Toronto, Canada-based Just Energy Group (JE) is a natural gas and electric utility — not the sexiest kind of business in the world, in other words. Detracting further from its attractiveness, Just Energy is only an occasionally profitable business, having lost money in three of the past six quarters, and made money in the other three, but overall, having lost $287 million more than it made.
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So why did Just Energy stock double in Thursday trading, closing at $0.56 per share?
The answer is that on Wednesday, Just Energy announced that the U.S. Federal Energy Regulatory Commission (FERC) finally gave its blessing to the Company’s previously announced “Recapitalization Transaction,” whereby $320 million of the company’s debt load (comprising both convertible debt and preferred shares) will be converted into common stock, $75 million in new capital will be injected into the company, and $410 million in other debt will have its due dates for repayment pushed back.
Just Energy is also settling litigation related to its 2018 acquisition of Filter Group, and conducting a reverse split of its shares such that for every 33 shares of Just Energy a shareholder owns today, after the “split” (which is actually more of a consolidation) such shareholder will receive just 1 new share of the company.
When all’s said and done, promises Just Energy, it will emerge with a stronger and “de-risked” business model that will “position Just Energy for sustainable growth as an independent industry leader” and ensure it has the “financial flexibility” to succeed going forward.
These happy events — the reverse split, as well as the recapitalization — were both originally expected to take place at the end of the trading day on Sept. 16, but were postponed awaiting FERC approval. Now, Just Energy expects to emerge from its cocoon as a beautiful and financially flexible butterfly on Sept. 28 instead.
So… problem solved?
Not quite, says RBC Capital analyst Nelson Ng, which considers Just Energy a “speculative” stock. The analyst rates JE an Underperform (i.e. Sell) along with a C$0.30 (US$0.22) price target. (To watch Ng’s track record, click here)
Although Just Energy’s recapitalization will strengthen the company’s balance sheet, the company will have to dilute its current shareholders to achieve this, warns Ng. Although investors are responding to the recapitalization plan by doubling the stock’s share price this week, the plan itself will far from double the company’s underlying value.
After the 1-for-33 reverse share split, granted, the stock’s sticker price will probably be closer to $7.26 or thereabouts. But in Ng’s opinion, that will still leave this stock overpriced by more than 100%.
It has been relatively quiet when it comes to other analyst activity. In the last three months, only two analysts have issued ratings. Based on one Sell rating and one Hold, the word on the Street is that JE is a Moderate Sell. Meanwhile, the average price target is $0.30, which suggests a 30% downside on the NYSE. (See JE stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
