Hawaiian Electric: An underperformer in an overperforming industry (NYSE: HE)

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Investment thesis

Over the past three years, we have seen great volatility in the market due to the pandemic, high inflation, recessionary pressures and the Russian-Ukrainian conflict. The pandemic is now considered a benchmark for identifying and assess resilient companies that have held up through the pandemic and challenging market conditions.

According to a McKinsey Report, the past year in capital markets has underestimated the increasing pace of change. Several cyclical correlations have played a significant role in various industries, for example, a downward trend seen in consumer discretionary and an upward movement in commodity-related stock prices due to the commodity super cycle.

Hawaiian Electric Industries, Inc. (NYSE: IT), the largest electricity provider in the state of Hawaii, has been on a very monotonous road since Covid-19. Observing the price movement of the last 3 years compared to pre-Covid and post-Covid returns with the average Dow Jones Utility returns over the same period shows that the company has not followed DJU in the period post Covid.

At the same time, the company’s weak price momentum over the past 3 years has underperformed the S&P 500 by more than 40% over the past three years.

Data by Y-Charts

Investors in a bear market are reluctant to act boldly, and a recent spike in inflation made investors more risk averse. Moreover, fearing a recession-type market situation, investors are more inclined to recession proof Industries.

Looking at the returns of Hawaiian Electric Industries, it is clear that when a sector performs well, correlated with the macro indicators, it does not necessarily mean that all companies in the respective sector will be profitable. The utilities sector generated stable returns over the past year compared to other sectors. According to S&P Globalthe last quarter of 2021 saw electric and multi-utility stocks recover, with indices reaching highs of 12.1% to 13.4%, by far the best performance for the sector during the year.

Change in utility and market stock prices in 2021

S&P Global

With a highly leveraged capital structure, slow growth relative to its peers, and recent insider selling, I would rate the stock as a “sell”.

Company presentation

Hawaiian Electric, a public NYSE-listed company with a market capitalization of $4.32 billion, is engaged in investing in electric utilities, banking, and renewable infrastructure in Hawaii. With more than 16 years of experience in the utility industry, Hawaii Electric is responsible for providing essential electrical services to more than 1.40 million people, or 95% of Hawaii’s population, holding a monopoly on electricity. state energy supply. The company generates 1,794 megawatts of electricity by operating four company-owned power plants and four other IPPs.

On the other hand, American Savings Bank, a subsidiary of Hawaiian Electric Industries, is one of Hawaii’s largest financial institutions, with over $9 billion in assets.

HE turnover


The company generated $2.9 billion in MRQ revenue with year-over-year growth of 17.56%, with its banking subsidiary responsible for 10% and the electric utility segment accounting for 90% of total turnover, respectively.

Insider Selling

Investors generally view insider buying and selling as an indicator of future stock performance. Hawaiian Electric has a relatively high percentage of insider sells, with nearly one million or about 1% of total outstanding shares sold in the last 3 months. This higher percentage can be partly attributed to its relatively larger board, as 6 new directors have joined the board in the past 3 years.

Hawaii Electric has seen significant insider selling over the past year. With CFO Gregory Hazelton selling more than $0.9 million in shares in May 2022 and $1.4 million in shares sold by CEO Constance Lau in December 2021, investor sentiment is not positive.

He sells insiders


Source: Insider Trading Activity in Hawaii Electric Stock – TipRanks


Earnings per share have followed a stable trajectory over the past five years, with MRQ EPS at $0.63. Interestingly, these earnings don’t impact his lofty P/E multiple of 17.36x as much as it should. Slower-than-market growth and a lower earnings outlook can drive the stock price down, putting current shareholders’ investments at risk. It could also mean that new investors wanting to invest in the company will pay a high premium on the stock price.

HE Earnings Outlook

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So how much premium? If we run a DCF fair value model based on FCF, with a decent long term growth rate of 10%, a discount rate of 9% representing the high leverage and a terminal growth rate of 2 %, the stock yields a fair value of $17.90, almost 30% less than its current price.

DCF model based on HE FCF


According ForbesDJUA’s current yield is 2.3x that of the typical S&P 500 ETF. And best-in-class companies have a clear path to increasing dividends by at least 6-8% per year, enough to match even the current rate of inflation. Unfortunately, HE’s dividend growth history doesn’t paint a good picture. Growth prospects aren’t just there, with the most recent dividend growth rate of 3.01% versus the industry median of 5.50% and a 3-year, 5-year, and 10-year dividend CAGR years of 3.08%, 2.16%, and 1.08%, compared to 3.86%, 5.7%, and 4.47% for the industry.

Additionally, its FCF yield of 2.46%, lower than its dividend yield, and cash dividend payout ratio of 1.4x dampen any prospect of dividend growth.

High debt is high risk

HE’s debt ratio has gone from 86.7% to 108% over the last 5 years and from 114.49% at MRQ. The operating cash flow to debt ratio of 0.16x suggests that debt is not well covered by current operating cash flow.

Elements of the HE balance sheet

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The company would need a major recapitalization if it were to pay off its creditors soon. Still, the long-term debt to EBITDA ratio of 3.2x and its EBIT covering its interest expense of 4.1x show that the company can manage the current debt as a capital-intensive sector. Additionally, since nearly all debt is long term, the company’s current and fast ratio of around 12x means that its short term is secured by a strong cash balance.

The high leverage is primarily in response to high post-pandemic working capital needs due to high accounts receivable balances and write-offs, primarily due to high inflation affecting consumers’ ability to make timely payments timely. According to the MRQ, about $38 million (about 10%) of utility accounts receivable were 30 days past due, including about 23% on payment plans. The collection delay has resulted in a 44-day accounts receivable turnaround, which if not addressed quickly will lead the company to seek additional funding from WC.

Still, that doesn’t mean HE can afford more debt, as he wouldn’t want to be exposed to high levels of credit risk, especially given his high 56x debt-to-FCF ratio and fully consumed balance. on the revolving credit facility. .

Data by Y-Charts

Since debt is cheaper than equity, high leverage should result in a lower cost of capital and higher profitability, which means the higher risk should be offset by higher rewards . However, the company’s profit margins are mediocre at best.

HE profit margins

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What’s the benefit?

As the sole electricity provider for most of Hawaii’s population, the company can become an attractive investment if it can improve its cash flow and maintain a return above its current 3.4%. Going forward, high costs imposed by inflation will likely affect the company’s short-term profitability. Nevertheless, it could turn the tide in the long term by making the risk-reward dynamic more favorable, either by deleveraging or by improving its growth indicators.

This could be done in a number of ways, including paying down its long-term debt to reduce interest payments, optimizing its working capital by accelerating accounts receivable, and investing in high-return assets.

Given that the company missed 5 out of 8 previous analysts’ revenue targets, but beat 7 out of 8 EPS targets, it is evident that HE can achieve operational optimization through careful resource management.


According Deloitte, In 2021, the electricity and utilities sector overcame tough challenges, made measurable progress and received clean energy encouragement from a new administration. But the utilities sector has done well recently. As the U.S. economy began to emerge from its pandemic-induced recession, electricity sales increased 3.8% through August 2021 from a year earlier.

This has not been the case for Hawaii Electric in recent years as it has reinvested capital and generated low returns for its shareholders, including below-industry dividend growth of 2.16% CAGR over the past five years, while its peers averaged around 6.80%.

Investors could generate much better returns by investing in other income or growth stocks, as Hawaiian Electric’s poor performance and negligible growth indicators appear to be indicators of a sell call.

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