P/E for Renewable Energy Utility Companies

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Permalink Reply by Sachidanand (Sacha) Singh on January 1, 2010 at 11:26am

EDF Energies Nouvelles, Iberdrola Renovables and Theolia are pure play wind farm firms that are listed. (I got the names from a research paper summary; I have no idea where they are listed; as both the researchers were France based, I expect the firms to be listed in France or in some other country in Europe; but I will not bet on it.)

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Permalink Reply by Srdjan Kovacevic on January 1, 2010 at 12:58pm

Thanks Sacha,

They are indeed French companies. I've started from these companies and found 8 other. Most of them operate at loss, but for the 3 that are profitable, P/E ranges from 30 to 50.

For comparison, I've found P/E ratios for profitable conventional electric utilities (67 of them, mostly N. American companies), and their ratios average at 17 (ranging from 0,3 to 89).

Thanks for your help!

Srdjan

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Permalink Reply by Sachidanand (Sacha) Singh on January 1, 2010 at 1:11pm

Taking an average P/E when the range is 3 to 90 can hardly be called a logical approach (whatever its merit as a compromise). If I may, I'll suggest you decide on your target's P/E analytically. If valued correctly, P should be V which should be EPS1*Payout Ratio / (k-g) thus P/E = EPS*(1+g)*Payout ratio/(k-g)

You should have all items on right hand side. Use the prices of all listed wind farms for getting Ke to be used in k. Also take care to load country risk premium where applicable.

All the best

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Permalink Reply by Srdjan Kovacevic on January 1, 2010 at 2:26pm

I've taken an average just to illustrate the nature of the distribution. Your suggested approach sounds interesting, but I don't understand what k and g stand for...

On a side note, any idea where could I find data on country risk premia for private equity investments?

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Permalink Reply by Sachidanand (Sacha) Singh on January 1, 2010 at 2:38pm

g is growth rate (steady state) and k is the required return (cost of capital).

You can work out country risk premium from the bond ratings. If the country has issued sovereign bonds and the spread on those bonds and US treasuries of matching maturity is say 3.5% then investors clearly are demanding 3.5% extra to assume the risks associated with investing in that country rather than in the US.

CDS premia too can give good pointers on country risk. You will get CDS premia for most countries at Markit site. (Not free, unfortunately)

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Permalink Reply by Srdjan Kovacevic on January 1, 2010 at 6:46pm

Thank you very much Sacha!

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