It's hard to find another business like Dong Energy.
That would normally be a problem for a company looking to stage one of the year's biggest European IPOs because investors like to make comparisons with industry peers that are already traded on the stock market. But it's Dong's very uniqueness as the largest player in offshore wind power that gives the Danish power generator scarcity value.
Investors wanting exposure to renewable energy through big companies typically have to buy an old-style energy or utility group whose diversification into clean energy is still dwarfed by legacy conventional power assets. Alternatively, they can invest in smaller, specialized operators like SolarCity or First Solar, but these tend to be more volatile and have issues of their own, starting in some cases with the viability of their business models.
Then there's Dong, which Thursday said it's looking to sell a stake of as much as 17.4 percent in an IPO that may value the company as high as 106.5 billion kroner ($16 billion). Unlike any other large energy company, 75 percent of its capital is already employed in wind power. While Dong has an oil and gas business, it’s clear this is trending toward being an irrelevance in the overall business mix. Meanwhile, a domestic Danish power distribution network provides the stable revenue streams beloved of utility investors. Up to a point, this can support investment in the core wind business.
Dong looks like the closest Europe has come to having a must-own IPO for a long time. The macro backdrop is supportive: Policymakers are incentivizing clean energy. The micro story looks plausible too. Dong has successfully redeployed its expertise in offshore oil and gas development into offshore wind farms. While the technological challenges are immense, the payback is potentially greater than with on-shore wind because farms can be larger and the weather is generally more gusty. There’s also a global growth story too, with Dong looking to harness demand for offshore wind in America and Asia.
Investors still have a valuation headache, in part because long-term visibility over the business is poor. Right now, the majority of Dong’s wind-farm revenue has come from government subsidies. These subsidies will trend to zero in time -- but that may play to Dong’s advantage as the scale player and low-cost operator.
What's more, the business demands a large amount of capital spending. While Dong isn’t raising new money now, prospective shareholders would be unwise to assume it won’t tap them for fresh equity in future. Cash flow was negative last year and Dong is estimating capex of as much as 70 billion kroner between 2017 and 2020 -- compare that with a target market capitalization 83.5 kroner to 106.5 billion kroner. Dong's aspiration is to share the capex burden with partners, but outsiders will find it hard to forecast its ability to do so.
Given its investment needs, it might seem odd that Dong should be guiding toward paying a 2.5 billion-kroner dividend for the current year. That implies a sub-3 percent dividend yield, versus 4.2 percent for Western European utilities. This looks designed to lure utility investors who want an income, while signalling that this is really a growth stock.
At the midpoint of the proposed equity range and adding 23 billion kroner of net debt, Dong would be valued at 6.3 times trailing Ebitda, a premium to the 5.9 times paid by Enel to buy back Enel Green Power in November. It seems ambitious. But the multiple falls closer to 5 times using Dong's projected 2016 Ebitda of 20 billion to 23 billion kroner. Many investors who have been underweight utility shares are likely to see Dong as a chance to restock.
Update: This story has been updated to reflect Dong's aim to share its capex burden with partners.
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(Updates seventh paragraph with details of Dong Energy's capital expenditure plans.)
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