Shares in ERM Power Limited, the electricity producer and retailer, fell out of bed yesterday after the company reaffirmed its previously lowered earnings guidance for 2015-16, but gave a very strong hint that the results for 2016-17 could be lower.
The shares (ASX code EPW) plunged more than 24% to $1.105 after the release of the statement that contained the news from the company that it would meet the reduced 2015-16 guidance set in February for earnings before tax, interest, depreciation, amortisation and financial instruments of $81 million to $85 million.
The shares closed at their lowest since the company listed on the ASX in 2011.
In February ERM trimmed its guidance from the $80 to $94 million set at the annual meeting in October to $81 to $85 million. The downgrade came after the company cut its expectations for profits from its emerging US business.
But now it seems the company’s Australian markets will be problematic in the coming year, after a weak effort from its key asset in Queensland, and that seems to be why the shares tanked. “Oakey (Queensland) Power Station, now operating as a merchant plant, was forecast to achieve $16M EBITDAF for FY 2016 but will underperform, given challenging market conditions in Q4 FY 2016. This will be offset by the performance of the Australian and United States (US) retailing businesses. "The business remains on track to meet the forecast sales load of 20TWh to 21.5TWh (Australia and US) and SME customer sites in Australia of 37,500 to 41,000. “The final dividend for FY 2016 is expected to remain at current levels,”directors told the ASX yesterday.
ERM Power CEO Jon Stretch said the strategy responded to changes in the industry and recognised growth streams beyond the Australian retailing business which was approaching its natural market share ceiling. “The US business is increasingly encouraging in terms of growth, margin and operating expenditure."
“Our Energy Solutions business deepens relationships with customers and creates value through revenue, retention and growing total customer margin in the burgeoning energy efficiency space. The integration of our two recent acquisitions, Lumaled and Greensense, is well progressed. They form an important part of our diversified Energy Solutions capability,” he said in yesterday’s statement.
All that sounds OK, but what seems to have spooked investors was a gloomy outlook for the impact of increased competition in 2016-17 (a bit like Metcash yesterday, see separate story). “Pricing discipline ensures all customer deals pass internal hurdle rates, however, as existing higher margin contracts roll off, average gross margin for FY 2017 is expected to be about $3/MWh for the Australian retailing business,” ERM said yesterday.
"The effect of price competition will become a larger proportion of the ERM Power book in FY 2017. Operating expenditure is anticipated to be in line with FY16 levels. "The increase in volatility over the past 12 to 18 months has made it a challenging environment in which to optimise margins and has been taken into account when forecasting a reduced FY 2017 gross margin.
"The market price for large‐scale renewable certificates has more than doubled in FY 2016, significantly increasing the value of ERM Power’s inventory of these products. Reducing this inventory has resulted in a positive impact in FY 2016 and contributes to the reduced gross margin forecast for FY 2017,” the company warned. In other words ERM is telling the market that 2016-17 trading, revenue and earnings will become more volatile, with a good chance they could end up lower than higher than 2015-16.
