Company Overview: Edison International (NYSE: EIX) is a holding company of SCE and Edison Energy Group. Southern California Edison (SCE) is engaged in electricity distribution and holds a ~50,000 square mile supply grid in Central, Coastal, and Southern California. Edison Energy Group is engaged in data-driven energy solutions to industrial, institutional and commercial customers.

EIX Details

Material Business Updates

SCE to Launch Nation’s Largest Utility-Led Electric Vehicle (EV) Charging Program – On 12 July 2021, EIX announced SCE’s US$436 million investment in a five-year Charge Ready Program which is estimated to deploy about 38,000 EV charging stations across the destination, workspace, and multifamily locations in California.

Upgradation in Transmission Lines Successfully Materialized – On 7 June 2021, EIX announced SCE’s US$740 million upgradation of ‘West of Devers’ transmission lines in Southern California which shall amplify transmission capacity to more than 7,000 MW of battery and renewable energy storage resources. The aforementioned development is expected to upgrade the power delivery capacity from 1,600 MW to 4,800 MW.

Historical Financial Trend:

EIX illustrated considerable historical growth while keeping the value proposition intact. The Operating revenues remained consistent from FY16 – FY19 and spiked considerable in FY20. Operating revenues grew at a 3.4% CAGR (FY16 – FY20). EIX’s leverage has increased constantly to monetize constant project expansion strategies.

Figure 1: Historical Financial Overview:

Source: Company Reports, Analysis by Kalkine Group

Second Quarter FY21 Performance:

As a result of higher cost-recovery activities, ~20% PcP increase in purchasing power & fuel, and higher gas & power prices, operating revenue for the period improved by ~11% PcP. With the corresponding increase in top-line, net income surged by ~4% PcP. On six months ending June 30, 2021, net income surged ~16% to reach US$651 million. In contrary, cash flow from operating activities nosedived considerably, primarily from US$2,852 million wildfire-related claims.

On the balance sheet front, the cash balance stood at US$84 million, and long-term debt increased to US$22,891 million. During the first half of 2021, most debt issues were designated to repay SCE’s commercial paper borrowings and fund wildfire claims.

Figure 2: Quarterly Performance:

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Favourable Revenue: EIX’ top-line assumed uplift of ~10% YoY as a result of SCE’s increased rate base from US$32,592 million in FY19 to US$34,710 million in FY20. Amidst containment restrictions, peak demand surged to 23,133 MW relative to 22,009 MW in FY19.

Bottom-Line Restraining Factors: Although revenues increased, operating income and net income declined by ~31% and ~38%, respectively, primarily driven by US$1,328 million wildfire-related claims and related costs.

Figure 3: Annual Performance:

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~43.77% of the total shareholding. The Vanguard Group, Inc. and State Street Global Advisors (US) holds a maximum stake in the company at ~11.31% and ~7.00%, respectively.

Figure 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Consistent growth in peak demand of SCE operations has translated into long-term sustainable growth levels. In addition, the steady cost of power purchase and operations & maintenance expenses have streamlined operating margins (ignoring non-recurring expenses), exhibiting a sustainable growth rate across years. As a result, EIX’ profitability and return status remain stable despite recent market disruptions.

Figure 5: Key Financial Metrics:

Source: Analysis by Kalkine Group

Outlook:

Opportunistic Trends in Electricity Industry: The industry has entered into a transitional phase driven by technological advancements into consumer-owned generation, electric vehicles and energy storage. California is focused on mitigating GHG emissions by 40% in 2030 from 1990 levels.

California’s Continuous Investment in Wild-Fire Prevention: From FY19 to FY21, the wildfire suppression budget has inclined from ~US$2.5 billion to ~US$2.8 billion with crew position increase from ~7,180 to ~8,134.

Cost Recovery: Pending and ongoing cost recovery are expected to strengthen EIX’ credit metrics with approved, potential insurance applications totalling ~US$793 million.

Capital Expenditure Targets: SCE forecasts capital expenditure to wander between US$14.7 billion to US$16.2 billion for 2021 through 2023, which shall cater to traditional capex in power distribution, transmission & generation, and wildfire mitigation-related capex.

Key Risks:

Wildfire incidents and respective claims pose a significant risk to the financial health of EIX’ by diluting significant operating cash flows. In addition, the electricity prices are not fully hedged, hence exposed to significant market volatilities.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

Stock Recommendation: EIX has delivered 3-month and 6-month returns of ~-7.079% and ~-6.388%, respectively. The stock is trading below the average of the 52-week high price of US$66.68 and the 52-week low price of US$48.47, indicating an opportunity for accumulation. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double-digit (in % terms). We believe that the stock might trade at a slight premium compared to its peer median EV/Sales (NTM trading multiple), considering increased investments to suppress wildfire. For this purpose, we have taken peers such as Pinnacle West Capital Corp (NYSE: PNW), Portland General Electric Co (NYSE: POR), Avangrid Inc (NYSE: AGR) to name a few. Considering the opportunities in the electricity industry, growing demand for electric vehicles & electricity storage, and valuation, we give a “Buy” recommendation on the stock at the current market price of US$55.39, up by ~0.53% on 3 August 2021.

EIX Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.