Raymond James Crius Energy Trust (KWH.UN-T) is "generating yield from doortstep to rooftop," said Raymond James analyst David Quezada.
He initiated coverage of the Toronto-based company with an "outperform" rating.
"With a mixture of M&A and organic growth we believe Crius' core deregulated retail energy business has a sizable opportunity to further penetrate a large addressable market," said Mr. Quezada. "Since the company's late 2012 IPO Crius has acquired a mix of 8 retail energy businesses and customer books bringing pro-forma Residential Customer Equivalents ('RCEs') from 596K in 2Q13 to 1,378K in 2Q17 (a 24 per cent compound annual growth rate). Moreover, with the exception of the polar vortex weather anomaly in 2014, Crius has also consistently seen solid organic net customer growth. We also believe Crius' strategic partnerships with telecommunications providers give access to a large pool of potential customers."
Mr. Quezada added the company's leveraging of its sales channels is likely to lead to "strong" growth in its solar segment.
"We believe Crius' large retail energy footprint makes the company unique among rooftop solar developers and facilitates a significantly lower cost of customer acquisition, representing a meaningful competitive advantage," he said. "Accordingly, we believe the company can succeed in a space where many players have struggled. We see the continued decline in costs of rooftop solar units making them an increasingly compelling proposition for many customers."
Mr. Quezada believes Crius is currently trading at a "significant" valuation discount to its peers, but he expects that to continue to narrow. He set a price target of $12 for the stock, versus the consensus of $11.88.
"Currently trading at just 4.4 times 2018 enterprise value to EBITDA, Crius trades at a significant discount to its most logical peer Just Energy (JE-T) at 7.0 times despite having a relatively similar business and risk profile," he said ."While we acknowledge that Just Energy is larger with 4.2 million RCEs versus Crius at 1.4 million and a market cap of just over $1.0-billion versus Crius at just $510-million, we highlight several other metrics augur more in Crius' favour, in our view.
"Mostly notably, Crius is growing with RCEs having steadily increased of late and poised to continue rising whereas Just Energy's RCEs have declined recently falling 4 per cent in F2016 and 7 per cent in F2017 (Mar-31 fiscal year end). Moreover, we would argue that the cash flows generated by Crius' deregulated energy segment are at least as stable as those of Just Energywhile, based on consensus estimates, Just Energy's forecast EBITDA CAGR of just 5 per cent between F2017-F2019 compares to our estimates for Crius' 2 year CAGR at close to 35 per cent "¦ We note the relative EV/EBITDA spread between Just Energy and Crius peaked in late 2015 at close to 6.0 times and has since narrowed to roughly 2.5 times which, in light of the foregoing commentary is a trend we expect will continue. We attribute the historical discount to several factors including 1) the fact that Crius only became 100% public via an offering in Jun-2016 and has only recently begun to see the stock's liquidity improve and bid-ask spread narrow; 2) some mis-steps by the company in the early days of its 2012 IPO that, while since addressed, are lingering in investor minds; and 3) a temporary overhang represented by 3.215 million shares that will come off lock-up in Dec-2017 and Jun-2018 respectively, representing 11 per cent of the company's total float (note: much of this stock is held be insiders who we believe are less likely to sell). It is also worth noting the 3.3 million shares now owned by MVC Capital (the prior owner of US Gas & Electric) will be locked up for a period of 4-6 months from closing of the transaction in early July of 2017. We emphasize our view that Crius' valuation discount is primarily a function of transitory factors that we expect will be resolved in coming months and we therefore see current levels as an opportunity to add to positions."