AMRC - Ameresco: Awaiting Key Factors Evolution In 2024

2024-03-20 15:04:03 ET

Summary

• Ameresco is an American EPC well-positioned to benefit from increased demand for renewable-related services.
• The stock has experienced a 78% drop, mainly due to delays in the construction of the Southern California Edison plant.
• I currently rate it as a Hold, awaiting developments regarding the SCE project, FCF and debt level in FY24.

After analyzing some of the most important IPPs (Independent Power Producers) globally, with today's article I want to bring your attention to Ameresco (AMRC). If you are interested in companies dealing with renewable energy, on my profile EuroEquity Research you wil l find several analyses. AMRC is a major American EPC (Engineering, Procurement and Construction) energy company, also engaging in O&M and asset management. It owns a total capacity of 508MWe (Megawatts equivalent) obtained through small-scale solar systems, storage systems, and RNG (renewable natural gas). Since November 2021, the stock has experienced a 78% drop, mainly imputable to the delay in the construction of a 537.5 MW storage plant for SCE (Southern California Edison) scheduled for August 2022 and not yet fully completed. This caused an overall pipeline slowdown, probable financial compensation to SCE, as well as market attention to AMRC's covenants and, consequently, its financial position. Ameresco, however, represents one of the major players in the industry, with all-around exposure to energy transition and a business capable of being very positively affected by the increased demand for renewable-related services. A normalization of interest rates between FY24 and FY25 could be the right catalytic event for the company. Increased funding availability will translate into revenue growth, supported already now by record levels of backlog at $3.9B, including $1.3B fully contracted, as of December 2023. The tax credits introduced by the Inflation Reduction Act , particularly Investment Tax Credits , and new investments in energy systems will have a positive effect on OCF's operating results and production, containing debt and enabling implementation of the investment program undertaken since 2022, focused on organic growth with a focus also on the dynamic European segment. To support the investment thesis, I conducted a DCF analysis that returned a valuation of $23.32 a share. Although I find the stock price attractive, I assign Ameresco a Hold rating, at least until the release of further positive developments regarding the SCE project.

Business Overview

Ameresco's business is mainly divided into 3 segments:

Project is the main activity, consisting of the implementation of energy projects aimed at reducing the energy consumption of buildings through Energy Savings Performance Contracting (ESPC) , acting as an ESCo ( energy service company ). In FY23, 72% (vs. 46% FY22) of its revenues were indeed derived from federal, state, provincial, or local government entities, including public housing authorities, public universities, and municipal utilities. In FY22, the segment experienced a spike in revenues due to the recognition of the SCE project. The above-mentioned problems with the project, however, led to a slowdown in AMRC’s operations in FY23, resulting in a 32% YoY decrease in project revenues, still above FY21 levels. I expect revenues to accelerate again between FY24 and FY25, in line with increased demand for new renewable plants. Barring further delays on projects, I anticipate a return to FY22 highs as early as FY25. This business area is also dedicated to the construction of small-scale renewable systems, often combined with energy efficiency operations....

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