When we first outlined the investment case for wind farm owner Infigen, back in the March 2011 quarterly report, it had a market capitalisation of $280m. For that price, investors received $170m in cash, $30m equity in the Woodlawn windfarm, and $480m of book value in a heavily indebted portfolio of windfarms held in a messy corporate structure.
It wasn’t a pretty situation but it was enticing. The indebted windfarms, based in Australia and the United States, were supported by government subsidies and there was a decent case for them being worth replacement cost. Fast forward four-and-a-half years, however, and Infigen hasn’t paid a dividend, its market capitalisation is still $280m and, unfortunately, that’s now probably about fair value. It has been a bad result, particularly in an environment where investors are paying record amounts for infrastructure assets. So what has gone wrong?
Plenty. Cash has been frittered away through excessive management costs, operational costs have been higher than expected and significant expenditure on development projects in Australia has yet to benefit investors. The regulatory environment in Australia has also been problematic. The unexpected shrinking of demand for energy in Australia smashed electricity prices, and the government balked at the prospect of shutting coal power stations to accommodate new renewable generation in a market that just didn’t need new supply. After a torturous limbo period, the renewable target was scaled back significantly.
But the most severe value destruction occurred in the United States. With earnings subdued in Australia, Infigen’s bank covenants came under pressure and a sale of its US assets was the easiest solution to the problem. Unfortunately, the messy structure of the assets and the smell of desperation didn’t impress buyers and the United States windfarms were sold for US$230m, rather than the US$500m originally hoped.
That smashed our potential upside and we’re now left with a business that still has too much debt and and is likely to undertake a capital raising. The cashflows should become predictable, worth a lot in today’s low interest rate environment, and the regulatory environment is more favourable with a Turnbull-led government in charge. But the share price is trading at its highest level in many years and we don’t see great returns from here.
Infigen goes onto the mistake side of the ledger. In a period where we’ve more than doubled investors’ money, the holding has been a significant drag.
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Register for Melbourne – Monday 23rd November
Register for Sydney – Wednesday 25th November
4 thoughts on “Value in Infigen Blown”
Really ? For some reason I thought you’d picked up the shares at around $0.20. I’d held mine for years and in the end sold out small loss.
Good to see a reasonably comprehensive report on a not so good investment. I’ve seen too many funds where the not so good ones disappear without a word, usually just before the end of the quarter.
In view of “But the share price is trading at its highest level in many years and we don’t see great returns from here”, would this now be sold? Or is there enough value left for it to be retained as an alternative to cash until something better comes along?
They are receiving about $40m extra cash p.a. with LGC prices compared to the start of the year. A few projects in oz get funding and a deal on debt may give some.
Personally, I put the failure down to the “the word slogan”. He tried his best to kill renewables and Infigen was one of the casualties. A pity that the rest of the world believes in the scientific method.