Polaris Infrastructure Inc. (TSX: PIF) is engaged in the acquisition, exploration, development and operation of geothermal and hydroelectric energy projects in Latin America.

Key Updates:

• Healthy balance sheet: In FY21, the company reported a lower Debt to Equity ratio of 0.67x, as compared to the industry median of 2.61x, which indicates prudent capital management and higher financial flexibility. Moreover, this would lead to a lower interest cost for the company and would support the company’s profitability and cash flows.

• Attractive margins: In FY21, the company reported its EBITDA margin and operating margin of 72.7% and 26.7%, respectively, as compared to the industry median of 56.2% and 22.7%, respectively. This indicates improved cost-structure and is a key positive for the company. Moreover, the company’s pretax margin stood higher at 7.4% in FY21, as compared to the industry median of 0.4%.

• Bullish Sectoral outlook: In order to address the ongoing climate change issue, most of the developed nations are inclining towards renewable source of energy. Hence, the scope of expansion across the Latin American countries remains huge due to the under utilization of renewable sources of energy across the region. Also, the Latin America hosts some of the world’s most dynamic renewable energy markets and we believe the company is highly poised to take advantage of it.

Risks associated with the investment:

 Due to the inherent nature of the operations, the company might foresee setbacks from the global economic trends, risks related to local social, political, environmental, and economic conditions, as well as currency and inflation-related risks within the markets within which it operates. 

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• PIF announced its full-year result, wherein the company posted its revenue USD 59.5 million, declined from USD 74.7 million in FY20. The slide was primarily due to the lower contribution from the San Jacinto (Geothermal) project.
• Operating income fell to USD 15.9 million in FY21 from USD 56.8 million due to reduced topline coupled with higher general and administrative expenses, partially offset by a lower direct cost. Notably, in FY20, the company’s operating income was supported by an Impairment recovery amounting USD 24.4 million.
• Net earnings stood at USD 0.5 million, as compared to USD 28.8 million in FY20. The decline was due to a lower operating expense, partially offset by lower income tax and a decline in the finance costs.

   Valuation Methodology (Illustrative): Price to Earnings

Analysis by Kalkine Group

Stock Recommendation:

The stock of PIF carries a dividend yield of ~4.838% on an annualized basis, which looks impressive considering the persisting interest rate scenario. Moreover, despite the ongoing sluggish economic growth, the company paid a higher dividend of USD 11.1 million, compared to USD 9.4 million. This looks impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Northland Power Inc, Montauk Renewables Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of PIF at the closing price of CAD 15.78 on March 16, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 16, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Disclaimer

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