Polaris Infrastructure Inc. (TSX: PIF) is engaged in the acquisition, exploration, development, and operation of geothermal and hydroelectric energy projects. The company, through its subsidiaries, owns and operates a 72-megawatt capacity geothermal facility (the San Jacinto Project), located in northwest Nicaragua.

Key Highlights:

• Decrease in the power production: In Q1FY22, the company reported a decline in the consolidated net Power production to 177,765 MWh (megawatt hour) against the consolidated net power production of 180,984 MWh in Q1FY21. The company’s Nicaragua (Geothermal) unit stated the total power production of 113,915 MWh in Q1FY22, lower than 119,854 MWh in Q1FY21, resulting in the overall decline in the consolidated power production in Q1FY22.

• Increased expenses: During Q1FY22, the company witnessed an increase in the direct costs to USD 2,679 million in Q1FY22 when measured against the direct costs of USD 2,580 million in Q1FY21. The power plant in Nicaragua reported the direct costs of USD 1,756 million in the same period (Q1FY22) vs USD 1,736 million in Q1FY21, and the plant in Peru reported a direct cost of USD 923 million in Q1FY22 against the direct cost of USD 844 million in pcp.

• Decline in the liquidity: During Q1FY22, the company stated a decrease in its cash to USD 83.38 million as compared to the cash balance of USD 97.93 million in Q1FY21. Also, the net cash flows from operating activities sunk to CAD 7.57 million against USD 17.06 million in Q1FY21. The decline in liquidity is a major concern for the company to manage its business operations smoothly and carry out its growth plans.

Valuation Methodology (Illustrative): Price/ Earnings based

Analysis by Kalkine Group

Stock Recommendation:

The company reported decreased consolidated net power production of 177,765 MWh during Q1FY22 against 180,984 MWh in Q1FY21 along with the increased direct cost of USD 2,679 million in the same period (Q1FY22) vs direct cost of USD 2,580 million in Q1FY21. Also, the group reported declining cash balances and reduced cash flows from the operating activities, which is a major concern to maintain the smooth running of the business operations. On the valuation front, the stock is measured on the Price/ Earnings based relative valuation multiple, and the stock is currently offered at 31.7x against the industry (utilities) mean of 27.6x, implying the stock is still overvalued. We have considered Innergex Renewable Energy Inc., Maxim Power Corp., etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock of PIF at the last closing price of CAD 20.30 on June 02, 2022.

One-Year Technical Price Chart (as of June 02, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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