January 23, 2019
Crius Energy Trust
Analyst Day highlights changes implemented in 2018 will drive a strong 2019
Our view: We are reiterating our Outperform rating on Crius Energy, and continue to believe that the company will deliver solid results in 2019. At Crius Energy’s Analyst Day, management provided more details on cost savings initiatives, improving customer profitability trends, and gave the market more comfort on the company’s liquidity position.
Key points:
Management’s “return to core” strategy should simplify the business while enhancing profitability. Since the conclusion of the company’s strategic review in mid-2018, management has implemented initiatives to i) increase profitability (e.g., cost reduction and focusing on higher margin customers), ii) simplify operations (e.g., exit solar business, and consolidate its brands, IT/billing systems, and offices), and iii) invest in growth with a larger focus on direct-to-customer channels. Please refer to Exhibit 3 for additional details regarding cost savings.
Pro-forma analysis looks attractive, but execution is key. Management reiterated that the pro-forma Adjusted EBITDA and Distributable Cash for the 12 months ending September 30, 2018 would be $107 million and $64 million, respectively, compared to the actual results of $69 million and $25 million, respectively. The pro-forma adjustments account for items including headcount reduction, synergies, and savings on the consolidated credit facility, and exclude non-recurring costs and charges and the negative contribution from the roof-top solar business.
We see increasing customer profitability trends and potentially strong Q1/19 results as positive catalysts. We believe the next catalysts that could drive the unit price of Crius Energy higher are continued increase in gross profit for new customers, coupled with data showing that attritioning customers are low-margin. We also believe the release of the Q1/19 results (first “clean” quarter reflecting all of the business improvements) in May 2019 could be a positive catalyst. Management highlighted that liquidity is within its historical range at the end of 2018, and will likely remain within the range through 2019, so we expect investors will get more comfortable with Crius Energy’s balance sheet over time.
Keeping estimates unchanged, but there is upside to our forecast. Our $94 million Adjusted EBITDA forecast for 2019 reflects our more cautious view, and we believe the company can exceed our forecast if management executes on its strategy. Management noted that the 2019 Embedded Gross Margin net of costs (Adjusted EBITDA proxy under a no growth scenario where they run-off the business) is $92 million. Separately, we note that Crius Energy has immaterial exposure to PG&E’s pending bankruptcy, with only 200 customers in PG&E’s service territory.