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Hawaiian Electric Industries (HE)

FIN 3303 Investments


Group Members: Jacob Fabricius
Nicholas Sypteras
Chang Run Lim
Yaoyi Shi

Agenda
Introduction
Industry Analysis

Financial Analysis
Recommendation

Hawaii & HEs Background


1.

Hawaii: 8 main islands

2.

Population: 1.392 million as of 2012

3.

HE: Incorporated on October 13, 1891.

4.

Generates, purchases, transmits & distributes electricity

5.

Has provided power for Hawaii for over a century

6.

Supplies 95% of the electricity demanded by 1.2 million


residents of Hawaii

7.

Other Businesses: Provide financial services i.e. deposit,


checking, insurance and lending to individuals &
businesses

Understanding The Electric Utility


Industry
Other
Renewables: 5%

Petroleum:1%

Other Gases:1%
Coal

Hydropower:7%

Natural Gas

Nuclear:
19%

Coal:
37%

Nuclear
Hydropower

Other
Renewables
Natural Gas:
30%

% Share of Total Electricity Generation in 2012

Industry Analysis
Edison Electric Institute (EEI) : Association that
represents U.S investor owned electric companies
EEIs Financial Analysis Group tracks & analyzes a
range of industry financial metrics covering 56 U.S
shareholder owned electric utility firms

Electric utility holding firms & traded on major US


stock exchanges: 50
Electric utilities & subsidiaries of non-utility/foreign
firms: 6

Financial Analysis

Revenue Growth for 5 years


18000
16000
14000
12000
HE
NG
AEP
EDE

10000
8000
6000
4000
2000
0
2008

2009

2010

2011

2012

Quarterly Growth
HE

2012 Q4 --2013 Q1

2013 Q1- 2013 Q2

2013 Q2 2013 Q3

-6.44%

1.66%

4.27%

142.86%

20.59%

19.51%

2012 Q4-2013 Q1

2013 Q1- 2013 Q2

2013 Q2 2013 Q3

Revenue %

-14.22%

6.81%

-5.57%

Net income %

-21.94%

7.40%

-94.21%

2012 Q4-2013 Q1

2013 Q1- 2013 Q2

2013 Q2 2013 Q3

20.94%

-18.89%

17.05%

138.53%

-62.31%

31.19%

2012 Q4-2013 Q1

2013 Q1- 2013 Q2

2013 Q2 2013 Q3

Revenue %

-20.25%

19.35%

-19.23%

Net income %

-43.17%

56.10%

-15.47%

Revenue %
Net income %

AEP

EDE
Revenue %
Net income %

NG

YOY Growth HE vs. NG


HE
Revenue %

Net income %
EPS %

2008-2009

2009-2010

2010-2011

2011-2012

5Y
average

-28.25

15.39

21.66

4.09

5.88

-8.05

39.05

21.39

0.31

10.64

-14.95

32.97

19.01

-1.39

6.63

VS.
National
Grid

2008-2009

2009-2010

2010-2011

2011-2012

5Y
average

36.43

-10.71

2.40

-3.56

9.52

Net income %

-70.46

46.82

55.77

-5.70

7.84

EPS %

-68.64

46.07

13.98

-10.69

2.22

Revenue %

YOY Growth HE vs. AEP


HE
Revenue %

Net income %
EPS %

2008-2009

2009-2010

2010-2011

2011-2012

5Y
average

-28.25

15.39

21.66

4.09

5.88

-8.05

39.05

21.39

0.31

10.64

-14.95

32.97

19.01

-1.39

6.63

VS.
American
Electric Power

2008-2009

2009-2010 2010-2011

2011-2012

5Y
average

Revenue %

-6.59

6.95

4.78

-1.13

2.24

Net income %

-1.45

-10.74

60.30

-35.30

2.94

-13.45

-14.53

58.89

-35.32

-0.90

EPS %

YOY Growth HE vs. EDE


HE
Revenue %

Net income %
EPS %

2008-2009

2009-2010

2010-2011

2011-2012

5Y
average

-28.25

15.39

21.66

4.09

5.88

-8.05

39.05

21.39

0.31

10.64

-14.95

32.97

19.01

-1.39

6.63

VS.
Empire District
Electric

2008-2009

2009-2010

2010-2011

2011-2012

5Y
average

-4.05

8.87

6.58

-3.43

2.59

Net income %

3.96

14.77

15.98

1.29

10.87

EPS %

0.85

-0.85

11.97

0.76

3.9

Revenue %

Ratio Comparison
Based on fiscal year 2012
2012

HE

National
Grid

AEP

EDE

Net Margin

4.11

14.72

8.42

9.99

Current Ratio

1.08

0.90

0.67

1.46

ROA

1.4

4.34

2.36

2.68

ROE

8.87

22.25

8.42

7.89

D/E

0.89

2.22

1.02

0.96

Key Ratios of HE
Dec-08

Dec-09

Dec-10

2.8

3.59

4.26

4.26

4.11

Current Ratio

1.08

0.96

1.09

1.08

1.08

ROA

0.92

0.91

1.26

1.48

1.4

ROE

6.78

5.86

7.76

9.17

8.87

D/E

0.87

0.95

0.92

0.87

0.89

Net Margin

Dec-11 Dec-12

Stock Valuation

CAPM
Risk Free Rate (10 year T-Bill): 3%
Has been growing very fast
Our Beta: .23, Yahoo Finance Beta: .23
Market Required Return (Average Trailing 36
months: 12%
Risk Premium: 9%
Hawaii Electric Expected Return: 5%

WACC
Cost of Debt: 4.35 %
Cost of Equity (CAPM): 5%
Capital Structure: 51.52% Debt, 48.48%
equity

WACC: 4.6%

Growth Rates
All projections are tied to revenue growth
Revenue growth rates have been tapering down

2014
8%

2015
5%

2016
5%

2017-Infinity
3%

FCFF Method
Historic Prices
2010
EBIT(1T)Dep

2011

2012

Projections
2013

2014

2015

2016

2017

$335,212.35 $366,352.45 $354,297.30 $367,273.53 $385,637.20 $404,919.06 $425,165.02 $437,919.97

Capital
Expenditures $182,125.00 $235,116.00 $325,480.00 $286,141.45 $300,448.52 $315,470.95 $331,244.49 $341,181.83

Change in
Working
Capital

$118,932.39 $(29,368.00) $(27,275.00) $39,857.44 $18,939.17 $19,886.13 $20,880.44 $13,154.68

FCF

$160,604.4
$34,154.96
5 $56,092.30 $41,274.64 $66,249.51 $69,561.99 $73,040.09 $83,583.46

Discounted
FCF's

$63,335.59 $66,502.37

$
4,626,187.98

FCFF Continued
Total Corporate Value: $4.88 billion
Market Value of Debt: $1.7 billion
Shares Outstanding: 99.3 million
Intrinsic Value Per Share: $32.04
Current Trading Price: $26.11

FCFE Model
2010

FCF
Increases in
Long Term
Debt
Interest
Expense
lessTax

FCFE
FCFE
Discounted

2011

2012

2013

2014

2015

2016

2017

$34,154.96 $160,604.45

$56,092.30

$41,274.64

$66,249.51

$69,561.99

$73,040.09

$83,583.46

$(24,872.00)

$82,802.00

$(6,338.66)

$70,826.67

$74,368.00

$78,086.40

$49,194.43

$22,200.72 $104,392.89

$36,460.00

$26,828.51

$43,062.18

$45,215.29

$47,476.06

$54,329.25

$58,222.56

$21,644.31

$16,459.12

$25,201.33

$26,361.70

$27,580.03

$31,271.21

$76,552.44

$76,552.44

$
3,030,670.05

Discounted FCFE and FCFE terminal value by the cost of equity, not by
WACC

FCFE Model Continued


Intrinsic Value of Common Equity: $2.9 billion
Shares Outstanding: 99.3 million

Intrinsic Value Per Share: $30.06

Discounted Dividend
Model
The annual dividend has stayed at $1.24 for the
past 23 years
We used a growth rate of 0% in the DDM

Last dividend: $ 1.24


Required Rate of Return: 5%

Intrinsic Value of Stock: $24.80

Comparative Analysis
Hawaii Electric

Industry

16.7

17

Price to Book

1.4

1.2

Price to Cash flow

7.3

7.2

0.69

1.2

PE Ratio (Average)

Price to Sales

Recommendation
FCFF: $32.04
FCFE: $30.06
DDM: $ 24.80
Average: $29.00
Weighted Average: $30
Market Price: $26.01

Recommendation: Buy

Q&A

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