Sempra Energy (SE) carries CFRA's highest investment recommendation of 5-STARS, or Strong Buy. Sempra Energy is a San Diego-based multi-utility that provides electric and gas services to customers in the U.S. and Mexico, notes analyst Paige Meyer, in CFRA Research's flagship newsletter The Outlook.
Sempra has experienced material changes to its business over the past couple of years after activist investors Elliot Management and Bluescape Resources announced they had made recommendations to SRE's board and nominated six directors to the board.
SRE initiated a strategic portfolio review and an operational review. In response, SRE sold off numerous assets to focus on its core operations. SRE divested its U.S. renewables business (solar and wind) in 2019, two natural gas storage assets in 2019, and its South American utilities businesses in 2020 – Chile and Peru.
SRE reinvested capital from these asset sales in expanding its operations in Texas, limiting its needs to access the capital markets. As a result of this strategic repositioning, we forecast EBITDA margins will increase to 42.9% in 2020 and 44.7% in 2021, up from 37.5% in 2019.
Our Strong Buy opinion reflects our view of strong EPS growth — driven by new projects entering service and SRE's discount-to-peers valuation. SRE's utility segments have various projects in development that will likely add to SRE's rate base.
Also, SRE has filed for rate increases covering the period from 2019 through 2022. We see the startup in 2020 of the Cameron LNG export project boosting EPS, with Cameron LNG Train 3 substantially completed.
We note the LNG revenues will come from take-or-pay contracts (the customer pays for the capacity that has been set aside for it at a fixed rate, whether used or not), which are lower risk.
Meanwhile, SRE's California utilities have decoupled revenues with no earnings exposure to changes in volumes or commodity prices, which will likely be beneficial during the coronavirus pandemic slowdown.
To mitigate wildfire risks from operating in California, SRE procured more than the required $1B of wildfire insurance under a balanced program to comply with AB 1054 wildfire fund requirements. SRE has invested more than $2B in wildfire mitigation since 2007 as part of its 'Fire Safe 3.0' program.
Our 12-month target price of $154 is 19.9x our 2021 EPS estimate, or a premium to peers, warranted by prospects for an above-peer three-year EPS growth rate and improving margins following the strategic repositioning.
Risks to our recommendation and target price include unfavorable regulatory decisions, weaker results from international and unregulated operations, weaker economic conditions, and an unexpected rise in interest rates.
