2023-05-18 05:21:05 ET
Summary
- Recent earnings show a comforting element of predictability in what has become more uncertain times.
- Yields on new investments are exceeding 8% at present which is ensuring the company meets its return targets despite higher interest rates.
- The business remains robust with first-quarter volumes reaching their highest ever allowing the company to reaffirm its earnings and dividend guidance through 2024.
- Despite this, the share has fallen by 12% over the last month widening its valuation discount to its broader peer group.
- Buying HASI today gets you an effective 8% 12-month dividend return with a substantial upside to my $45 target price.
Hannon Armstrong now called 'HASI' ( HASI ) released results on the 4th of May 2023. This as we know has been a bit of a battleground stock on both Seeking Alpha and in the broader marketplace. Bulls and bears alike have had a chance to weigh in on the company and its performance over time with the overarching issue being the complexity of the business and how it fits into the various sectors in the market. In my last article on the company, I suggested that the business wasn't complex at all but that the company existed to help finance investments in the green infrastructure space and/or to invest in green infrastructure. At the end of the day, we need to judge performance on their ability to do that successfully and profitably. So, with that in mind lets dig into the results announcement and see how things went.
Earnings
The business is performing well and as a shareholder I personally having nothing to complain about. Results were in line with expectations and the business in my opinion has delivered predictable results through this higher interest rate period. The tone of the conference call was pretty upbeat too, and the company reiterated its 2021-2024 guidance which is to grow distributable earnings by 10-13% per annum and the dividend by 5-8% per annum.
Operationally, distributable EPS came in at 53c which was 2% higher year on year ((y/y)), this on the back of growth in distributable net investment income of $47.1m (up 11% y/y). Income investors will notice that this figure is higher than the dividend of 39.5c. The overall portfolio grew by 18% y/y and now sits at $4.7bn.
Q1 earnings (Company results announcement)
Eighty-seven percent of debt is fixed rate. The cost of all debt is now at 4.8%. The company strives to earn a spread on its financing of 3.5-4.5% and as rates have risen the incremental returns on investments or projects needs to rise too in order to maintain it. Q1 saw the company deliver its highest ever value of transactions for the period at $389m and the yields generated were over 8% implying the company is in fact seeing yields increase alongside higher funding costs. This is good news for the business and its growth prospects. This quarters closings were also mostly from previously agreed investments which means we're essentially seeing the business operating with a lag and these lagged yields were already north of 8%.
Q1 growth (Company Presentation)
In an attempt to help investors picture the change in yield for the portfolio relative to the change in interest rates the following graphic was provided. It goes back to 2018 and shows how this has evolved over time. Interestingly the company has maintained a portfolio yield of 7.5% for the last 3 years as interest rates have fluctuated but based on management comments that yields in excess of 8% are currently being achieved the portfolio yield should start to rise which keeps them on track for their return targets.
Portfolio yield vs interest cost (Company Presentation)
Outlook
Guidance is to grow earnings from the 2020 baseline of $1.55 by an annual rate of 10-13% from 2021 to 2024 That would imply a range as follows:
HASI Guidance (Management)
The 53c of earnings in Q1 puts them on track to earn $2.12 for the 2023 period which is perfectly in line with the numbers management have suggested.
In my last note I discussed the valuation which compared HASI to various peer sets via this graphic here.
Relative PE comparison (Author)
In the company presentation, management posted the following:
Valuation vs peers (Company Presentation)
What jumps out to me is that renewable equipment peers lost quite a lot of value as a group. Energy services have also declined but less so. Utilities are flat and asset manager have risen. HASI on the other hand has fallen too, down about 11% since I last wrote on it. So, IF we need to compare it to a renewable equipment company or an energy services company (as those sectors have also fallen) HASI still remains a multiple which is at a minimum half the valuation of the lower end. More steady Utilities and Asset managers have widened the valuation gap if we compare it to them. Doesn't matter how you look it HASI remains cheap. For a company that's performing solidly this is something I struggle to get my head around which is why I keep adding bits all the time as share price volatility allows.
My target price for HASI is $45.00 which is an average of my DCF and PE multiple (check the previous note for details) and I don't see a reason to change that at the moment.
Buying the stock today would earn you a dividend of 39.5c as its still cum the July payment, this means that on a 12-month view assuming HASI doesn't increase the dividend you'll earn $1.975 in cash flow which gives you a dividend return of around 8% at current prices. That's very enticing for me.
Conclusion
The valuation disconnect between HASI and the market has widened over the last month despite the company delivering predictable earnings during what has been a tough period for any business that has interest rate risk on its balance sheet. With earnings well protected by the majority of debt being fixed and yields on new investments improving there is a case to be made for HASI reaching the upper end of its spread targets over the next few quarters. This coupled with an even better entry point and an effective 8% 12-month yield at today's prices cements my bullish bias toward the company at present.
HASI remains a buy in my book.
For a more comprehensive review of the risks please see the risk section in my last note.
For further details see:
HASI Is Delivering Solid Predictable Earnings And Attractive Dividends