A CONFIDENT TRUenergy has begun registering designs for logos to support its relaunch as EnergyAustralia as part of its expected $3 billion float later this year.
TRUenergy, owned by Hong Kong's CLP Holdings, has reportedly begun the search for investment banks to manage the public offering of up to 49 per cent of the company, so the rebranding exercise is not surprising.
EnergyAustralia is the retail business bought a year ago from the New South Wales government in a $2.2 billion deal that more than doubled TRUenergy's revenue and earnings from downstream operations.
It is hardly surprising that CLP wants to ditch the TRUenergy brand, a legacy of previous owner, TXU Corp, in favour of something that covers the full scope of its business, from coal seam gas and wind-power generation through traditional coal generators and on to the meter boxes of homes and businesses.
It is also no shock that if it is going with that name it wants to drop the old "fishing net" logo of EnergyAustralia in favour of something a little zippier although it seems to be torn between a stylised letter "e" and an eight-pointed star.
Sadly, though, the entity in CLP's Australian corporate chain that controls the businesses, TRUenergy Holdings, barely made a buck last year on its nearly $7 billion of turnover. Net profit was a measly $11.25 million for calendar 2011, according to accounts recently filed with the Australian Securities and Investments Commission.
While TRUenergy clearly did not earn enough to pay a dividend to its Hong Kong-listed parent, it did pre-pay $100 million in shareholder loans at the end of March.
The profit was made worse by a disproportionately high $57 million tax bill on earnings of $68.3 million, treble the normal 30 per cent corporate rate due to some undeductible expenses.
Once you add back the $350 million slashed from its bottom line as a post-carbon tax impairment charge against the value of the Yallourn power station and $238 million in interest charges, TRUenergy's performance becomes more respectable.
Make those adjustments and earnings before interest and tax in 2011 were nearer $600 million which, if reports are true of it wanting $3 billion for a shade under half the company, means it is being priced on an EBIT multiple of about 10 times historical earnings seemingly pretty high in this environment.
Insider suspects, though, that with the full consolidation of the EnergyAustralia business in 2012, and no doubt big cost savings as it eliminates duplication, there ought to be some widening in profit margins. Bearing down on that, though, will be the effects of higher power costs, which are not just borne by consumers.
If and when TRUenergy does come to market, one thing investors may want to keep their eye on is its defined benefit superannuation scheme.
M2 on telco superhighway
M2 TELECOMMUNICATIONS' $83 million renounceable issue to fund its $192 million acquisition of Primus Telecom Holdings will be worth watching on several fronts not the least of which will be the behaviour of its largest shareholders.
M2's decision to give investors the chance to sell their rights to help fund buying new shares was explained by chief executive Geoff Horth as designed "to recognise all shareholders equally . . . There has been a bit of criticism recently of institutional placements or other equity raising models."
Horth is right, with Insider and others criticising the "accelerated entitlement" issues most large companies use to ensure they get their money faster and, they hope, cheaper, than an underwritten raising that gives smaller investors a chance to at least realise the value of their rights.
On that basis, M2's decision is welcomed. M2 directors said they would take up the issue to the best of their individual ability.
The family of Horth's predecessor and former driving force, Vaughan Bowen, owns close to 15 per cent of M2 which would mean a bill of $12.5 million if they elect to take up their full share of the deal.
Long-time investor in telcos Phil Cornish has been a supporter of Bowen, although his investment company lightened its load by almost 2 million shares in mid-December which most probably realised about $6 million.
That will work out nicely if it banked the money, because Cornish Investments still has 8.2 million shares (6.5 per cent of the company), and the 1-for-4 issue would cost it $5.5 million to support fully.
With the offer priced at $2.66 for each new share, compared with $3.49 before the announcement, the discount is steep but unsurprising in the context of how the Primus acquisition fundamentally changes M2's structure and balance sheet.
Uptake by retail investors will not only be a test of M2 and its business judgment, but of the likelihood of other companies opting for renounceable issues. Manager and underwriter Goldman Sachs will also be interested in how many shares need to find a home.
It is a brave deal for M2, given that it near doubles the size of the company and lifts its debt from $26 million to $138 million but does not seem to give a wholesale leap in earnings per share (EPS).
If a note from Moelis Research yesterday is a guide to market views, then Horth and his team have some selling to do.
"Whilst the Primus purchase does make [M2] a considerably larger operator within the domestic telecommunications sector, it does seem like a lot of effort for [less than 10 per cent EPS] accretion after synergy benefits are achieved as such although [M2] offers exposure to the business telco sector we do see risks associated with the acquisition not compensated for by the purchase price, and so have downgraded our recommendation to 'hold'," said Moelis.
Investors should note that while M2 has said it "aims to maintain" its policy of paying 70 per cent of net profit as dividends, that is not a commitment. The company has also said it will look at using surplus cash to reduce the debt faster which means a delicate balancing of lowering borrowing costs and distributions to shareholders.
insider@fairfaxmedia.com.au
It is a brave deal for M2, given that it near doubles the size of the company and lifts its debt from $26 million to $138 million but does not seem to give a wholesale leap in earnings per share.
Frequently Asked Questions about this Article…
What is happening with TRUenergy and why is it rebranding as EnergyAustralia?
According to the article, TRUenergy — owned by Hong Kong’s CLP Holdings — has begun registering new logo designs as it prepares to relaunch under the EnergyAustralia name. The rebrand follows CLP’s purchase of EnergyAustralia’s retail business and seems aimed at reflecting the wider scope of the combined business ahead of a planned public offering of up to 49% of the company.
Is CLP planning to float TRUenergy / EnergyAustralia and how big is the float expected to be?
Yes. The article reports CLP has reportedly begun searching for investment banks to manage a public offering, with media suggesting the float could raise about $3 billion for just under half the company — effectively selling up to 49% of the business.
How profitable was TRUenergy in 2011 and what should investors know about the numbers?
The article notes TRUenergy Holdings reported a net profit of about $11.25 million for calendar 2011 on nearly $7 billion of turnover — a thin headline profit. However, after adding back a $350 million post–carbon tax impairment (Yallourn) and $238 million of interest, adjusted earnings before interest and tax were closer to $600 million, which gives a different perspective on underlying performance.
Why did TRUenergy’s tax bill look unusually high in 2011?
The article explains TRUenergy faced a disproportionately high $57 million tax bill on earnings of $68.3 million — roughly treble the normal 30% corporate rate — because some expenses were not tax-deductible, which inflated the effective tax charge in that year.
How are investors valuing the company if the float is around $3 billion?
Based on the article’s figures, pricing something under half the company at about $3 billion roughly implies an EBIT multiple of about 10 times historical earnings (using the adjusted EBIT figure). The article suggests that multiple looks fairly high in the current environment.
What operational or market risks could affect TRUenergy / EnergyAustralia after the rebrand or float?
The article highlights two key considerations for investors: potential margin improvement from consolidating EnergyAustralia and cutting duplicated costs, and downside pressure from higher wholesale power costs — which can squeeze margins and are not borne only by consumers.
What part of TRUenergy should investors keep an eye on in a potential prospectus or IPO documents?
The article specifically flags the company’s defined benefit superannuation scheme as something investors may want to watch closely when TRUenergy comes to market, since schemes of that type can carry funding and future cash‑flow implications.
What is M2 Telecommunications doing and why should everyday investors care about its renounceable rights issue?
The article describes M2’s $83 million renounceable rights issue to help fund its $192 million acquisition of Primus Telecom. The offer lets shareholders sell their rights, is priced at $2.66 (down from $3.49), and will almost double M2’s size while increasing debt from $26 million to $138 million. Analysts (Moelis) warned the deal offers less than 10% EPS accretion after synergies, prompting a downgrade to ‘hold’ — all points retail investors should consider when assessing dilution, debt and earnings impact.
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