We are initiating coverage on Ithaca (IAE.L) which is in a phase of solid cash generation while GSA (Greater Stella Area) remains on course in coming years. Overall, the energy sector is our favorite, although companies which have verified well-managed FCFs (free cash flows) and capital structure along with policies have revealed they are capable to outperform to the sector as well as market at large. In our opinion, company’s solid cash generating report will drive to significant capital returns to investors and, therefore a fall in the market discount to our assessment.
We believe that company will create total free cash flow to equity nearly of $1.05 billion in range of 2015-2019 years, approximately 1.4 times of the existing market capital. In due course, firm’s main concern will be to surge shareholder value via reinvestment of capital however, in our opinion; the larger scale of cash generation provides itself to a return of certain grow and amount. We forecast that company could return $300 million to $450 million to shareholders in last five years, yet have about $400 million to $550 million in hand for prospective re-investment.
Company currently trades at a 19% discount to our Core net assets value of ₤1.64 per share. We certainly believe that, initial production from GSA should be a vital catalyst for the shares as it somewhat limits the risks of delivering of the reservoir and decreases the prospective for value dip via delay or cost exceed (as limiting risk GSA puts in ₤0.12 to our assessment). We also anticipate that as we move toward initial production the market discount to our assessment will decrease as investors place themselves in lead front of the case, and in anticipation of substance cash returns.
Based on our assessment, we retain our “Outperform” rating and ₤1.90 target price.