By Jiayi Liang, Equity Analyst
Atlantica Sustainable Infrastructure PLC ($AY) is a worldwide company headquartered in the United Kingdom and traded on the Nasdaq Stock Exchange. While the company’s major business is in renewable energy assets, it also owns, manages, and invests in energy storage, natural gas and heat, electric transmission lines, and water assets in the United States, Canada, Mexico, Peru, Chile, Colombia, Uruguay, Spain, Italy, Algeria, and South Africa. With the ultimate goal of achieving a more sustainable world, Atlantica invests in and manages sustainable infrastructure. Currently, it owns 40 assets and has a market capitalization of roughly $4 Billion. The company churns out a dividend yield above 5%.
Below, we are going to analyze the company’s current financial situation and its growth potential mainly based on its Second Quarter 2022 financial reports. With the recent passage of the “Inflation Reduction Act” focusing the spotlight on the acceleration of the renewable energy movement in America, is now a good time to own Atlantica?
What is Atlantica’s debt situation?
With interest rates rising rapidly across the globe, this is the first question that investors should be asking about any company’s financial position. Rising interest rates could mean that formerly solvent companies face much higher interest payments.
Atlantica owes $5.88 Billion debt in total, which looks very intimidating at first glance. That seems like a lot of debt for a company whose shares are only worth $4 Billion on the open market.
The most important thing to understand is: the bulk debt shown on the balance sheet does not entirely represent the company’s debt situation. Whether the company is holding a significant amount of debt depends on its industry to a large extent. Since Atlantica is a sustainable infrastructure company that is asset-intensive, it is very common to owe a huge amount of debt, secured by those hard assets. After all, the company has to put an incredible amount of capital into acquiring all of those windmills, solar panels and transmission lines. The key question for an investor is: how has this debt been managed?
In this case, the majority of the firm’s debt is long term debt, at fixed rates well below the current rate of inflation. According to the company’s latest report, 93% of the debt is either fixed rate, or hedged against rising interest rates. Additionally, most of the debt does not come due until at least 2026, and even then, the debts only need to be repaid gradually. There will be no nasty surprises for Atlantica shareholders.
Since the pure number on the balance sheet does not tell us a lot, keeping tabs on the debt ratio is imperative for investors to understand the financial health and potential growth opportunities for the company. With $1.17 in long-term assets for every $1 in long-term debt, Atlantica has a healthy balance of long-term liabilities and long-term assets. Moreover, debt ratio measures the amount of leverage used by a company in terms of total debt to total assets. With total liabilities of $7B and total assets over $9B, the debt ratio is 0.8, which means that Atlantica has more assets than debts and that a greater portion of its assets is funded by equity. Also, cash available for distribution has been increasing. All this information tells us that we do not need to worry about the company’s solvency or ability to pay dividends.
Is the lack of obvious profit on the P&L sheet a problem?
As shown on the profit and loss sheet, the profit for the period is only $20 million. This may dismay lots of investors as they assume that the company is not on good financial footing. Nevertheless, if we take a deeper look, its depreciation, amortization, and impairment charges reach an incredible $117 million. In the utilities sector and renewable electricity industry, it is not surprising to see such a huge figure. After all, Atlantica holds 40 extremely large-scale heavy assets, and their depreciation costs are huge. But remember, depreciation is often just an accounting concept, and may not affect cash flow in real life.
Therefore, it would be wise to look at EBITDA to understand the real, core operating performance of the company, since it excludes all the obscure effects of interest, taxes, depreciation, and amortization. As shown on the quarterly report, the adjusted EBITDA is $228 million, which is $208 million higher than the profit after all these factors. This promising EBITDA makes investors breathe a sigh of relief as they realize the underlying corporate profitability. In this case, the tiny profit shown on the income statement is misleading. The monstrous depreciation that comes with owning hard assets cloaks the truly lucrative nature of Atlantica’s operations.
Can they continue to grow their dividend over time?
As shown on the reports, cash available for distribution (CAFD) increased by 6.7% year-over-year up to $117.3 million in the first half of 2022. This is good news for investors because they will be very likely to enjoy more dividends. When examining the 10-year dividend payout history, Atlantica has kept growing its dividend from $0.45 in 2016 to $1.72 by 2021. Moreover, its 5-year dividend growth rate hit 12.86%. All these numbers indicate promising development, a solid profit, and an expanding dividend. Lastly, all its businesses, such as renewable energy and efficient natural gas and heat, have increased their production. This indicates the ability of the company to expand its business and to make more profits in the future. All in all, it is highly possible that Atlantica will continue to grow its dividend over time.
Is this a good investment given the growth of green energy?
With the increasing attention to green energy, Atlantica’s position in the market seems to be more and more robust. To figure the question out, we need to analyze the totality of the financial reports including revenue, profit, debt, and dividend.
To untrained eyes, Atlantica’s position seems deceptively weak. But nothing could be farther from the truth. International currency fluctuations make it look like the business is shrinking.
If we ignore the effects of the crashing Euro, we would think there was a 9.1% revenue decrease year-over-year. However, the truth is, on a comparable basis, revenue for the first half of 2022 reached $555.3 million, or a 4.7% increase year-over-year. One of the risks of owning an internationally diversified business is that currencies fluctuate through the years. However, Atlantic’s underlying operation, and ability to pay dividends, just continues to grow.
With fossil fuels in crisis in the Eurozone and American Industry newly committed to green energy, Atlantica should be a company with the wind at its back for decades to come.
Uninformed investors may get scared when they see the huge debt number on the balance sheet. Nevertheless, we need to compare debt by industry instead of individual companies, since each industry’s mean debt varies dramatically. As an asset-intensive company, holding a large amount of debt is not a big deal, and rather, it is very common to do so. Lastly, dividend plays an essential role in deciding whether Atlantica is a good investment or not. As we analyzed before, both the past dividend performance and the future prediction are excellent.
This year, 21% of America’ s energy was produced by wind and solar. Just two years ago, that number was only 14%. More and more, America’s enterprising business people are seeing financial green as well as eco friendly green in renewable energy. Atlantica should be very well positioned to ride this growth for the foreseeable future. With their debt well managed and their dividend growing, the winds of change might just be blowing the right way for Atlantica shareholders.