Special Situations/RV: APR Energy (APR LN)Transformational deal and emerging markets play: BUY
www.aprenergy.com<http://www.aprenergy.com>
APR LN: GBP 8.59; initial target: GBP 12.00
APR Energy delivers temporary electrical power via mobile turbines at short notice to anywhere in the world. The company handles everything from transporting the equipment to installing, operating, and maintaining it. Whether it's an emergency, seasonal, or longer-term electricity need, APR offers an immediate solution for a premium fee, instead of the large capital investment of a power plant. The temporary nature of this business requires developing the scale, the relationships, and the capability needed to maintain high utilization rates. These high barriers to entry, combined with the company's differentiated equipment offering, have allowed APR to generate a mid-teens return on capital which we hope will rise with increasing capacity utilization. APR has a solid long-term growth opportunity. The emerging markets, and even some developed ones, face serious shortfalls in their electric-generating power infrastructures for the foreseeable future. These deficits are the result of local governments' inability to plan for or finance their countries long-term electricity needs. Temporary power fills just a small portion of that overall deficit today. APR uses mobile, aero-derivative turbines which are more reliable, fuel efficient, environmentally friendly, and compact than diesel generators or industrial turbines. Only GE and Pratt & Whitney can currently produce this kind of dual-fuel turbine. The latter doesn't have much capacity dedicated to this business, and APR recently formed an exclusive supply agreement with GE. As a result of that strategic deal, GE now owns roughly 16.5% of APR. The ability of GE to provide not only scarce equipment but also sales leads is a potentially transformational partnership for APR.
Last October, APR acquired GE's power rental business for $314m. The deal will be earnings enhancing particularly if APR can improve the margins on the GE fleet and benefit from the marketing agreement it has with GE. The main attraction of the deal is the endorsement that GE brings to APR, given that 80% of the purchase price was financed by issuing shares to GE, with GE now holding a 16.5% equity stake in APR.
Valuations for APR are undemanding given the considerable potential for temporary power and the expected growth for APR. At less than 11x 2015 earnings and 5x 2015 ebitda, the stock is significantly undervalued. Our short-term target is GBP 12.00, ie. slightly above the GE deal of last October
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