Bullish Thesis on AES Corporation (AES)

We came across a bullish thesis on (The) AES Corporation (AES) – one of the world’s largest utility companies on Valueinvestorsclub. VIC is one of our favorite sites to follow because the ideas are usually posted by aspiring analysts, who are trying to find holes in their own thinking. We find the ideas presented on the site well-thought out and definitely worth checking. The article is available here. Below we summarize this bullish case on the NYSE listed AES:

The Arlington, Virginia-based global power company – AES –  is led by its well-accomplished CEO Andres Gluski, and is a Fortune 500 constituent. As a part of being one of the largest electricity generation and utility companies in the world, AES has partial or full ownership in subsidiaries globally. AES also has a 50% ownership (as a call option holder) in the world’s largest battery storage provider- Fluence. AES is transforming into a market leading clean energy developer.

AES looks poised to unlock the hidden value over the next few years. Some of the potential triggers are mentioned below.

After a 50% reduction in parent debt ($3 billion), and exit from 18 countries, AES has gone through major restructuring over the past few years. Trading at 12x next year’s earnings  vs the 19x industry multiples, AES looks undervalued. The company’s growth outlook of 7-9% through 2022 is based on their 6GW backlog of renewable energy.

After Fitch’s upgrade of AES debt, S&P and Moody’s are expected to follow suit, which should reduce the interest costs and further solidify the balance sheet.

With thermal power component expected to drop below 30%, AES continues its transformation to clean energy provider. The company stands high chances of meeting the Norges Bank’s ESG criteria. If came to fruition, AES could be part of the world’s largest sovereign wealth fund’s ESG portfolio with a $23 billion already in green utility stocks. That, in turn, would ignite interest among other funds to eye a piece of AES.

With a 2.1GW under its belt, Fluence has more GW deployed than Tesla and is expected to dethrone the latter as the world’s largest energy storage provider. An IPO of Fluence – a 50/50 JV with Siemens – around 2022 could add $5 to the stock valuation. Depending upon the growth of backlog both at AES and Fluence, the combined entity’s 2022 price target could range between $32 (60%) and $48 (152%).