Atlantica Sustainable Infrastructure: Important Takeaways From Its Earnings Call

Vanit Janthra

Renewable power stocks specified arsenic Clearway Energy (CWEN), Brookfield Renewable (BEP), NextEra Energy (NEP), and Atlantica Sustainable Infrastructure (NASDAQ:AY) person been struggling nan past year. Their value is little compared to a twelvemonth ago, chiefly arsenic a consequence of nan effect that higher liking rates is having connected these yield-sensitive investments. Atlantica has had nan further headwind that its main shareholder, Algonquin Power & Utilities (AQN), has been struggling financially and mightiness request to offload its stake.

Atlantica has started a 'Strategic Review', but it has been intentionally very vague arsenic to what it is aiming to accomplish. In immoderate lawsuit it is worthy remembering that Atlantica Sustainable Infrastructure tin past moreover if its sponsor/main shareholder doesn't. This brings backmost memories of Terraform Power that saw its sponsor spell bankrupt, and it still managed to survive, yet becoming portion of Brookfield Renewable.

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Given each nan play we decided to analyse nan earnings call cautiously for clues arsenic to what to expect from Atlantica's strategical reappraisal and what its guidance for nan twelvemonth would be. These were nan 2 main things we were paying attraction to, but location were immoderate further nuggets of accusation worthy sharing. The first is that nan institution is taking its first steps connected hydrogen, pinch a 10 MW PV installation that will manufacture hydrogen, and which precocious won a assistance successful Europe. This first hydrogen task will beryllium located successful Spain.

The institution besides reminded investors that it intends to progressively turn by processing and constructing its ain assets. The existent pipeline of assets nether improvement includes ~2 GW of renewable power assets, and ~5 GWh of storage. Most of nan pipeline is made up of PV, retention and upwind projects, and is focused connected North America, wherever nan institution expects to use from nan Inflation Reduction Act.

Atlantica Sustainable Infrastructure Investor Presentation

The results nan institution delivered for nan twelvemonth were a spot disappointing, successful our opinion, pinch rate disposable for distribution (CAFD) increasing only astir 5.5% successful 2022 to scope $237.9 million, which translated to CAFD per stock of $2.07, only a ~2.1% summation erstwhile compared to nan erstwhile year.

Strategic Review

The large mobility connected investors' minds is what precisely does nan strategical reappraisal nan institution is presently undergoing mean. During nan Q&A convention an expert asked precisely this question, connected whether this is conscionable an effort to facilitate an exit for its main shareholder, aliases if they are trying to find a strategical partner, aliases what precisely is nan institution looking to achieve. CEO Santiago Seage was very blunt successful responding that they are being intentionally vague, arsenic they are exploring a number of possibilities. Our mentation is that they are astir apt exploring some nan anticipation of trading nan full company, arsenic good arsenic conscionable uncovering a caller sponsor.

I evidently won't beryllium capable to beryllium excessively specific, because if we wanted to beryllium specific, we would person released thing much specific. So astatine this constituent successful time, nan Board has decided to commencement a strategical reappraisal and analyse a number of options brought successful bid to maximize value.

And arsenic you could spot successful nan announcement, this process has nan support of Algonquin arsenic nan largest shareholder. But we request to time off nan Board to place each those options, activity done nan options and get to a conclusion. So I won't beryllium capable to beryllium very specific, because we conscionable started this process, and arsenic you cognize very well, successful a strategical process, you typically analyse a wide scope of alternatives.

The large takeaway, however, is that nan institution was very nonstop successful saying investors should expect "business arsenic usual" while it does nan review, including paying its dividends. This is what nan CEO said astir it:

[...] we deliberation that we are capable to spell done thing for illustration this without affecting nan day-to-day business and possibly that acquisition besides helps. But arsenic I mentioned before, our volition is to proceed managing nan business, doing our investments, paying our dividends pursuing our existent strategy, if you want, while we do nan reappraisal and we deliberation we tin do some things astatine nan aforesaid time.

Balance Sheet

Atlantica's firm equilibrium expanse appears successful bully style pinch leverage of 3.4x nett firm indebtedness to CAFD pre firm indebtedness service. In nan past fewer years this leverage aggregate has been successful nan scope of 2.6x to 3.5x for nan company. It is truthful presently person to nan precocious side, but we still judge it is simply a comparatively reasonable level, moreover if we would for illustration to spot it somewhat lower.

Regarding nan effect of expanding liking rates, nan institution shared that an summation of 100 bps successful reference liking rates would person an effect connected CAFD of ~1.5%. It besides shared that ~96% of firm indebtedness and ~92% of task indebtedness is either fixed aliases hedged. With respect to task indebtedness we are little worried, fixed that it is mostly non-recourse, self-amortizing debt.

Atlantica Sustainable Infrastructure Investor Presentation

The institution ended nan twelvemonth pinch firm rate of $60.8 cardinal and disposable revolver capacity of $385.1 for full firm liquidity of $445.9. The mean maturity of its existent firm indebtedness is ~4.2 years, which we would for illustration to spot nan institution increasing. Maturities for nan adjacent 3 years look rather manageable, arsenic tin beryllium seen below.

Atlantica Sustainable Infrastructure Investor Presentation

Guidance

For 2023 nan institution expects CAFD to beryllium successful nan scope of $235 cardinal to $260 million, which astatine nan midpoint is only a small spot higher than nan $237.9 cardinal delivered successful 2022. At nan midpoint this would correspond ~4% maturation y/y, and astir apt little per share. Atlantica guided for adjusted EBITDA to beryllium successful nan scope of $790 cardinal to $850 million. Given nan important investments planned for nan twelvemonth we are a small spot disappointed pinch nan level of growth.

Atlantica Sustainable Infrastructure Investor Presentation

Still, location were immoderate bully news successful that nan institution appears to person hedged astir of nan consequence factors affecting its CAFD. These brings america to different important takeaway from nan net call, that nan large facet that will power whether nan institution delivers CAFD person to nan high-end aliases nan low-end of its guidance is nan weather. This is what nan CEO had to opportunity successful this respect:

It's typically the, let's say, if you look astatine nan little versus nan higher range, nan quality is typically really good nan projects will execute depending connected whether nan sun is sparkling and nan upwind is blowing aliases not, a spot of speech complaint erstwhile you look astatine EBITDA, not connected nan CAFD side, because it hedge and nan incremental caller projects, really quickly they travel online aliases erstwhile do we adjacent caller investments. So those are astir apt nan biggest shrinks there, truthful thing immense anywhere.

Valuation

With a caller stock value of $28.65 and CAFD of $2.07 successful 2022, nan P/CAFD aggregate is ~13.8x. The payout ratio is comparatively precocious astatine ~85%, and will astir apt enactment precocious fixed nan debased maturation expected successful CAFD for 2023. The dividend output is ~6.1%, but we don't expect nan institution to summation it meaningfully immoderate clip soon.

While we judge Atlantica Sustainable Infrastructure has a very reasonable valuation astatine nan moment, we find immoderate of its competitors much attractive. In peculiar we judge Brookfield Renewable is presently much charismatic and has amended dividend maturation prospects. That said, Atlantica shareholders could perchance get a bully stock value jump if nan institution receives an acquisition connection astatine a premium to nan trading price.

Risks

We presently spot 2 important risks for Atlantica's shareholders. One is nan rising liking rates environment, which is putting unit connected its equilibrium expanse and making nan financing of caller projects much expensive. The rising liking rates besides put downward unit connected nan stock price, arsenic different income alternatives go much attractive. The 2nd large consequence we spot is that its main shareholder could determine to waste its liking successful nan unfastened marketplace if nan company's strategical reappraisal fails to present immoderate bully options.

Conclusion

Atlantica's earning results were a spot disappointing, showing small maturation and providing anemic guidance. Still, nan astir important return aways from nan telephone are that investors should expect business arsenic accustomed while nan institution carries retired its strategical review. This includes nan normal paying of dividends and investing successful nan task pipeline. The different important return distant is that nan biggest facet connected whether nan institution delivers CAFD person to nan high-end aliases nan low-end of guidance will beryllium nan weather. There are respective risks to consider, but shares look very reasonably valued. We are truthful maintaining our 'Buy' rating, moreover if we were a spot disappointed pinch nan debased maturation delivered successful 2022 and nan anemic guidance for 2023.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

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