Stock Analysis - Atlantica Sustainable Infrastructure (AY)
The below references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
Welcome to the third analysis on stockreview.org. After a few busy weeks at work, this time we will focus on a sector that has gained a lot of traction during and not least because of Covid19 spreading around the world. That sector are renewable energies.
It will be a slightly shorter entry as I try to leave out making a few obvious points and omit some of the longer explanations. Instead I am working on a few visualization ideas to be used in future posts.
As in the first two analyses we had two US companies, with Atlantica, we have a company that is seated in London, Britain, but carries a global footprint in sustainable infrastructure. Before we dive in some details here are the usual fundamentals:
Atlantica recently changed its’ company name into “Atlantica sustainable infrastructure” from the previous “Atlantica Yield”. Good for us in this case, since the name is the program.
The plc owns and manages renewable energy infrastructure (wind and solar) as well as a few assets for energy transmission and transportation, water and efficient natural gas.
These are at the same time the main sectors in which Atlantica operates, with Renewables being by far the biggest.
Not only product wise, but also geographically the group is quite diversified with assets in Europe as well as North & South America providing roughly the same amount of revenues.
As we will see also throughout the analysis, while being far from offering a unique product and operating in a highly competitive market, Atlantica offers a good value proposition inside the renewable sector, mainly thanks to strong profitability and further growth perspectives.
This becomes evident right away during our financial scoring. Despite being heavily indebted AY does fairly well scoring a total of 5 points.
The financing of most of its’ project assets through designated debt contracts with the assets themselves as collateral, does not fare well with the companies Debt-to-Equity ratio as well as the EV/Market Cap indicator, both of which are far outside of a traditionally considered “safe” range. On the other hand, strong growth of key indicators over the past years, as well as high margins on most of their activities make up for that and add some layer of safety to Atlantica’s overall operations. The strong dividend of currently still >5% is an additional cherry on top of that for investors.
Picking up on the previous paragraph, the energy industry as a whole and especially the renewable sector are a highly competitive environment for all participants. In recent years renewable energies have caught up with traditional (fossil) methods of generation in terms of price and efficiency. While coal plants have now started to struggle, especially during the Covid19 crisis, producers of Solar and Wind energy are further pushing their advantage, taking additional market share as more and more consumption of traditional sources is being substituted.
Due to necessary investments, the market provides some level of entrance barriers, but as more and more conglomerates with significant liquidity realize the need to move into the renewable space more quickly, these barriers might be taken out quickly. With competition inside the sector itself increasing as well, the geographic as well as (to a smaller extent) sector diversification of Atlantica could prove to be an advantage in case of shrinking revenues or margins in one of the regions/sectors. Further, a significant part of AYs contractual partners for energy consumption are governments or government entities, which provides some safety to the cash flows.
While the overall scalability of solar energy (thanks to the near endless energy of the sun itself) is definitely a given, the business model and limited capital restrict the expansion of Atlantica’s operations somewhat.
As a company working mainly business-to-business or even -to-government, brand and other intangible assets play a less significant role than for other companies.
Still, with the current rise of renewable energy, and increased activity in the sector, secondary effects could have a further positive impact on the business (e.g. Better efficiency in energy generation through increased research activities).
The above brings the overall scoring result to a total of “only” 27 out of 40, or 67.5%. While kind of an average result, this does not entail that Atlantica might not be worth a closer look. It rather reflects the intense competition and challenges inside the industry.
Discounted Cash Flow
When analyzing Atlantica’s past revenue performance, results and cash flow development, it is quickly visible, that sales growth has somewhat stagnated in the last 2-3 years. Especially the renewables sector (despite its’ potential) has basically not left the +/- 10% growth range since 2016. Thanks to improvements in cost and capital structure, the result as well as the cash flows have seen very positive development in recent years, however, capitalizing on the recent upswing of renewable energies will be vital in order to achieve continuous positive developments.
Correspondingly, the DCF scenarios I calculated for AY have had a wide range of outcomes. While it is obvious that an annual cash flow growth of >40% might become more and more difficult to achieve going forward, it is not out of the way, that a further push in renewables growth could be the base for also finally increasing revenues again.
Continuous reduction of the company’s overall debt could be another opportunity to ensure cash flow growth for the years to come, through decreasing debt and interest payments. Freeing up further cash for expansion and/or dividend payments would certainly be in the interest of most shareholders.
Considering this and other factors within the DCF Model, even the most pessimistic as well as the “flat” development scenario offer some upside vs the current equity value. This upside grows even bigger when forecasting continuously increasing cash flows in the coming years, making the range of possible outcomes quite wide.
Multiples and Conclusion
Seeing the above positive results, my curiosity was sparked and I “went the length” of evaluating not only P/S and P/E ratio during the multiple valuation process, but also taking into account the EBIT/EV ratio when comparing AY to its’ peers, which I selected as:
- NextEra Energy Partners (NEP)
- Brookfield Renewable Partners (BEP)
- Algonquin Power & Utilities Corp. (AQN)
Surprisingly, also the equity value calculated via any of the above-mentioned multiple approaches, was over AY’s current market cap, despite the continuous rise of the share price in recent weeks.
Also using the multiple approach, none of the KPIs suggested that Atlantica was in any way overvalued considering the current comparatives especially of some of its’ US counterparts/peers.
This brings the average Equity Value for AY to an astounding amount of $8 billion (give or take), suggesting a huge upside based on the pure numbers.
As usual, there are a few risks (but also chances) to be taken into account before evaluating your decision to invest or not, which I will highlight below. Additionally, the more pessimistic DCF scenario in which future growth will be stagnating/decreasing, is more or less equal to the current market value of the shares and a further meteoric rise is not a given.
That concludes the first slightly shorter review on stockreview.org.
Let me know your thoughts on this one!
Is it still too long?
Or should we go back to explaining more detail again?
Also, what are everyone’s thoughts on the recent rise in the renewable sector!?
Do we finally see a shift towards a greener future?
Disclaimer: I am currently not invested in AY stock.