Description

Elevator Pitch: This is a simple and straightforward story; the bet is that management can:

1. Refinance debt via a Green Bond at the end of this year and
2. Execute the build-out of several low-risk renewable energy projects.
3. Continue their thus far, successful track record of acquiring small renewable power projects throughout LatAm at favorable prices.

The result of these three operational catalysts would be EBITDA growth of 66% between now and 2027 (EBITDA 2023E $60/$65 million, 2027E EBITDA $100 million), an improved balance sheet, and growing FCF.  The firm is currently trading at an EV/Managements 2027 EBITDA target of 4.7x while also paying a roughly 6% dividend.

Key Assets and Contracts: The Company’s operations are in 5 Latin American countries and include a geothermal plant (~72 MW), four run-of-river hydroelectric plants (~33 MW), and three solar (photovoltaic) projects in operation (~35 MW). 100% of the revenue from the assets is denominated in US dollars, and 98% is contracted with government offtakes via power purchase agreements with a weighted average remaining life of ~14 years.

The assets have project-level debt that will amortize over time in line with the offtake agreements and have fixed interest rates, except for the firm's San Jacinto debt.  The San Jacinto debt is the firm's most expensive debt and can be refinanced starting in 2025.

Management is targeting Q4-2024 to issue a $200 to $250 million green bond that will be used to repay the roughly $90 million of the San Jacinto debt that will be outstanding at the time of issuance. The remainder of the funds will be used to support future growth projects.

The growth projects outlined above will come online steadily over the next three years and represent strong return on invested capital opportunities.  The COD schedule also creates a steady flow of positive news events as each asset results in a meaningful boost to EBITDA of between 2% and 10% PA on our 2023E EBITDA.  

Valuation

We have approached the valuation by combining two DCFs and a dividend discount model; each scenario is then equally weighted, producing a single probability-weighted value.  We would note that as roughly $20 million in future EBITDA is forecasted to come from yet-to-be-announced M&A, our valuations are based on management coming up short of the goal of reaching $100 million in 2027 EBITDA by 20%. We run our models based only on known projects that are either already under construction or have a timeline to COD with construction starting in the future.  This means there is unpriced upside optionality to management's current plan vs. our outlook.

WACC-Based DCF: We discount the forecasted period via the firm's current weighted average cost of capital of 7.5% (based on Bloomberg calculations).  Our cash flows are based on asset-level power production through 2040 and assume contracted rates presented in the table above. We assume 5-year average margins, 0% growth in the terminal stage, and discount the terminal stage at 7.5%. The result is a punchy C$47 per share.

12% Discount Rate DCF:  The Bloomberg calculated WACC used in the DCF scenario above seemed too low.  The firm has execution risk on growth projects, general political risk, and counterparty exposure to various governments who are acceptable credits but are also capable on any given day of choosing not to pay their bills.  As such, stressing the above operational scenario with a higher discount rate makes sense. The result is a value of C$26.

Dividend Discount Model: The firm has paid dividends consistently since the first quarter of 2016.  As a power producer, albeit not necessarily a bond proxy in the same way as other utilities, it makes sense to assess the company on a yield basis, as that is a variable we expect investors to consider when examining this stock.  We utilize a 2-stage DDM with a 2% growth rate between now and 2027 and a 0% growth rate in the terminal stage and discount at the firm's WACC. The result is C$9

We probability-weight each scenario equally as they are all the same operational scenario with slightly different approaches to valuation that assume either more or less risk being baked into the discounting (the two DCF scenarios) or a wholly different perspective on how the same company outlook should be valued.  The result is a probability-weighted value of C$27 or roughly 100% return from the current market price.

Risks: As with any project-based company, the most significant risk is the execution of the growth projects.  Over the last few years, the management team has demonstrated a reasonable ability to execute its growth projects. It has deployed capital into brownfield expansions at its Geothermal operations in Nicaragua on time and on budget.  The next stage of the firm's growth will be more involved, with multiple projects dispersed throughout Latin America underway at one time and managed by the Toronto corporate office.  The projects are appropriately sized for the company and its capabilities, but there will be several balls in the air.   

The company also has counterparty risk and political risk. Based on conversations with existing investors in the company, there is a consensus that this combination of risks is holding the company back. We are not unconvinced of that but have no evidence one way or another. Nicaragua risk is a common concern raised by investors we have spoken with.  We suspect that since events in Panama related to First Quantum’s Cobre copper mine started, worries about the firm’s Panama exposure have also crept up the ladder of concerns investors have.  These risks are not easy to hedge for the company or investors.

Failure of management to find additional projects to acquire will result in them missing their 2027 EBITDA target by roughly $20 million.  Although this is a significant risk, our valuations do not assume they find these projects but only that currently known projects are executed. In this way, M&A failure represents a narrative risk to the stock price but not a fundamental risk to our valuation estimate.

Catalyst

2024/January 2025: Green bond replacing project-level debt at the firm's San Jacinto Geothermal asset, boosting earnings and FCF.

2024-2027: EBITDA Growth of $15 to $17 million from five growth projects coming online between now and 2027

Unforseeable Catalyst - Further M&A: Management is still seeking acquisition targets to produce $20 million in EBITDA by 2027.  The firms focus on sub-sized assets that are too small for proper utilities means they are usually one of only a few bidders for the projects they like.