Polaris Infrastructure receives a target raise from Beacon

The sky’s the limit for Polaris Infrastructure (Polaris Infrastructure Stock Quote, Charts, News, Analysts, Financials TSX:PIF), according to Beacon Securities analyst Ahmad Shaath, who reviewed in an April 21 report the company’s latest planned acquisition of a solar energy asset in the Dominican Republic. Shaath reiterated his “Buy” rating while raising his target price from C$25.50 to C$28.00 for a projected one-year return of 61 per cent.

Toronto-based Polaris Infrastructure is a renewable energy company with projects in Latin America. The company operates a 72 MW geothermal facility in Nicaragua, three run-of-river hydroelectric facilities in Peru with respective capacity of five MW, eight MW and 20 MW and two construction-ready solar projects in Panama. Last month, Polaris also announced the signing of a Share Purchase Agreement (SPA) for an operational run-of-river hydro project in Ecuador.

The latest news has Polaris announcing on Wednesday an SPA for an operational solar project in the Dominican Republic, signed with Canadian-based renewable energy developer Potentia Renewable. The 32.0 MWdc project named Canoa 1 has a 20-year power purchase agreement in place with a local Dominican distributor with a 2022 price at about $128.10 per MWh, expiring in 2040. 

The deal is valued at $53.4 million, with Polaris paying $18.4 million in cash and assuming $35.0 million in non-recourse, project-level debt, and Polaris said the transaction should close within 90 days. (All figures in US dollars except where noted otherwise.)

“We are very pleased to have signed this acquisition,” said Marc Murnaghan, CEO of Polaris, in a press release. “The combination of operational and development assets is the mix of assets we have been looking for and aligns with our strategic objectives. Once the acquisition is closed, our jurisdictions will increase to five and our plants in operation will increase to six, with solar added to the generation mix. This is all aligned with the goal of diversification by asset class and generation mix while maintaining 100 per cent of revenues derived in US dollars. In addition, we view the Dominican Republic as a very attractive market for Polaris to grow and develop further renewable projects.”

Looking at the deal, Shaath said there’s upside potential, as the Canoa 1 project currently occupies about 30 per cent of the total land parcel of about 1.4 km² and the agreements currently in place allow for the project to double in capacity to about 65 MWdc, although such an expansion would require a new Power Purchase Agreement.

“We made no changes to our forecast as we await the closing of this acquisition as well as the transaction for the assets in Ecuador,” Shaath wrote. “We remain of the view that PIF is poised for a rerating as it will continue to deploy its ample available liquidity to expand its asset base for further diversification from its main asset in Nicaragua.”

“The company took major steps over the last month, adding three countries (Ecuador, Panama, and Dominican Republic) and a new asset class (Solar) to complement its portfolio in Nicaragua (geothermal) and Peru (RoR Hydro). Upon closing of the pending transactions, we estimate Polaris stands to generate at least 30 per cent of its revenue from outside of Nicaragua. To reflect the improved risk profile, we are revising our valuation multiple to 11.0x EBITDA (versus 10.0x previously), which yields our new target price of C$28.50,” Shaath said.

Looking at the numbers, Shaath has forecasted Polaris to go from 2021 revenue and adjusted EBITDA of $59.5 million and $43.8 million, respectively, to 2022 revenue and EBITDA of $63.3 million and $45.5 million, respectively. On EV/Sales, Shaath has PIF going from 5.9x in 2021 to 5.5x in 2022, while on EV/EBITDA, he has the company going from 8.0x in 2021 to 7.7x in 2022.

Polaris last reported its financials in February where its fourth quarter 2021 and year-end featured $14.9 million in revenue compared to $18.5 million a year earlier and adjusted EBITDA of $11.1 million compared to $14.1 million a year earlier. For the 2021 year, revenue was $59.5 million compared to $75.7 million in 2020, while adjusted EBITDA was $43.8 million in 2021 compared to $58.7 million for 2020. 

Annual energy production for 2021 was 643,523 MWh, of which 465,935 MWh came from the Nicaragua geothermal facility and 177,588 from the hydro facilities in Peru. The company said temporary instability with cycling wells in Nicaragua lowered the fourth quarter production in Nicaragua from 57.89 MWs to 51.36 MWs but both of the wells are now generating in line with historical averages.

“With the strong financial position built further during 2021, significant cash balances and increasing projected cash flows, the Company remains fully funded to execute on its growth initiatives such as the Binary Unit and strategic acquisitions. In addition, the closing of the refinancing will add further financial flexibility in order to accelerate the diversification strategy, while continuing to return capital to shareholders through dividends,” said Murnaghan in a press release.