On Tuesday, Seaport Global Securities adjusted its rating on AES Corp. (NYSE:AES), moving from "Buy" to "Neutral." The firm pointed to several factors impacting their decision, including the company's positioning to capitalize on AI-related load growth in the U.S. through its solar/storage projects.
AES Corp. plans to add 5GW in solar/storage capacity annually at an estimated cost of around $7 billion. However, the expected equity returns from these investments are projected to be just $30 million.
Seaport Global Securities noted that only 5% of AES's existing power plants are likely to benefit from the rising forward power prices in the U.S. Additionally, since the company's analyst day in May 2023, AES's Renewables EBITDA estimates have not met expectations.
The reasons cited include the timing of new builds, increasing development expenses, and unfavorable hydro conditions.
The first quarter earnings report for 2024 emphasized earnings per share (EPS) and EBITDA with tax credits rather than proportional EBITDA, which Seaport Global Securities views as a regression in transparency.
Moreover, the firm's analysis suggests that AES's utilities, when valued at a peer-average price-to-earnings ratio, place AES ex utilities at approximately 14.3 times 2026 EV/EBITDA.
This is just below the 15 times valuation Seaport Global Securities would assign, especially after accounting for development expenses ranging between $200-250 million.
In light of AES's stock experiencing a significant six-month rally, Seaport Global Securities has decided to adopt a more cautious stance. While the downgrade reflects a shift to a neutral position, the firm still prefers AES over NextEra Energy (NYSE:NEE) due to valuation and the financing structure of AES's existing renewable power projects, among other factors.
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