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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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.