A good write up in the AFR todayAusEthical lights up on Infigen...

A good write up in the AFR today
AusEthical lights up on Infigen Energy

It’s good to revisit the investment theses of your portfolio holdings - have companies delivered on expectations and did the share price react in a way consistent with your read of the result? Do those reasons still hold true? Has management articulated a consistent strategic path, and are they executing?

Infigen

Infigen Energy is a small cap stock Australian Ethical is currently invested in, which reported a strong 2018-19 result. Infigen management has done a good job of diversifying its business, while locking in more of its earnings stream to soften the impact from declining Large-scale Generation Certificate (LGC) spot prices.

It reported revenue growth of 9 per cent and net profit growth of 8 per cent, driven by 12 per cent production growth. Importantly, Infigen has 75 per cent of production contracted under Purchase Power Agreements (PPAs) and commercial and industrial contracts for 2019-20, reducing exposure to merchant revenues which it has relied upon in the past.

This provides a much greater level of certainty over cash flows and guards against a sustained decline in spot energy prices in key markets.

Cashflow performance was also strong in 2018-19 with operating cash flow up 44 per cent and 110 per cent cash conversion. With a much-improved balance sheet, this enabled Infigen to commence paying a dividend, while continuing to invest growth capex of $154 million into acquisitions and new projects.

We expect a similar scenario in 2019-20 as Infigen continues to generate significant cash flow, with capex likely to fall in 2019-20 (pending any further significant acquisitions). We continue to believe there is comfortable upside at current share price given that Infigen trades on multiples well below peers and is now offering a modest dividend yield (3.3 per cent).

At the conclusion of reporting season, it is important to take the opportunity to review your investments and ensure you are comfortable with your holdings. After reviewing Infigen Energy, we are confident this is a strong stock to hold.

David Macri is the chief investment officer of Australian Ethical Investment