Opg Power Ventures Share Discussion Threads

[tim000] 24/6/2023 08:11

I had a reply from the Cenkos analyst. He says he’s not regulated to answer questions from private investors, only institutional investors, so I don’t think he’s going to be helpful.

[tim000] 23/6/2023 09:22

There is a distinct inconsistency between the tone of the trading update and the forecast figures published by Cenkos, as Goldbug has highlighted. It seems possible that the contents of the research note was discussed with management say a month ago, and hasn’t taken account of the very recent sharp softening in Indian and Indonesian coal markets. Hence a short para was added before publication warning that the numbers could be misleading. It’s not likely that a detailed forecast of P/L and balance sheet could be put together in the last few days to account for all the very latest data.

[tim000] 23/6/2023 09:13

If you google steelmint LinkedIn India coal index prices soften further in Apr 23 there is a useful monthly time series of thermal coal prices. April price for medium grade coal was R3689/t. Bearing in mind this info was published on 12 May, it suggests the Cenkos note is already out of date; a blended average of Indonesian and Indian coal prices is probably already below the $50/t threshold for operating at higher PLFs.

[tim000] 22/6/2023 15:09

I’ve emailed the Cenkos researcher, we’ll see if he replies.

[tim000] 22/6/2023 12:41

Yes, that might be it.

[dave4545] 22/6/2023 12:13

Would a low target be better then a high one.

Stock A worth £50 million. Broker targets £10 mil profits company makes £7 mil shares tank.

Stock B worth £50 million. Broker targets £5 mil company makes £7 mil shares surge.

Always winds me up that, just set the bar low and smash them and shares will rerate.

Other stocks out there making £4.5 mil ebitda probably worth 2-3 times as much

[tim000] 22/6/2023 12:02

Also no coal trading profits makes a big difference

[tim000] 22/6/2023 12:00

Cenkos has FY2024 EBITDA of a mere £4.5mn!! A function of low PLF and low margins. Florence suspects that reflects internal thinking, but I suspect it is just wrong and will need revising up idc.

[the original goldbug] 22/6/2023 10:09

Regarding post 746 I’m not sure there is anything remarkable about it. Given they put in the scrubbers prior to Covid I don’t think there is much need for maintenance capital.

They probably depreciate the plant over 20 years but it will last for 40. Thus as you note book value increasingly becomes financial assets give the plant is being depreciated away.

I would like to get to the bottom of the Cenkos report however. What EBITDA do they have for 2024? I would have thought it would be £40m plus???

[the original goldbug] 22/6/2023 09:58

You are right that fixed prices led to a quicker route to bankruptcy. Still the returns available in this sector have been diabolical which ever way you cut it.

Given stranded assets can be picked up at massive assets to book who is going to invest in much needed new capacity at book values (and above given inflation!!!)?

It’s a time bomb. I believe it can only be resolved by an extended period of super normal profits. Also banks will be super weary to lend to the sector given the y have been dealing with NPLs over the last 5 years.

[tim000] 22/6/2023 09:55

In other words, buying existing assets at book value is far cheaper than building new plant.

[tim000] 22/6/2023 09:32

Goldbug, yes a good point. But isn’t that because the plants available for sale were operating under the fixed price sales model you’ve described? Hence their insolvency. Yes, so in that market no one is going to offer a premium to book value for OPG now. But OPG isn’t for sale now. My wording was wrong. However, once the market tightens I think the underlying principle remains valid.

[tim000] 22/6/2023 09:27

You’re right Florence that the Cenkos report will be based on management information. But management has no visibility on coal prices, government policy nor necessarily the profitability of sales to Tangedco. The latter won’t be known until well after sales are made. And I understand the need to be cautious in a difficult investor climate. What gives me confidence however is the strength of the balance sheet and the success of the management in bringing that about through covid and the coal price spike. The reduction in gross debt has been remarkable. In effect, the company is using continual accounting depreciation of its generating assets to generate cashflow to pay down debt, rather than make questionable investments in plant to sustain the notional book value of the capital stock, which I’ve said is not a market value anyway.

[the original goldbug] 22/6/2023 09:18

You should be aware of one point Tim. That is many of these coal fired power assets are trading at massive discounts to book. OPG is not alone in that respect.

Therefore no one will make new investment capacity until the sector rerates and is inherently profitable again in the medium to long term.

The bear in Indian power assets has been tortuous and has guaranteed that no new capacity has been planned. Thus in the medium to longer almost guaranteeing a period of super normal profits.

[tim000] 22/6/2023 09:04

Florence, a good question you raise. I will try to pursue it. My current assumption is exactly as you state it, the massive spike in receivables almost by definition has to be associated with sales to tangedco, for onward sale to customers. The new policy states that gencos share 50/50 in the profits from these sales, while I assume any impairments are borne by tangedco, but I could be wrong. The market fundamentals suggest profits will exceed impairments. Also, there is a footnote in past reports that receivables are valued at amortized cost. I’m not a trained accountant, but I didn’t think that was normal practice for receivables (it is for inventories). That suggests the market value of receivables should be higher, since the government policy allows for a profitable markup on sales to tangedco (I believe).

[tim000] 22/6/2023 08:54

Worth noting too that book value is too low. It’s an historic cost value of the generating assets, whereas market value will be considerably higher. It’s very important with OPG not to get too hung up with short term considerations such as today’s coal price and share price. The management has proven it can work through very difficult trading conditions, in part to the unique circumstances of a structural shortage in power generating capacity in the Indian market. It’s hard to see OPG not having a very profitable long term future. I agree with Goldbug’s analysis in this. Good times will return!!!

[florence141414] 22/6/2023 08:51

Hi Tim, I agree with everything you say and suspect very strongly that this will be considerably higher in a year or two. It’s just that Cenkos are incentivised to be favourable so hearing negative assumptions from them carries more weight for me than positive ones. If you do speak to them, could you ask why they have assumed zero credit loss on receivables in FY24 when there have always been at least some in the past? Is this because they expect all income from government entities?

[tim000] 22/6/2023 08:45

Regarding coal prices, latest ICI4 price is $52.40 compared with the Cenkos FY24 assumption of $55. Indian coal prices are presumably lower than ICI4, but I don’t have any data, nor the extent to which OPG has been successful in its stated policy of participating in local auctions for Indian coal. We do know however that India is ramping up production a great deal, will continue to do so, and a lot of marginal coal production is sold through these auctions. If there is a shortage of power capacity, it suggests the auctions might not be too competitive as coal production ramps up. I remain very confident about the long term prospects for OPG, and its discount to book value is unwarranted. The majority shareholder could sell the generation assets to a trade buyer for multiples of the current share price.

[tim000] 22/6/2023 08:38

The trouble is, we have no access to management to get accurate information, so we must rely on detective work, the veracity of which is uncertain. I’m tempted to make a trip to the AGM later this year to meet the management, and encourage them to be more shareholder friendly, or at least test whether my reading of the new legal framework is correct. If it is, then it brings forward the day when OPG returns to good profitability. Given strong demand growth in India, I can see the policy being reintroduced next year too. And the balance sheet is now very strong, with much reduced gross indebtedness and much higher liquidity - partly due to the government-inspired spike in PLF since March.

[tim000] 22/6/2023 08:30

If you register with Cenkos (free) you might be able to see it. For new research you have to pay a subscription, but I haven’t paid and I’ve got access to the whole report. It’s worth seeing because they have probably reliable estimates of EBITDA etc for FY2023, and these are encouraging. There seems to have been a successful insurance claim for example, boosting “other income” last year. The forward numbers have little or no value imho because they don’t know what coal prices are going to be. And as I say, they make no allowance for the recent change in government policy. If my reading of the policy is correct, any power not sold by OPG to its profitable industrial customers can be sold profitably to Tangedco, so it’s not only a legal requirement to have a PLF of c75%, it’s maximizing profits to do so. In that situation, the company can’t make a loss. The press has also stated that the policy is helpful for large gencos such as Adani group (whose quarterly reports are publicly available).

[the original goldbug] 22/6/2023 07:46

I haven’t seen the Cenkos report. How do I get hold of it?

What is the current coal price versus their assumptions in the model?

Given the statement talks firmly about rewarding shareholders after their interminable wait I would be inclined to believe that, given we know the operating environment has improved markedly. The only uncertainty is whether tariffs will hold up. Even if they don’t you have to assume there will be a lag before they are revised downward.

BTW I don’t think tariffs have come down in the past.

[tim000] 22/6/2023 07:23

Florence, in case you still read the thread, the Cenkos report did say that if coal prices continued to fall below their assumed $55, their FY24 forecast effectively was worthless and that PLF and margins would be completely different. It’s also odd that the Cenkos report took no account of the Government’s recent extension requiring gencos such as OPG to maximise PLF until September. I’ll probably email the Cenkos analyst and see if this was an oversight. Finally, the company will be very liquid now and have large cash reserves, and its book value is over 40p per share. Quite a lot of that is in liquid assets. So there is tremendous upside potential once the coal price falls further, as is likely at some point.

[florence141414] 21/6/2023 22:32

I’ve sold out today. My theory that they had steered through the choppiest of waters and are now enjoying extremely favourable trading conditions for FY24 was not reflected in the Cenkos report. Maybe my theory was correct and Cenkos are wrong. However, given Cenkos’ superior access to management, I’m not willing to bet on it. I was already concerned on reading the update from OPG that they weren’t really banging the drum on current trading. The Cenkos report does not allay those concerns.

Good luck to all holders. Assuming Cenkos have the cash flow projections correct regarding receivables incoming for the current period, then at least there is a long runway for the company to get back to profitability without debt or dilution.

[tim000] 21/6/2023 06:22

I’ve removed references to FY2021 coal prices because the Annual Report shows they were lower than I had thought. Still, coal prices are trending down and should have further to fall given excess supply.