Key points in this equity note:
- Saxo’s renewable energy basket is the worst performing basket over the past week down 5.1% and also the worst performing basket over the past year. And this is despite the industry players reiterating their outlooks and analysts remain extremely bullish.
- Brookfield Renewable Partners is the worst performing stock in the basket down almost 21% last week despite reiterating their strong outlook on their Investor Day presentation two weeks ago. In other words, there is breakdown in the trust between green transformation companies and investors.
- The breakdown in the trust between green transformation companies and investors is clearly driving down Orsted’s share price where investors feel the company failed to help investors understand the factor sensitivities on their wind projects.
Are analysts being blind on the green transformation?
The worst performing theme basket the past week is our renewable energy basket down 5.1% as the meltdown across green transformation stocks continue. Our renewable energy basket is down 28% year-to-date. The biggest contributor to last week’s decline was Brookfield Renewable Partners down 20.8% following the company’s Investor Day a week before reiterating its strong outlook and that growth was looking stronger than ever. A return target of 12-15% was reiterated and capital deployment targets were increased.
While analysts have broadly brought the entire message from Brookfield Renewable Partners and increased their price target (consensus price target is now $33.84 or 64% above the last close), investors are getting increasingly worried about the outlook, multiples and return dynamics amid higher bond yields for longer and high commodity prices. At 16x EV/EBITDA, Brookfield Renewable Partners (BEP) is still priced considerably above the global equity market and given the green transformation a growth premium is expected, but if profitability is getting squeezed the question is whether it makes sense with these valuation multiples.
Bloomberg’s default risk model still has BEP at investment grade which is also confirmed in BEP’s corporate bonds with its Jan 2030 bond trading at a yield-to-maturity of 5.79% which is still a small credit spread on the same USD government bond maturity.