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Geregu: We are covering Geregu Power Plc (NGX: GEREGU), a company engaged in the generation and supply of electric power. Geregu Power Plant was constructed by the Federal Government of Nigeria and was then operated by the Power Holding Company of Nigeria (PHCN). The plant was established to generate and supply electric power to the national grid. On an average, Geregu contributes 6% to the national grid.

Huge Market Potential: Based on the market opportunities, we see a lot of potentials for Geregu in the medium to long term. Relative to peers, Nigeria’s electricity consumption is the lowest despite her abundant gas and other energy resources. In bridging the consumption gap, significant investments are required. Nigeria needs an estimated $400bn to fix the economy’s energy deficits. Therefore, we expect to see increased scale of activities in the Nigerian power sector.

Established Industry Position: At 6%, Geregu ranks 9^th among the 29 power generating companies in Nigeria. With a planned acquisition of additional power assets, the Company is on course to be among the top 3 power generating companies (with a projected 20% market share). The market share expansion is expected to translate into significant value in the medium to long term.

Solid Financial Profile: Geregu grew by a 34% CAGR over the last five (5) years. EBITDA and net margins grew steadily over the period and the 5-year average ROE and ROA are 21% and 14% respectively.

Value Drivers:

We expect the Company’s future growth to be driven by the following:

1. Capacity Expansion: the company recently secured a significant debt funding to acquire power assets. Upon successful completion of the acquisition, its market share could grow to as high as 20% from its current 6%.
2. Favourable Regulatory Policies: Although the industry is generally characterised by liquidity constraints, the payments of GenCos services are backed by the NBET, Also, the national authorities have demonstrated the willingness to bridge the wide electricity supply gap in the country.

Valuation

Our estimated the fair value for Geregu, using a blend of Discounted Cash Flow, Discounted Dividend, Enterprise Value, and Residual Income valuation methodologies, is N77.99, offering a -29% total return (price appreciation + dividend yield). Although we are positive about the growth prospects of the company, we yet believe that the price-to-earnings (P/E) ratio of the stock is higher than its justified P/E. We expect to see a price correction over time. Therefore, we initiate our coverage of Geregu with a SELL recommendation.

Please follow the link “Geregu Power Plc – Positioning for Future Growth”  to view the whole report.

Thank you.