COVID-19 has brought many changes to our lives, one of them has been a greater focus on the “old way” of doing things. As working habits change and we have some more time to look at the current state of the world, green energy is back in the forefront for many people.
With all the excitement and hype around the energy sector, I wanted to pick a company to understand what they do, where they have come from, and what are they trying to achieve.
Who Is Atlantica Yield?
Atlantica Yield (AY), or Atlantica Sustainable Infrastructure, owns and manages renewable energy, efficient natural gas, transmission and transportation infrastructures and water assets.
If it’s linked to green energy then these guys have their eye on it. With such a broad scope they are diversified across the green energy spectrum, which is unique compared to companies focusing on a single type of renewable or owning a particular piece of IP. Rather than building out the projects themselves, AY acquire completed projects and focus on the financing and technology aspects. This is a shift in thinking, buying existing sites with contracts to sell the energy already in place, you remove the construction risk but take on the management and contract delivery obligations.
Currently, AY has over 25 assets, 343 MW of efficient natural gas-fired power generation capacity, 1,166 miles of electric transmission lines and 10.5 Mft3 per day of water desalination assets. All in all, AY has 1,496 MW of renewable energy generation capacity. This places them alongside a large coal plant in terms of total ability, however, the power is split across sites and geographies.
What sets AY apart from many competitors is long term contracts (weighted average is 18 years), diversification across business segments and geographies (US, Canada, Mexico, Peru, Chile, Uruguay, Spain, Algeria, and South Africa!), and a focus on returning capital to shareholders. The yield part of the original name is not just for show, it is a core feature of AY.
AY isn’t going to change the world of renewable energy, but they will be the ones owning the sites and selling the energy on in the form of long term guaranteed contracts. With sites ranging from solar, wind, water-based, gas, and even energy transport, they have a mixed basket and skillset.
Hows Does Atlantica Make Money?
Diversified and dividend-paying doesn’t mean this is a high earning company. The energy sector often comes with heavy investment into R&D, to further reduce the cost for green-energy. AY is not in the business of energy innovation, but the efficient management of completed projects and keeping them serviced for the long term.
Source: AY Q1 2020 Report
Source: AY Q1 2020 Report
Annually AY brings in over $1bn in revenue every year and has done since 2017. What you might find strange looking at the balance sheet, is AY considers it’s sites “intangible assets”, they label them as “contracted concessional assets”, meaning they look at the total value of the contracts and the site as a whole.
By treating each site as a long term revenue-generating asset the balance sheet shows $8.16bn which will be paid out over the life of the sites. After which the sites can be sold off or new contracts secured. The site would already be financially successful at this point regardless, giving additional flexibility in terms of finding new contracts or selling the whole site.
This does mean the financials are very interesting. AY is trying to payout excess money to shareholders, but it also has to raise capital upfront to acquire these sites.
Is AY Financially Stable?
Financial control and stability are the cornerstones of what makes them such a unique energy business. They are investors at heart.
Source: Genuine Impact
On the surface, AY doesn’t appear to be that groundbreaking versus the whole market. This is where we want to dive a bit deeper into what they are doing financially.
Due to the dividend payouts, financing, debt payments, and some clever accounting, AY isn’t a very profitable company. They have a profit margin of 5.94%, which is extremely week, however, the gross margin is 100% and the operating margin is 36.74%. There is a lot more going on than meets the eye.
What will be a reoccurring theme with AY is it’s hard to judge them as a traditional investment.
AY balances their debt and takes a long term view by buying the assets and contracts from companies that can’t afford to wait. Let’s go back to the financials as an investor to see why these are one of the strongest companies for returning capital to shareholders.
Putting this into perspective, as a long term dividend paying company AY is extremely attractive. It’s not the highest dividend yield and the return on invested capital is low, as we are judging the factors in the short term, rather than long term cash-cows.
Source: Genuine Impact
The expectation is this dividend will keep growing, and as AY brings on more sites the excess regular cash is sent back to shareholders. With 44.48% of shares owned by directors and staff and 48.78% owned by institutions, there is real alignment about what AY should be doing.
AY acts almost like an investment trust but it is more involved and takes on the financial risk for these long term contracts, rather than investing in the companies involved. It’s an odd blend of an energy company and investment trust.
Is It An Affordable Buy?
With a strong asset sheet, you might assume this makes AY a cheap purchase. The fairly even liabilities does cut away at this, and the negative earnings per share (EPS) due to the low-profit margin and regular negative returns on a quarterly view, means your common value ratios will be showing a lot of red flags.
Source: Yahoo Finance
With a P/E of 88.68x, a lot of traditional value investors will shut off. However, like with the finances we do need to check a few other places to get a clearer picture.
AY has a strong 14.59x book to share ratio and even 7.56x cash per share. There are a few redeeming features. The complexity comes down to how they have structured their assets.
Are They Well Positioned For The Future?
Looking at what historic growth figures we can, the EPS growth against the previous quarter is 344.44%. The quarterly figures are extremely volatile due to the loss marking versus minor profit-making quarters, this throws off getting useful information from these statistics.
Averaging out the previous quarter growth to try and do some forward prediction you see a strong upward trend. I expect as the cash and earnings build up this will be deployed or paid out, reducing the ratios once again.
Source: Genuine Impact
The future growth is very punchy because of the revenue and EPS predictions. The reality is these figures are controlled by acquiring new assets and taking on less debt versus the lifetime of the asset. EPS is slightly different as operational improvements will leave us with a stronger earnings position, but this is still driven by financing rather than return on assets, the return on assets is being paid out, and any additional operational gains I expect will do the same.
We have seen a sell-off today and a drop in share price, which has boosted the future share price predictions. Remember that the share price will dip with dividends and this is a dividend-focused investment. I normally put a lot of stock into the future share price and it’s impact, however, this investment is slightly different, they want to increase the raw cash being paid out, not inflate the share price.
Even though AY is a large firm, they don’t seem to have a lot of dedicated sell-side coverage. With only four analysts covering the stock any future projects are going to be spotty and infrequent. Which impacts any decision making, lack of coverage can result in lack of insight.
Future Plans For AY?
AY are currently focused on growing their cash to increase shareholder distribution. This means optimising the operations of existing assets and acquiring new contracted revenue-generating assets.
Rather than build new projects which takes on far more risk, AY uses cheap low-interest green bonds and other financial incentives to buy guaranteed revenue-generating completed projects.
As governments and companies around the world look to improve their environmental standing, AY looks to profit by buying long term sites which existing revenue contracts to maintain. As more green bonds and financial benefits are being announced, AY snaps these up to help pad their cash position to buy up these assets as they are constructed.
Right now AY is looking to optimise the existing portfolio, create new synergies between its purchases, and looking to establish more guaranteed contracts on the existing sites to extend their profitability.
The business depends on buying up these assets and securing these deals. AY has the “right of first offer” exclusive agreement in place with serval of their existing customers. If they are looking to sell, transfer, or dispose of in any way they have to come to AY first. Their strength isn’t in a lab trying to improve the efficiency of solar panels, their power comes in a strong balance sheet to assist the constructures and researchers by giving them some cash upfront, knowing the longer-term contracts give them a reliable future and return on their investment.
It’s rare to talk about the energy sector to end up talking about a company focused on the financial aspects and treating green energy as an investment.
AY wants to keep paying out more to investors and to grow their wealth slowly. AY is a long term view and their future growth plans also reflect that, buy up the assets with fixed long term revenue and existing contracts in place.
Is AY A Long Term Investment?
I’ve spoken at length at the interesting approach to renewable energy AY has, and the potential up and downsides.
Ultimately does this make for a solid long term investment in your portfolio? If you want renewable energy exposure, should this be the investment you look at?
If you want to build out a dividend-paying portfolio, then AY should be on your watchlist. A dividend payout happening every year going back to 2014, though the frequency has been changing the payouts are present. AY offers a high and growing dividend yield, exposure to a range of renewable energies and their infrastructure, and focuses on reliable cash income above all else.
For a growth based portfolio, you might be interested in a board renewable energy ETF or investing in individual firms with a focus on R&D or renewable construction. AY won’t offer great share price returns as they will actively seek to pay out more as a dividend to dampen the growth.
For die-hard dividend hunters who want some renewable exposure, I hope this has been an interesting read into a company you might have previously glossed over. For anyone interested in the renewable energy sector I hope this opens up the range of investments in this space and lets you know about different ways to get exposure to this growing sector.
I wanted to take a slightly different approach and look more at a theme and the background to a company as well as the fundamentals. Please let me know what you think of my views, and anywhere I can improve!
Stay safe and thanks for reading.