CRASH! Here’s why the ERM Power Ltd share price crashed 22% today

It’s been a bad day for shareholders of ERM Power Ltd (ASX: EPW) who have watched their shares crash more than 22% to just $1.14. That compares to a 1.3% rise for the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO).

The shares are currently trading at a 53% discount to their 52-week high achieved in June 2015, with a similarly sharp fall endured in October last year.

ERM Power sells electricity to small and big businesses in Australia and the United States, while it also generates a sizeable portion of its revenue from gas-fired power generation assets and delivery of power generation solutions.

In an announcement from the group today, ERM Power confirmed its guidance for EBITDAF for financial year 2016 (FY16), although it did note weakness at its Oakey Power Station. It said the station will underperform expectations of $16 million EBITDAF for the year, although that would be offset by the performances of the Australian and United States retailing businesses.

Note: EBITDAF = earnings before interest, tax, depreciation, amortisation, impairment and net fair value gains and losses.

However, it appears management do not expect the recent issues to be limited to FY16. It also anticipates load growth and margin pressure in its Australian electricity market due to “significant retail competition”, with a growth rate below historic levels.

It also said that the Australian retail business is approaching its natural market share ceiling, suggesting that growth will continue to moderate over the coming years, with lower margins also potentially a lasting effect.

Meanwhile, 2017 EBITDA for Oakley Power Station is also forecast in the range of $14 million to $16 million, which it said includes an allowance for a scheduled maintenance outage.

Arguably, today’s selloff has been overdone and may present a reasonable opportunity for long-term investors to consider buying. In saying that, investors should also remain wary of the conditions within the industry itself and consider how ERM Power will deal with that in the long run.

Why retirees LOVE these 5 ASX stocks

Discover The Motley Fool's top 5 ASX dividend stock ideas for 2016 to get you started building a more diversified income portfolio that is paying you back! Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.