|Shares Out. (in M):||46||P/E||0||0|
|Market Cap (in $M):||668||P/FCF||0||0|
|Net Debt (in $M):||445||EBIT||0||0|
|TEV (in $M):||1,145||TEV/EBIT||0||0|
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Ameresco is a well-managed, owner-operated business that is likely to grow significantly over the next five years. Ameresco is what is commonly referred to as an “ESCO” (energy service company), founded in 2000 by the current CEO George Sakellaris. Sakellaris is a key piece of the thesis - he is a pioneer in the industry, owns 50.4% of the company, never sells shares and has added to his stake in the business numerous times.
At a high level, Ameresco can be broken down into two main segments: services and owned assets. Please note that in this report, we use adjusted numbers to estimate the financials of each segment, though the company reports in a different manner – we are happy to go into that detail in the Q&A. A concerted effort to expand the company’s ownership of small-scale, renewable energy assets during the last five years has resulted in this business becoming a material proportion of the total value of the company.
We expect the company to triple EBITDA from company-owned assets during the next five years. Combined with a modestly growing services business, an equity owner ought to be able to achieve returns approaching 20% compounded during the period. Given the substantial visibility in the services business from the company’s growing, higher-margin backlog and the long-term contracted nature of the owned assets, the return offered by Ameresco is particularly attractive on a risk-adjusted basis, and we believe it can continue to compound at attractive returns beyond the next five years.
Summary Return Potential
Ameresco’s backlog of existing projects, owned asset pipeline, continued growth of the owned asset pipeline, and modest earnings growth in the company’s services business combine to provide attractive returns over a multi-year period.
By 2023 we estimate that nearly 2/3 of the company’s value will reside in its owned asset portfolio. As previously mentioned, base case returns approaching 20% appear attractive in relation to the predictability of the business:
Why Does Opportunity Exist?
Management and Incentives
From a high level, Ameresco owns two different business, a services business and an owned assets business.
In the services business, a client, like a university or DoD defense base, will solicit proposals seeking to reduce energy consumption and build redundancy into their energy network. Ameresco will conduct audits, propose a series of improvements and guarantee certain performance outcomes. If successful in its bid, Ameresco will implement the solution and, in some cases, provide long-term oversight, repairs and maintenance via the company’s operating and maintenance (“O&M”) business. The investment in the efficiency project is financed either by the client with the assistance of Ameresco (in the case of non-federal clients) or by Ameresco selling its rights to payments from a federal entity to third parites (in the case of federal clients).
In the owned assets business, Ameresco seeks small-scale energy projects in solar and “green gas” (low carbon natural gas) to develop for its own balance sheet. It must finance a project, design a solution and find a third party offtake customer for the energy production, while assuring itself an appropriate return on its equity.
Services Business Details
Source: Internal and Ameresco Investor Presentation
Source: The Edison Foundation
Source: Internal and Ameresco
“Importantly, we are seeing an increase in gross margins embedded in our backlog as lower-margin contracts progress and are replaced with higher-margin contracts. We believe the increasing complexity of both government and institutional projects will continue to lead to not only larger but higher-margin awards.”
- 2019 Q2 Conference Call
“Importantly, our anticipated gross margin on the backlog is about 1 percentage point higher than a year ago driven by large and more complex projects.”
- 2019 Q1 Conference Call
Owned Assets Business Details
Source: US Energy Administration
“We have a good pipeline of green gas projects, both in our reported assets in development metric as well as the 5 to 6 earlier-stage projects we have spoken about in previous calls.”
- Q2 2019 Conference Call
Taxes and Incentives
Projections, Valuation and Potential Return
While an investment in Ameresco appears attractive, the businesses owned by the company are unlikely to afford one a “lollapalooza-type outcome.” The company is essentially investing cash flows from a low capital intensity business into long-lived, stable, income-producing power generation assets. Meaningful surprises to the upside are unlikely. Additional risks include:
Source: Environmental Protection Agency
Quotes from Tegus Calls – Services Businesses
“I guess the first thing I'll say is the CEO was, not only founded the companies, kind of almost founded of the industry. Just conceptually, I believe he was one of the first people to identify this potential with ESPC. And that is a business that he loves and wants to do as much of that as possible. I don't know what his current age is, 72 or 73. And I expect him to, my expectation is he is going to stay in that position for quite a while. He's very healthy, he's very mentally quick. Great with numbers, good financial mind.”
- Former VP Ameresco
“… a Johnson Controls is my competitor I'm going to say, "Listen, all those employees over there are driven to make sure that they put in York International equipment, owned by Johnson Controls. Of course, Johnson Controls is known for Johnson Controls control system. So they're surely not going to want to put in a Siemens or a Honeywell, and what we're going to do as Ameresco is we're going to give you the best fit and function of your building whether that be a Siemens system or a Honeywell system or a Train system or a JCI system, and we're going to put in the most energy efficient component for you that we can… So could that be an advantage for a particular client? Yes, it could. Would I find that to be a complete knock out across the space? No, absolutely not. Because most of the time the customer if they've got a 25 year old carrier unit and it's not working and they need air, their guideline is, get the air conditioning The opposite side if you work at Train or if you work at Johnson Controls is, listen, we have the most energy efficient equipment in the industry, our advantage is we engineer it, we manufacture it, we build it, and we have local branch businesses that can support it after the ESPC work is done. When I put in my train control systems again we engineer the control system, we manufacture it, we have people locally that know how to install it, it's our own Train people that do the installation. And by the way we're here for the next 18 years to maintain that control system for you, can Ameresco do that?”
- Former VP and GM Johnson Controls
“So if Johnson Controls already has the existing relationship at the university or at the local government level and it has their products and services in there, the batting average if the customer pursues the project is usually above a 75% close ratio”
- Former VP and GM Johnson Controls
“I would say sitting at Train and then also sitting at Johnson Controls they were viewed as a good competitor. If you saw Ameresco being one of the bidders you respected the fact that they were going to look at the project very professionally and that they would put their best foot forward and be a formidable competitor. So it was not like who are these guys? And quite honestly a lot of the people that work at an Ameresco were ex Honeywell or ex Johnson Controls people.”
- Former VP and GM Johnson Controls
“I think it's a 7 to 9% EBITDA space guys, I don't think it's any more than that.”
- Former VP and GM Johnson Controls
Quotes from Tegus Calls - Owned Assets
“Our work is primarily driven by state incentives… each market's unique… And so because we're driven by incentive markets that develop finite capacities for development, we're constantly dealing with a rollercoaster of tracking policy, helping craft policy, to be able to implement the type of projects we want, and typically that's a commercial-scale project on a piece of land, like a farm field, forest, or a very large roof.”
- Former Senior Manager Solar Development at Ameresco
“Ameresco has impressive in-house talent. And I've seen that pretty clearly in the other developers I've worked with… Ameresco, they're almost unique in the industry in that they do want to own and operate assets that they develop. While they don't have a large risk appetite to spend cash at risk, they have incredible in-house resources… The difference at Ameresco was that they had such strong depth in engineering, construction management, and legal counsel that they were able to design projects that molded better or fit better to the program, like I've talked a bit about landfills and carports in Massachusetts.”
- Former Senior manager Solar Development at Ameresco
“I would be concerned, footnote is the reset rules, right? If EPA comes out very aggressive on the D3 requirement, then I don't think I would be very concerned at all. If the reset rules come out, again this is going to dictate what happens through 2022 and those D3 requirements are set too low, then that's the ultimate risk right there.”
- VP Alternative Fuels Council
“The biggest risk on their renewable side is in the landfill gas, because you can get a lot of variability in about how much gas you're getting just depending on, there's an art and a science to predicting the gas yield out of landfill. But it is a little bit of an art to it. There's also contaminants that you have in landfill gas in some places. There can be a fair amount of variability to that from landfill to landfill.”
- Former Executive VP Ameresco
Taxes and Incenives
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