2023-03-07 03:52:35 ET
Summary
- Atlantica's earnings results were a bit disappointing, showing little CAFD growth and providing weak guidance for 2023.
- Still, the company appears in good shape, has an attractive project pipeline, and is reassuring investors that it's "business as usual" while it carries out its strategic review.
- While the valuation looks attractive, we don't expect meaningful dividend growth any time soon.
Renewable energy stocks such as Clearway Energy ( CWEN ), Brookfield Renewable ( BEP ), NextEra Energy ( NEP ), and Atlantica Sustainable Infrastructure ( AY ) have been struggling the past year. Their price is lower compared to a year ago, mainly as a result of the impact that higher interest rates is having on these yield-sensitive investments. Atlantica has had the additional headwind that its main shareholder, Algonquin Power & Utilities ( AQN ), has been struggling financially and might need to offload its stake.
Atlantica has started a 'Strategic Review', but it has been intentionally very vague as to what it is aiming to accomplish. In any case it is worth remembering that Atlantica Sustainable Infrastructure can survive even if its sponsor/main shareholder doesn't. This brings back memories of Terraform Power that saw its sponsor go bankrupt, and it still managed to survive, eventually becoming part of Brookfield Renewable.
Given all the drama we decided to analyze the earnings call carefully for clues as to what to expect from Atlantica's strategic review and what its guidance for the year would be. These were the two main things we were paying attention to, but there were some additional nuggets of information worth sharing. The first is that the company is taking its first steps on hydrogen, with a 10 MW PV facility that will manufacture hydrogen, and which recently won a grant in Europe. This first hydrogen project will be located in Spain.
The company also reminded investors that it intends to increasingly grow by developing and constructing its own assets. The current pipeline of assets under development includes ~2 GW of renewable energy assets, and ~5 GWh of storage. Most of the pipeline is made up of PV, storage and wind projects, and is focused on North America, where the company expects to benefit from the Inflation Reduction Act.
Atlantica Sustainable Infrastructure Investor Presentation
The results the company delivered for the year were a bit disappointing, in our opinion, with cash available for distribution ((CAFD)) growing only about 5.5% in 2022 to reach $237.9 million, which translated to CAFD per share of $2.07, only a ~2.1% increase when compared to the previous year.
Strategic Review
The big question on investors' minds is what exactly does the strategic review the company is currently undergoing mean. During the Q&A session an analyst asked exactly this question, on whether this is just an attempt to facilitate an exit for its main shareholder, or if they are trying to find a strategic partner, or what exactly is the company looking to achieve. CEO Santiago Seage was very blunt in responding that they are being intentionally vague, as they are exploring a number of possibilities. Our interpretation is that they are probably exploring both the possibility of selling the entire company, as well as just finding a new sponsor.
I obviously won't be able to be too specific, because if we wanted to be specific, we would have released something more specific. So at this point in time, the Board has decided to start a strategic review and analyze a number of options brought in order to maximize value.
And as you could see in the announcement, this process has the support of Algonquin as the largest shareholder. But we need to leave the Board to identify all those options, work through the options and get to a conclusion. So I won't be able to be very specific, because we just started this process, and as you know very well, in a strategic process, you typically analyze a wide range of alternatives.
The big takeaway, however, is that the company was very direct in saying investors should expect "business as usual" while it does the review, including paying its dividends. This is what the CEO said about it:
[...] we think that we are able to go through something like this without affecting the day-to-day business and maybe that experience also helps. But as I mentioned before, our intention is to continue managing the business, doing our investments, paying our dividends following our current strategy, if you want, while we do the review and we think we can do both things at the same time.
Balance Sheet
Atlantica's corporate balance sheet appears in good shape with leverage of 3.4x net corporate debt to CAFD pre corporate debt service. In the last few years this leverage multiple has been in the range of 2.6x to 3.5x for the company. It is therefore currently closer to the high side, but we still believe it is a relatively reasonable level, even if we would prefer to see it somewhat lower.
Regarding the impact of increasing interest rates, the company shared that an increase of 100 bps in reference interest rates would have an impact on CAFD of ~1.5%. It also shared that ~96% of corporate debt and ~92% of project debt is either fixed or hedged. With respect to project debt we are less worried, given that it is mostly non-recourse, self-amortizing debt.
Atlantica Sustainable Infrastructure Investor Presentation
The company ended the year with corporate cash of $60.8 million and available revolver capacity of $385.1 for total corporate liquidity of $445.9. The average maturity of its current corporate debt is ~4.2 years, which we would like to see the company increasing. Maturities for the next three years appear quite manageable, as can be seen below.
Atlantica Sustainable Infrastructure Investor Presentation
Guidance
For 2023 the company expects CAFD to be in the range of $235 million to $260 million, which at the midpoint is only a little bit higher than the $237.9 million delivered in 2022. At the midpoint this would represent ~4% growth y/y, and probably lower per share. Atlantica guided for adjusted EBITDA to be in the range of $790 million to $850 million. Given the significant investments planned for the year we are a little bit disappointed with the level of growth.
Atlantica Sustainable Infrastructure Investor Presentation
Still, there were some good news in that the company appears to have hedged most of the risk factors affecting its CAFD. These brings us to another important takeaway from the earnings call, that the big factor that will influence whether the company delivers CAFD closer to the high-end or the low-end of its guidance is the weather. This is what the CEO had to say in this respect:
It's typically the, let's say, if you look at the lower versus the higher range, the difference is typically how well the projects will perform depending on whether the sun is shining and the wind is blowing or not, a bit of exchange rate when you look at EBITDA, not on the CAFD side, because it hedge and the incremental new projects, how quickly they come online or when do we close new investments. So those are probably the biggest shrinks there, so nothing huge anywhere.
Valuation
With a recent share price of $28.65 and CAFD of $2.07 in 2022, the P/CAFD multiple is ~13.8x. The payout ratio is relatively high at ~85%, and will probably stay high given the low growth expected in CAFD for 2023. The dividend yield is ~6.1%, but we don't expect the company to increase it meaningfully any time soon.
While we believe Atlantica Sustainable Infrastructure has a very reasonable valuation at the moment, we find some of its competitors more attractive. In particular we believe Brookfield Renewable is currently more attractive and has better dividend growth prospects. That said, Atlantica shareholders could potentially get a nice share price jump if the company receives an acquisition offer at a premium to the trading price.
Risks
We currently see two important risks for Atlantica's shareholders. One is the rising interest rates environment, which is putting pressure on its balance sheet and making the financing of new projects more expensive. The rising interest rates also put downward pressure on the share price, as other income alternatives become more attractive. The second big risk we see is that its main shareholder could decide to sell its stake in the open market if the company's strategic review fails to deliver any good options.
Conclusion
Atlantica's earning results were a bit disappointing, showing little growth and providing weak guidance. Still, the most important take aways from the call are that investors should expect business as usual while the company carries out its strategic review. This includes the normal paying of dividends and investing in the project pipeline. The other important take away is that the biggest factor on whether the company delivers CAFD closer to the high-end or the low-end of guidance will be the weather. There are several risks to consider, but shares look very reasonably valued. We are therefore maintaining our 'Buy' rating, even if we were a bit disappointed with the low growth delivered in 2022 and the weak guidance for 2023.
For further details see:
Atlantica Sustainable Infrastructure: Important Takeaways From Its Earnings Call