While multiples in the Regulated Utilities segment could remain elevated, against the backdrop of continued low interest rates, FirstEnergy Corp. FE could come under pressure as its above-market, non-regulated hedges expire and the company faces competition, Goldman Sachs’ Michael Lapides said in a report. He downgraded the rating on FirstEnergy from Neutral to Sell, while reducing the price target from $36 to $31.
Analyst Michael Lapides cited the reasons for the downgrade as:
- Below-consensus EPS estimates for 2018, with above-market hedges set to roll off
- High leverage at the non-regulated segment
- Significant equity financing needs
- Valuation
- Dividend growth of 1 percent, versus the peer median of 5 percent
Consensus May Prove Aggressive
Lapides mentioned that the estimates for 2018 were about 6 percent below the consensus expectations, with FirstEnergy energy margins contracting 20 percent versus the 2017 levels. This is because the company’s above-market hedges were set to expire in 2018, offsetting higher capacity revenues.
Substantial Equity Issuance
The analyst expects FirstEnergy to issue equity worth $1.2bn, representing about 8 percent of the current market cap between 2016 and 2019. The company would resort to equity issuance in the face of weakening credit metrics at its non-regulated segment.
The current price target reflects 11 percent downside, versus 1 percent average upside “for our US utility universe,” Lapides commented.
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