2023-11-08 09:00:00 ET
Summary
- Hannon Armstrong Sustainable Infrastructure Capital invests in renewable energy and sustainable projects, avoiding early-stage projects and focusing on earnings visibility.
- The company has a well-diversified portfolio and invests across the energy transition infrastructure to mitigate concentration risks.
- Despite underperforming in the past year, the company remains confident in its long-term growth profile and does not anticipate near-term funding challenges.
- I assessed that the worst is likely over as the Fed inches closer to its peak rates. Despite that, investors shouldn't expect HASI to recover its 2021 all-time highs soon.
- I argue why it's timely for buyers to consider catching this falling knife, even though its distributable EPS growth is expected to slow further.
Hannon Armstrong Sustainable Infrastructure Capital, Inc. ( HASI ) is a company that invests in a broad range of renewable energy, energy-efficient assets, and sustainable projects. Its portfolio is well-diversified across the public and commercial base and invests in projects that have demonstrated their " economic value. " As such, the company doesn't focus on early-stage projects, providing earnings visibility to investors and avoiding substantial development risks.
YTD closed transactions (HASI)
In addition, the company invests in various segments across the energy transition infrastructure, mitigating concentration risks. Notably, the company stressed that it has "no offshore wind projects in their pipeline or portfolio," as these projects have faced significant execution and funding challenges recently. As such, HASI maintains its confidence in the long-term secular growth profile of its infrastructure projects, notwithstanding the current cost of capital headwinds.
Despite that, the HASI indicated that it doesn't anticipate near-term funding challenges, given its relatively low leverage ratio (1.7x debt/equity). It also doesn't expect additional equity investments to fulfill its reaffirmed 2024 distributable EPS guidance.
Accordingly, HASI posted solid results in its recent third-quarter or FQ3 earnings release. The company reported a distributable EPS of $0.62 and $973M in closed transactions, lifting its YTD metric to $1.8B. Furthermore, it achieved a portfolio yield of 7.9% in Q3 at a cost of debt of about 4.9%.
Management indicated that the company's primarily fixed-rate/hedged debt profile (88%) helps mitigate significant interest rate risks. Despite that, investors should consider that the company expects to refinance its bonds over the next three years, which could increase its estimated blended cost of debt to 5.7% based on the current market conditions. However, management highlighted that the company is confident of generating an ROE above 11.5%, indicating that investors shouldn't be unduly concerned.
Despite that, HASI has significantly underperformed the S&P 500 ( SPX ) ( SPY ) over the past year, with a 1Y total return of nearly -24%. On price-performance terms, HASI has also underperformed its real estate ( VNQ ) and financial sector ( XLF ) peers since HASI topped out in January 2021.
Therefore, I believe investors have rotated out of HASI as they grew increasingly concerned about its ability to finance its energy transition infrastructure ambitions, notwithstanding its positive guidance outlook. Compounded by the surge in the 2Y ( US2Y ) and 10Y ( US10Y ) Treasury yields, investors are justified to ask for higher compensation for taking on increased risks in such assets, as HASI's distributable EPS growth cadence is expected to slow.
In other words, the market likely deemed HASI's FY2024 guidance no longer attractive enough to justify lower forward dividend yields, given the expectations of a higher-for-longer rate regime.
Accordingly, management reaffirmed a midpoint FY24 distributable EPS guidance of about $2.40. Based on a starting EPS of $1.55 in FY20, it represents a 4Y CAGR of 11.3% through FY24. However, the growth was front-loaded in FY21, as HASI's distributable EPS increased by more than 21%. As such, based on the revised analysts' estimates, HASI's distributable EPS is expected to grow by just 5.7% in FY24. Furthermore, as HASI faces potentially higher refinancing costs over the next three years, investors are justifiably concerned about its post-FY24 distributable EPS outlook, baking in higher execution risks into its valuation.
HASI last traded at a forward dividend yield of 8.3%, given the hammering over the past two years. As such, I believe it's clear that the Fed's rapid rate hikes have led to a significant downward valuation de-rating in HASI.
However, with the Fed likely at peak rates, I also assessed much pessimism is reflected in HASI's current valuation. Despite that, I must caution investors that they shouldn't expect a rapid recovery toward its 2021 highs anytime soon, as the days of cheap financing are likely a thing of the past.
Notwithstanding that caution, I assessed that HASI's worst is likely over, proffering investors an opportunity to buy its recent recovery as dip-buyers attempt to lift it from its October 2023 lows.
Rating: Initiate Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Hannon Armstrong: This Underperformer Is On The Verge Of A Pivotal Inflection