Spruce Point Capital Management is releasing a short-biased report on Just Energy Group Inc (NYSE:JE) (TSE:JE).

Just Energy

For a fully copy of the report, set for publication at 11:00AM EST, please visit their SeekingAlpha profile here after 11am EST

Just Energy is struggling to survive amidst a brutally competitive market

Just Energy Group Inc (NYSE:JE) (TSE:JE) is a company that U.S. consumers and investors are quickly realizing has become toxic to their wallets through deceptive energy marketing practices, and harmful to their brokerage accounts. Investors tempted by its seemingly attractive 7% current yield should carefully consider the sustainability of its dividend through a rigorous analysis of the company’s earnings prospects, already debt-heavy capital structure, and management’s historical proclamations. Having Net Debt/EBITDA of 6.4x, we believe Just Energy Group Inc (NYSE:JE) (TSE:JE) has overstretched its balance sheet and is struggling to survive amidst a brutally competitive market for its energy products, waning organic growth, and declining margins. The company already cut its dividendin February 2013, but we think another cut is highly probable.

Research Highlights:

  • Just Energy Group Inc (NYSE:JE) (TSE:JE) took a backdoor listing to the NYSE last year in an attempt to foster a new set of shareholders, as its funding sources in Canada appear depleted. The company’s core business, energy marketing, has shown dramatic margin contracting, increasing competition, and declining growth
  • Faced with the decision tree to cut its generous dividend, or continue placating its shareholders, it appears management went on an aggressive path towards signing up customers with deceptive marketing practices. Even worse, the company diversified its business through a debt-fueled acquisition binge that has pushed the company into more riskier and capital intensive businesses such as solar, ethanol, and home services

  • Just Energy Group Inc (NYSE:JE) (TSE:JE) has purposefully used aggressive and distortive measures such as Adjusted EBITDA and Embedded Gross Margin to paint an overly optimistic picture of its financial condition, and to ensure investors its dividend is sustainable

  • Many critics surfaced in 2010-2011, yet the company continued assuring investors that its dividend was safe. However, there were numerous warning signs of the opposite, and the company finally cut its dividend earlier this year

  • We estimate Just Energy Group Inc (NYSE:JE) (TSE:JE) needs to cut its dividend even further, and is incapable of producing sufficient cash flow to cover its reduced C$122m/year dividend burden this year, rendering its dividend policy unsustainable. The company has limited financial flexibility to pay its dividend. JE has little cash on its balance sheet left, few marketable assets or businesses of value in our opinion, and a credit facility that expires in 5 months that is already >30% utilized

  • Regardless of any dividend cut, we believe Just Energy Group Inc (NYSE:JE) (TSE:JE)’s stock is grossly overvalued and has an intrinsic value of $4.00 per share, representing ~46% downside from the current price. The market is assigning an irrational 9x FY 2014E EBITDA to its businesses, when peer comparables on much stronger financial grounding are trading at closer to 7x EBITDA