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mid-cap

Compelling Bets on these Mid-Cap Stocks - NRG, REYN

May 28, 2021 | Team Kalkine
Compelling Bets on these Mid-Cap Stocks - NRG, REYN

 

 

NRG Energy, Inc.

NRG Details

NRG Energy, Inc. (NYSE: NRG) operates as an integrated power company, and is focused on producing, selling, and delivering electricity and related products in major competitive power and gas markets in the U.S. and Canada. As of December 31, 2020, the Company sold energy, services, and sustainable products and services directly to retail customers under the brand names NRG, Reliant, Green Mountain Energy, Stream, and XOOM Energy, among others, supported by around 23,000 Megawatts (MW) of generation. As of May 27, 2021, the company’s market capitalization stood at USD 7.92 billion.

Sale of 4.8GW of Fossil Generating Assets: On February 28, 2021, the company signed an agreement with Generation Bridge, an affiliate of ArcLight Capital Partners, to sell 4,850 MW of fossil generating assets from its U.S. East and West regions of operations, for total proceeds of USD 760.0 million. Under the terms of the agreement, NRG will enter into a tolling agreement for its 866 MW Arthur Kill plant in New York City through April 2025. The transaction is expected to close in Q4FY21.

Inorganic Growth: On January 05, 2021, the company closed the acquisition of Direct Energy, a North American retail provider of electricity, natural gas, and home and business energy-related products and services, for an aggregate purchase consideration of USD 3.63 billion, plus an additional purchase price adjustment of USD 77.0 million. As a result, NRG now features a larger customer footprint, serving all 50 U.S. states and parts of Canada, with capabilities across residential and small & large business segments. 

Q1FY21 Results: The company reported a sharp 4x uptick in total revenue to USD 8.09 billion in Q1FY21 (ending March 31, 2021) compared to USD 2.02 billion in Q1FY20, with total operating revenue from the U.S. East region increasing to USD 3.83 million in Q1FY21 from USD 521.0 million in Q1FY20. However, the net loss for Q1FY21 was USD 82.0 million, as compared to a net income of USD 121.0 million in Q1FY20.

Key Risks: The operation of power generation facilities involves significant risks and hazards that could have a material adverse effect on NRG's business and the results of operations. In addition, the company mostly relies on a single or a small number of contracted suppliers for the provision of fuel, transportation of fuel, chemicals, and other services required for the operation of certain of its facilities. Similarly, the company often has to depend upon a few customers to purchase a significant part of a facility’s output. Any impediment to these key suppliers’ or customers’ ability to honor their commitments could negatively impact the company’s ability to generate revenues.

Outlook: The company stated that it expects the adjusted EBITDA for FY21 to be in the range of USD 2.4 billion to USD 2.6 billion. As a result of the lingering financial impact of Winter Storm Uri, the company expects the total FY21 loss before income tax to be USD 975.0 million, and the net cash flow impact to range between USD 350.0 million and USD 550.0 million.

FY21 Guidance (Source: Earnings Presentation, May 06, 2021)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

NRG Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: NRG fell 11.94% in the past 3 months and is currently leaning towards the higher end of the 52-week range of USD 28.22 to USD 44.08. The stock is currently trading below its 200 DMA levels. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 37.50. Considering the correction in the stock price in the past 3 months, the recent acquisition of Direct Energy, and a significant increase in revenues, we recommend a “Buy” rating on the stock at the closing price of USD 32.15, down by 0.59% as of May 28, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

 

Reynolds Consumer Products Inc.

REYN Details

Reynolds Consumer Products Inc. (NASDAQ: REYN) is a leading consumer products company with a presence in 95% of US households. The company is focused on producing and selling products across four segments, including 1) Reynolds Cooking & Baking, 2) Hefty Waste & Storage, 3) Hefty Tableware, and 4) Presto Products, focused on the sale of food storage bags, trash bags, reusable storage containers, and plastic wrap. Presto products are sold under store brands that hold strategic importance among the company’s customers. REYN was listed on the NASDAQ on January 31, 2020. As of May 29, 2021, the company’s market capitalization stood at USD 6.32 billion.

Q1FY21 Results: The company reported a slight increase of 3.70% in total revenue to USD 757.0 million in Q1FY21 (ending March 31, 2021) compared to USD 730.0 million in Q1FY20. Revenue from the Reynolds Cooking & Baking segment increased by 11.93% to USD 272.0 million in Q1FY21 vs USD 243.0 million in Q1FY20, driven by increases in both sales price and volume. Net income for Q1FY21 was USD 74.0 million, 2.85x more than USD 26.0 million in Q1FY20.

Key Risks: Some of REYN’s products are manufactured at a single location. As a result, the loss of the use (whole or in part) of any of its key manufacturing facilities could have a material adverse effect on its business. Also, the company operates in highly competitive markets, and if the company’s products fail to compete successfully with other branded or private label offerings, in terms of quality, pricing, and innovations, it could negatively impact sales and profitability.

Outlook: In its Q1FY21 Report, the company stated that it expects the net revenues to grow in high single digits in Q2FY21 on a base of USD 822 million in the previous year. It forecasts an Adjusted EBITDA of USD 140-150 million. Net Income is estimated to be in the range of USD 73-80 million, implying an EPS range of USD 0.35- 0.38 per share.

FY21 Guidance (Source: Earnings Presentation, May 05, 2021)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

REYN Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: REYN has declined by 9.30% in the past 9 months and is currently trading lower than the mid-point of the 52-week range of USD 27.27 to USD 36.00. The stock is currently close to its 200 DMA levels. We have valued the stock using the P/E-based relative valuation methodology and arrived at a target price of USD 35.00. Considering the attractive valuation of the newly listed company, strong fundamentals, and positive outlook, we recommend a “Buy” rating on the stock at the closing price of USD 30.14, up by 0.1% as of May 28, 2021.

* The reference data in this report has been partly sourced from REFINITIV.