2023-12-15 09:15:00 ET
Summary
- Renewable energy capacity more than doubled between 2013 and 2022, with hydropower and wind capacity experiencing significant growth.
- Atlantica Sustainable Infrastructure plc is a renewable utilities company with a portfolio of 2.2 GW operating assets.
- AY's earnings in Q3 2023 showed flat revenue growth, but a significant increase in net profit due to lower impairment charges.
Renewable energy capacity more than doubled between 2013 and 2022, rising from 1,567K Megawatts, MW, to 3,382K. Within those totals, Hydropower grew from 1,137K MW to 1.393K, while Wind capacity rose from 300K MW to 899K MW.
Meanwhile, the average utilization of coal-fired generation in the United States declined from 48.5% in the first 7 months of 2022 to 39.8% in the same period in 2023, while the capacity factor of natural gas-fired generation increased from 54.6% to 57.7% in the same period. (IEA)
Within the Utilities sector, there is a sub-sector of companies classified as renewable utilities. One of these companies is Atlantica Sustainable Infrastructure plc ( AY ).
Company Profile:
AY is a sustainable infrastructure company focused on renewable energy with a portfolio of 2.2 GW operating assets.
"In 2022, our renewable sector represented 75% of our revenue. We complement our renewable assets portfolio with storage, efficient natural gas and transmission infrastructure assets, as enablers of the transition towards a clean energy mix. We also hold water assets, a relevant sector for sustainable development.
We currently own 44 assets which generally have contracted or regulated revenue. As of March 31, 2023, our assets had a weighted average remaining contract life of approximately 14 years." (AY site)
Energy Portfolio:
As of 9/30/23, Renewables amounted to 2.2 GW, 70% of AY's revenue, followed by 398 MW of Natural Gas & Heat, at 15%. AY also has 1229 miles of Transmission Lines, which are 12% of its portfolio, and 17.5 MWT/day of Water, at 3%.
Its operations are 40% N. American, 34% European, 18% S. American, and 8% in the rest of the world.
Earnings:
Like most utilities, AY isn't a growth company - its works on long term Purchase Power Agreements, known as PPAs, which had an average remaining term ~13 years, as of 9/30/23.
Q3 '23 saw flat revenue growth, with slight downturns in EBITDA and Cash Available For Distribution ((CAFD)). Net Profit, however, jumped 301%, swinging from a ~$9M loss to an $18M profit, due to lower impairment charges. Likewise, EPS rose from $.13/share loss to an $.18/share gain in Q3 '23. Interest expense was up by ~$9m, a 13.6% rise.
Q1-Q3 2023: Revenue was flat vs. Q1-3 '22, while Net Profit rose ~$42M, to ~$49M, continuing the upward trend seen in full year 2022, aided by lower expenses and impairments. Adjusted EBITDA was flattish, while CAFD was up ~3%. EPS reversed from -$.09 to $.40. Interest Expense was flat - there's something we haven't seen that often in 2023. The share count rose ~1%:
While revenues were down ~2% in the Renewables segment, the deficit was countered by gains in the other 3 segments, notably transmission lines, which rose ~10%.
Adjusted EBITDA also fell ~2% in the Renewables segment, whereas it rose 10%-plus in the transmission lines segment, and was roughly stable in the other 2 segments:
Growth Projects:
AY has several growth projects planned, which total 2.1 GW in renewables and 6 GW/Hour in storage. N. America is the main area for both types of expansion.
Management is focusing on Storage, 42%, and PV/Electric, 44%, growth projects, in addition to 13% on Wind projects. 77% of these projects are greenfield, i.e. start from scratch, while the balance are expansion of existing assets. 37% of these projects are in an advanced stage.
Dividends:
At its 12/12/23 closing price of $19.69, AY yielded ~9%. Management has kept the quarterly dividend at $.445 since Q3 '22. AY has a good 5-year dividend growth rate of over 6.17%, although that growth was mainly in 2019 - 2020. AY goes ex-dividend and pays in a March/May/August/November schedule.
Management uses CAFD as its dividend sustainability metric. The CAFD dividend payout ratio was 86% in full year 2022, and improved a bit, to 84.5% in Q1-3 '23:
Profitability & Leverage:
As Net Profit returned to a positive figure in 2023, so did ROA and ROE, both of which were above industry averages, as was EBITDA Margin. Debt/Equity leverage was stable, but higher than average, while Net Debt/EBITDA leverage improved to 5.57X, but was higher than the industry average. EBITDA/Interest was stable, but a bit below average, whereas AY's EBITDA Margin was higher than average.
Debt & Liquidity:
Management has $1.9B in Corporate debt slated for reduction over the next 5 years, and is targeting a $2.5B debt figure for year-end 2028, vs. the current $4.4B figure:
AY also matches its debt to its projects, and hedges over 93% of its consolidated debt at fixed or hedged interest rates. Its next significant maturity is in 2025, when $153M comes due.
AY's debt has corporate Ratings of BB+ from S&P and Fitch.
Performance:
AY has outperformed its industry over the past month, with a 10.25% rise, as the interest rate story evolved to a seemingly more dovish stance by the Fed, which may just wait and see before any further action on rates.
Utilities, which use debt to finance their capital-intensive assets, are seen as being very interest rate sensitive, so an eventual reduction in rates should be bullish for the overall sector. Meanwhile, Utilities have taken it on the chin over the past year - AY has a total return of -18.5%, while its industry's 1-year return is ~-25%:
Looking back over the past 5 years, AY has had a much lower total return than the broad Utilities sector:
Analysts' Price Targets:
AY received one a downgrade from Raymond James in October, from Outperform to Market Perform, with a drop in their price target from $36.00 to $25.00/share.
At its 12/12/23 closing price of $19.69, AY is ~15% below Wall Street's average price target of $22.70, and 3.5% above their $19.00 lowest price target.
Valuations:
As seen below, P/Es are very high for Utilities. That's due to a large amount of non-cash Depreciation & Amortization. AY's trailing and forward P/E valuations are both higher than its industry's averages. However, its P/Book of 1.39X is quite a bit lower than average, as is its P/Sales and EV/EBITDA. Its Price/CAFD is 9.41X.
Parting Thoughts:
On the technical side, AY looks overbought on its long term Stochastic chart. While it's 34% below its 52-week high of $29.81 from back in Q1 '23, it's also ~20.% above its 52-week low of $16.35. We rate AY a Hold for now, and wait for more clarity on interest rates before potentially buying some shares.
For further details see:
Atlantica Sustainable Infrastructure: 9% Yield On Renewables