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Earnings Cavalcade

By Roger S. Conrad on Feb. 25, 2014

Embattled Just Energy, easily the highest-risk holding in our International Portfolio, posted solid results for its fiscal third quarter ended Dec. 31, 2013, triggering a massive short squeeze that sent the stock surging.

After slashing its dividend by 32 percent last year, the power company’s FFO failed to cover this lower payout in its fiscal first and second quarters.

Management attributed these shortfalls to seasonal factors–a legitimate assessment–and asserted that strong third-quarter results would offset weakness earlier in the year.

However, the company’s recent track record of poor expectations management made investors skeptical about its ability to deliver.  

A lot was riding on Just Energy’s results: Short interest in the company’s US-traded shares had reached 13.46 percent of its outstanding float and 19.7 days of average trading volume, reinforcing the market’s lack of confidence in the firm’s turnaround effort.

We took a chance on Just Energy for three reasons: 

  • As one of 20 stocks in our International Portfolio, the strong performance of our other holdings would help to blunt the damage of a total implosion;
  • The company’s FFO in the first two quarters of its fiscal year failed to cover the payout but were still in line with management’s guidance; and
  • Solid third-quarter results would send the stock surging higher, as short seller scrambled to cover their positions.

Our bet paid off. Just Energy proved the critics wrong and delivered earnings that suggest the company will be able to sustain its monthly dividend of CA$0.07 per share. 

Just Energy posted third-quarter FFO of CA$38.8 million, a 9.9 percent increase from the prior year. This solid showing translated into a payout ratio of 80 percent and reduced the payout ratio for the nine months ended Dec. 31, 2013, to 114 percent–a vast improvement over the 272 percent payout ratio that the firm posted over the same period last year.

Management reiterated guidance for the company to generate sufficient FFO to cover its full-year dividend obligations and called for further progress in its fiscal 2015.

In a conference call to discuss Just Energy’s third-quarter results, CEO Ken Hartwick reinforced once again that the company aims to cut costs and grow its margins by double digits in fiscal 2014.

Management’s guidance calls for a 26 percent increase in Just Energy’s full-year earnings before interest, taxes, depreciation and amortization (EBITDA). Although weather will play an important role in the final results (the colder, the better), Just Energy has grown its EBITDA by 37 percent in the first nine months of its fiscal year.

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