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Why the Infigen Energy share price is rocketing higher today

The Infigen Energy Ltd (ASX: IFN) share price is on fire! The stock has rallied 9.3% to 47 cents in the last hour of trade and is among the best performing stocks on the All Ordinaries (Index:^AORD) (ASX:XAO).

The gain comes on a day when both the All Ordinaries and S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index have slipped into the red, no thanks to weak offshore leads.

The outperformance of the power generation company also stands in contrast to its larger peers with the Origin Energy Ltd (ASX: ORG) share price falling 1.9% to $7.71 and AGL Energy Limited (ASX: AGL) share price trading flat at $22.17 at the time of writing.

The glorious return of dividends

Infigen, which owns renewable power generation assets, excited the market when it announced it bought the 109MW Smithfield Open Cycle Gas Turbine (OCGT) plant for $60 million and indicated it planned to restart paying dividends again after an eight-and-a-half-year break!

The company plans to pay a 1 cent a share distribution to shareholders for the second half of the financial year and indicated it will keep paying half-yearly dividends from then on.

The last time Infigen declared a dividend was back in December 2010 when it paid a similar amount to shareholders.

Strategic acquisition to improve earnings quality

The Smithfield plant acquisition is also good news for investors as it’s a strategically important asset in Infigen’s asset portfolio of renewable power plants. It’s located in one of the best load corridors in the National Electricity Market and has access to reliable gas supply.

More significantly, the acquisition will help Infigen significantly grow its commercial and industrial customer base in New South Wales as Smithfield provides a “capacity firming” solution.

While power generated from renewables like solar and wind are great for the environment, output from these power generation assets fluctuates. This is why firming capacity is required to kick-in whenever output from other renewable plants falls short of demand.

What this means is that the Smithfield acquisition will enable Infigen to add another 300W to 400MW of intermittent renewable energy generation assets to its portfolio. It will also improve the quality of Infigen’s earnings as Smithfield is expected to facilitate a substantial increase in contracting into higher priced, longer tenor and more stable markets.

Smithfield is expected to keep operating for 20 to 30 years and is forecast to generate at least a 12% post tax nominal levered equity return on a standalone basis.

Brokers thinks Infigen is a “buy”

The $60 million price for the plant will be paid from Infigen’s cash reserves but the company may have to cough up extra (up to $14 million) depending on the plant’s performance prior to November 2019.

“The acquisition of the Smithfield peaking plant  and  the expected reintroduction of distributions  on a sustainable  basis, represent two important milestones in the further successful execution of our business strategy,” said Infigen’s chief executive Ross Rolfe.

“The ownership of firming capacity in NSW will enable us to substantially increase the renewable energy we sell to our growing customer base on a reliable and firm basis, and to increase the number of customers we serve.”

I think the Infigen share price has room to climb further and the four brokers polled on Reuters are recommending the stock as a “buy” with an average price target of 77 cents a share.

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Motley Fool contributor Brendon Lau has no position in any of the 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 Scott Phillips.

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