.0 1.1 1.2 1.2 Cash at Start 12.0 15.6 16.3 5.7 5.5 Cash from operations 24.8 25.2 26.4 30.1 33.4 Capex -14.5 -9.7 -32.6 -13.9 -14.7 Free cash flow 10.3 15.5 -6.2 16.2 18.7 Cash flow from investing 0.0 -0.1 -0.5 -0.5 -0.5 Cash flow from financing -6.7 -14.8 -3.8 -15.9 -17.8 Cash at end 15.6 16.2 5.7 5.5 5.9 Free cash flow per share (cps) 2.8 4.2 -1.7 4.2 4.9 GOCF / EBITDA 114% 106% 101% 108% 108% FCF / Underlying cash NPAT 70% 129% -42% 93% 96% Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report.