- Spark Energy reported a disappointing, albeit expected loss in the quarter as the impact of the Texas winter storm played out on results.
- Company continues to reduce exposure to lower margin commercial customers.
- Stock trading at 4.0x EV/EBITDA on 2022 estimates.
- 2022 FCF to EV of 19%.
- Dividend yield of 7%.
Spark Energy (SPKE) delivers electricity and natural gas to its customer base which includes residential and commercial customers across 19 different states in the US. With significant room for organic growth and the company’s strategy of acquisitions over the last few years, we believe Spark Energy should continue growing well in the medium term. Growth, coupled with a compelling dividend yield of 7.1% and 2022 FCF to EV of 18.9%, we believe, offers investors with an attractive risk-reward scenario. At current prices, Spark Energy is available at an inexpensive 2022 P/E of 6.3x and EV/EBITDA of 4.0x. Our EV numbers take into account the Class B shares outstanding.
Source: Spark Energy Investor Presentation
1Q21 Results Affected by Texas Winter Storm
Spark Energy reported an expected loss in its 1Q21 numbers of $27.6mn as the winter storm Uri in February 2021 resulted in a direct loss of $64.9mn for the company. In 1Q20, Spark Energy had reported a profit of $10.1mn. Revenues for the quarter fell 32.0% YoY. Within this, revenues for the retail electricity segment were 35.3% YoY and 22.9% YoY in the natural gas business. Gross retail margin was down 9.9% YoY as the company had fewer customers in its portfolio. Encouragingly adjusted EBITDA grew by 7.8% YoY as lower gross margins were offset by a decrease in G&A expenses and customer acquisition costs. The company has also declared a quarterly dividend of $0.18125/share of Class A stock and $0.546875/share of Series A preferred stock.
Commenting on the results, Keith Maxwell, Spark Energy's CEO said:
Since the start of the year, Spark's initiatives to improve the quality of its customer book and implement additional integrations resulting in cost reductions, are producing tremendous results. That said, first quarter results were curtailed by the impact of February's winter storm Uri, which adversely affected Spark and the entire retail energy industry. I am extremely proud of Spark and its employees as everyone came together to work through the impacts of the storm. While the storm presents a temporary setback, it will have negligible impact on the future ambitions and goals for the Company. We will continue to execute on our initiatives of ramping up organic sales along with a few tuck-in acquisitions.
4.0x EV/EBTIDA, 19% FCF to EV, 7% Dividend Yield in 2022
Source: Spark Energy Investor Presentation - By the Numbers.
Given that the financial impact from the winter storm is still uncertain, our 2021 numbers are subject to change as more information is available. Currently, we value the company on a 5.5x EV/EBITDA multiple, using our 2022 EBITDA estimate. We use 2022 numbers since this would reflect normalized earnings. Through this, we arrive at a target price of $15.00, which represents 47% upside from current levels. This target price is with a one year view and still implies very inexpensive valuation metrics of 4.8% dividend yield and 14.1% 2022 FCF to EV. In our model, our forecasts don’t include any effect of mark to market accounting changes on Spark Energy’s derivative instruments and therefore are not strictly comparable with reported historical numbers. Our model is attached at the end of this model for reader's reference.
With significant room for organic growth and the company’s strategy of acquisitions over the last few years, we believe Spark Energy should continue growing well in the medium term. This growth, coupled with a compelling dividend yield of 7.1% and 2022 FCF to EV of 18.9%, we believe, offers investors with an attractive risk-reward scenario. We value the company on a 5.5x EV/EBITDA multiple, using our 2022 EBITDA estimate. Through this, we arrive at a target price of $15.00, which represents a 47% upside from current levels. This target price is with a one year view and still implies very inexpensive valuation metrics of 4.8% dividend yield and 14.1% 2022 FCF to EV.
Source: Spark Energy Investor Presentation
Volatility in Commodity Pricing
In case of large volatility in commodity pricing, Spark Energy’s costs could be impacted despite its hedging policies.
Inability to Improve Customer Numbers
Spark Energy’s ability to grow significantly will be dependent on the number of customers it’s able to gain. A reduction here will impact revenues and future revenue expectations.
High Customer Acquisition Costs
A sharp jump in customer acquisition costs will impact margins and profitability for Spark Energy.
Spike in Bad Debts
Any spike in bad debts for the company will negatively affect margins and profitability for the company.
Significant Financial Impact from the Texas Winter Storm
Management expects to see a negative impact on financials for 2021 because of the winter storm in Texas. A large hit on financials can impact Spark Energy’s liquidity position.
Room for Organic Growth
Spark Energy has significant room for organic growth with a large number of customers not having made a choice for competitive energy supply. Additionally, the company uses a number of marketing and sales channels to increase its customer base. An improvement in these numbers, once the short-term impact from COVID-19 subsides, can provide meaningful room for growth.
Attractive Dividend Payout
Spark Energy paid out a dividend of $0.725/share to Class A common stockholders which translates to a very compelling dividend yield of 7.1%.
Improvement in Margins
Management’s focus on reducing the run rate for G&A costs as well as the strategy to decrease the number of lower margin commercial customers can provide some tailwind to margins looking ahead.
Spark Energy Q1FY2021 Model -
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