|Shares Out. (in M):||100||P/E||NM||NM|
|Market Cap (in $M):||1,967||P/FCF||9.4||8.0|
|Net Debt (in $M):||5,100||EBIT||0||0|
|TEV (in $M):||7,058||TEV/EBIT||NM||NM|
Sign up for free guest access to view investment idea with a 45 days delay.
Abengoa Yield owns utility-scale renewable generation, conventional generation, and electric transmission assets. The company generates roughly 65% of its EBITDA from solar plants, 15% from electric transmission, 15% from conventional plants, and 5% from wind and water plants. All assets have contracted or regulated revenues with investment grade counterparties, many of whom are state-owned enterprises. The weighted average remaining life of these agreements is 24 years. ABY is the YieldCo vehicle for the sponsor company Abengoa (ABG SM), a diversified Spanish engineering and construction company.
NPV of $28/share solely from existing operations (e.g., no asset growth)
A DCF analysis is rather straight-forward. ABY has the longest weighted average contract duration in the YieldCo space at 24 years, versus roughly 15 for the industry overall. ABY also provides the greatest amount of project-level detail relative to other YieldCo’s.
Since its IPO in June 2014, ABY closed on 3 tranches of acquisitions from its sponsor (referred to as ROFO 1 through 3) and announced a fourth acquisition (ROFO 4) on July 2015. Based only on assets through ROFO 3—since ROFO 4 has not closed yet—we estimate a run-rate EBITDA of US$730mm. For reference, 2Q 2015 reported EBITDA was US$160mm; the delta to the annual US$730mm is driven by full ROFO 3 contribution (ROFO 3 closed in May 2015 with an estimated annual EBITDA of US$150mm) and small contribution from a ramp in US solar assets (Solana/Mojave; more on this below).
Adjustments for future cash flow stream include:
For the discount rate, we break down our assumptions into weighted average rates: (1) 6.4% for asset-specific risk (6%-7.5% depending on whether it’s solar, wind, transmission, or water), (2) 1.1% for country risk (based on respective countries’ CDS rate), and (3) 0.7% in other risk (based on a qualitative assessment of regulatory and operational risk). This yields a blended discount rate of 8.2%. This yields a $28 NPV for ABY’s existing assets; put differently, at the current $20 stock price, the market is pricing in a 12% discount rate on what are contracted, visible cash flows.
Upside from ROFO 4
While ABY has not closed the announced ROFO 4 acquisition ($371mm in total purchase price), there is enough liquidity from its revolver (US$290mm capacity) plus cash on hand (US$155mm) to finance the transaction. The company’s stated goal is to raise long-term debt and free up its revolver; however, given high cost to borrow in the current environment (debt yields of 6%-9% throughout the industry versus the revolver at Libor + 250 bps), ABY will likely keep the debt on the revolver for now. We estimate that ROFO 4 will be 9% CAFD accretive.
No IDRs + longer contract duration + low counterparty risk
ABY is one of three YieldCo’s (PEGI and NYLD being others) without an incentive distribution right (IDR) structure. This is an important distinction as IDRs significantly increase a YieldCo’s cost of capital. At ‘high splits’ (NEP and TERP), a YieldCo would have to pay half of its incremental cash distribution to its sponsor. This can lead to 200-400 bps increase in cost of equity capital; at worst (as what happened to some MLPs), the incremental cost of equity capital can nearly double.
Another attractive aspect of ABY is the long duration of its contracted assets (24 years) relative to peers (15 years). This makes an NPV analysis much more straight-forward for ABY as we can ascribe a 0 terminal value to all of the assets. ABY’s offtakers are all investment grade counterparties and/or state-owned enterprises.
On a forward dividend yield basis, ABY trades at 10.5% versus peer average of 7.6%
We see the company’s $2.10-$2.15 dividend target for 2016e as conservative; we think the company can do $2.45 in CAFD/shr for 2016e assuming marginal ramp-up contribution from Solana and Mojave. A full ramp of Solana including production from its molten salt storage presents upside of approximately $0.15 in CAFD/share.
For comparison, we include in ABY’s peer group NYLD (6.5% forward yield), PEGI (8.1%), NEP (4.7%), and TERP (8.3%). Prior to the recent sell-off, ABY traded at a ~50 bps discount on a NTM dividend yield basis. We exclude CAFD (6.6%) and GLBL (13.5%) in the average given lack of comparable historical data (recent IPOs) and vastly different risk profile. For reference, GLBL generates all of its cash flows from emerging markets: Brazil (28%), India (20%), China (8%), South Africa (7%), and other Latam (30%).
Upside to $45/share under normalized market conditions
Including ROFO 4, ABY could do $2.35 in annualized dividends by the end of 2016. Assuming the company's 10%-15% dividend growth profile (2x CAFD backlog identified at ABG) we think the market will price ABY at a 5% dividend yield, implying a ~$45 share price target for 2016. While this is not a base-case price target today, if conditions normalize both at the sponsor level and across the YieldCo space, we think the $45 target is reasonable.
Opportunity is driven by extreme risk aversion in both the YieldCo space and at the sponsor level
Since June, the forward dividend yield for the space widened by 150~400 bps excluding ABY, which widened by an astonishing 550 bps. Underperformance is explained by the thesis that its sponsor, ABG, faces liquidity pressure and may have to restructure or file for creditor protection.
ABY’s sponsor, ABG files for creditor protection
While we acknowledge such risk, we think ABY stock more than reflects this scenario. This is the primary reason our analysis focused on an NPV analysis and a detailed look at ABY’s current cash flow profile and not a dividend yield + growth metric that most analysts focus on for YieldCos. The latter analysis would produce a $40+ target price.
Key risks and next steps if ABG files:
CFO Eduard Soler recently and abruptly stepped down
While market speculation abounds as to the reason why, we believe it was politically driven. Risk that the CFO stepped down due to potential accounting issues, while possible, is low in our opinion. ABY owns assets and concessions that are project financed, most of which have been operating for 2+ years. Cash flow is cash flow and we believe creditors’ due diligence would have spanned greater access and visibility to project financials and projections.
Brazil currency risk
We do not think this is a meaningful risk factor, but mention it as many sell side and buy side analysts appear to misunderstand the situation. ABY generates US$18mm in cash flow (relative to ~$250mm of CAFD) from its preferred equity interest in a Brazilian transmission asset called ACBH.
“EM” currency risk
We again do not see meaningful currency risk. While some may cite that “30% of cash flows are from Latin America”, we note that 17% is in Mexico, where the counterparty is Pemex, a state-owned and investment grade rated company. An additional 7% is from Peru where ABY owns transmission lines and where the counterparty is the Peruvian government. In both instances, contracts are USD-denominated.
- Successful rights offering and resolution of liquidity issues at the sponsor (ABG) level.
- Continued execution and dividend raise to $2.10 on an annualized basis by 2Q 2016.
|show sort by|
Are you sure you want to close this position ABENGOA YIELD PLC?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea ABENGOA YIELD PLC for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".