CA - Polaris Renewable Energy: Wait For A Better Entry Point

Summary

• Polaris Renewable Energy is an exciting opportunity for investors if they want to get exposure to renewable energy in South America.
• Being a small company they are still able to grow steadily and provide value to shareholders.
• With the solar market having plenty of tailwinds ahead it shouldn't be hard for Polaris to find new projects to invest into and generate increasing revenues from.

The Investment Plan

Polaris Renewable Energy ( OTCPK:RAMPF ) is a company operating in the energy sector. With their business being in Latin America, they are managing a number of different renewable energy sites. With the largest site in Nicaragua being a 72 MW geothermal facility. Besides this they hold some hydroelectric facilities in Peru and also a solar project in the Dominican Republic. With renewable energy sources being under so much demand, Polaris is believed to have several tailwinds ahead of them.

Polaris is a great company growing at a steady pace. The current price though isn't sufficient for me to get my ideal annual return. Instead I think it's best to hold on to shares and wait for a time where they are lower and to add them. This should prove to be the best way in the long-term.

Last Earnings Report Highlights

Polaris Renewable reported on November 3. 2022 their Q3 earnings. Looking at the top line first they managed to generate $14.5 million in revenues, a slight decline of 2% YoY. One of the reasons the management laid out for the decreases is that their largest facility in Nicaragua was scheduled for maintenance. This reduced their output by around 22% YoY. I would expect that after this maintenance is done, the revenues should start ticking upwards once again.

Looking at the bottom line I can note that the company had an almost $1.5 million net loss which turns out to $-0.7 EPS. But with the issues we mentioned, a likely uptick towards 2021 profitability might be possible in the near-term in my opinion.

The management of Polaris remained optimistic and pleased about the performance in the quarter. The CEO Marc Murnaghan can be quoted saying:

We are pleased with the third quarter results as we generated strong free cash flow and consolidated recent acquisitions in the numbers.

Sector Outlook

Polaris is operating in the renewable energy sector with investments into geothermal sites and also solar farms. Like I mentioned previously they operate in South America, where the switch to solar hasn't been as fast as the United States or Europe. But until the year 2025, which is not far away, the market is expected to grow around 11% CAGR . This should incentivise more companies to get a foothold and expand into South America.

The solar sector is poised for growth and companies operating in the sector should see a clear increase in demand. As South America is mostly dependent on non-renewable energy sources there might be larger pushes for it ahead. With Luiz Inacio Lula Da Silva winning the presidential election in Brazil, a push towards green energy might be expected. Polaris does not operate yet in Brazil, but this could be a way to enter the market there perhaps, which in my opinion would be a major catalyst.

Competition

Looking at the competition in South America there aren't any clear companies that pop out that could directly threaten Polaris. Being a company focused on renewable energy sources, they are new to the market in South America. What I think could threaten them is that larger and more established energy corporations start to invest more heavily into renewables as more pressures start to mount.

In terms of large energy corporations in South America, Iberdrola ( OTCPK:IBDSF ) or other private energy corporations like Electrobras could potentially be disruptors.

Polaris Renewable doesn't hold a lot of facilities currently, but with expansion in mind they might face competitors from these larger companies as they try and get a foothold.

One of the reasons I think that these largest companies will invest more into renewables is for the pressures being put on governments to find greener sources. But Shell ( SHEL ), one of the world's largest energy suppliers, is already investing into this space. So I think it makes sense that others follow their footsteps.

The Balance Sheet

The balance sheet for Polaris is quite short and does not provide too much info in their latest earnings report, so I had to do some digging. The segments I want to highlight on the balance sheet for the company is the cash/debt position and also how assets fare against liabilities. On top of this I think it's important to look at if there is some share dilution and whether cash flow is positive or not.

The current cash position for the company has me worried. They only have $36 million in cash, a large decrease compared to $97 million the year before in 2021. A big reason for this is that they have begun maintenance on some facilities and have expanded into some new areas during the year. What has me worried is that it's far from covering the long-term debt of $187 million. Thankfully they should be able to cover the current debts of around $13 million.

Looking at the assets I notice that a large portion of the value comes from net property, plant and equipment. Which makes sense as they have begun expanding little by little each year and building up their assets. They have almost 2x as many assets as liabilities which makes me hopeful they are growing in a profitable and healthy manner without taking on too much debt.

The shares have been continuously diluted in the last few years, but not at too much of an alarming pace for a growing company. Looking 5 years back they have increased around 19%. I think that's reasonable, at least looking at some of the other up and coming companies in the solar industry. I have faith that they will slow this down as they build up more and more cash flow.

Looking at the cash flow I think they are heading in the right direction. They have positive free cash flow and it has been like that for the last few years. I believe this will greatly help them pay down debt and further expand into new countries and regions in South America.

Valuing The Company

Investing into Polaris is an exciting opportunity to get some exposure to renewable energy in South America. But paying the right price for it and getting a good annual return on your investments is vital.

With Polaris I have set a terminal p/e valuation of 14. This is a bit below the sector average of 20. But I would argue that with them so new and located in new and emerging markets, conservative valuations are very important. It helps shield against downside risks.

For the next 5 years I would estimate the bottom line to increase about 10% each year. With this number I am taking into account that there will continue to be about 3% share dilution each year. Something that hurts investors and makes the long-term return not as high as one might hope for. I do think that once they have established more facilities and created a good structure they will see margin expansion and the need for share dilution disappears.

But until then I want to prepare for the worst and hope for the best. At the current price an investment would yield about 37% or 7.4% annually. This is not enough to entice me and make an investment. Instead I think that waiting for a better entry point is the best thing to do. If you have shares in the company and want to have a higher return then selling and looking elsewhere might be good. But I believe in the company and would just wait for hopefully lower share prices to add for a long-term hold.

Conclusion

Polaris is targeting an undeserved part of the renewable energy market, South America. As the push for greener energy has been hard the last few years, the same trend is starting to appear in South America.

The company already holds a number of different facilities where they generate renewable energy. Being that they have their operations in different countries they have successfully already managed to diversify their business.

The revenues are steadily climbing but it comes at the cost of some share dilution. A factor that might have contributed to the share price remaining suppressed. The cash position the company holds has been decreasing heavily in 2022 compared to 2021. The reason being they needed to do some much needed maintenance, this also affected the revenues in the last quarter. But I think it's great the management are taking these steps to ensure they have reliable revenue streams.

Right now, the share price is a bit too high to make an investment. But it's not far from where I would start buying. Until then, I think it's perfectly fine to just hold on to shares in the company and wait for better buying opportunities.

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