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 Q1 FY22, the company reported a lower Debt to Equity ratio of 0.64x, as compared to the industry median of 2.67x, which indicates prudent capital management and higher financial flexibility. Moreover, this is commendable as the company’s operation is capital intensive in nature.

• Robust Profitability margins: In Q1FY22, the company reported its EBITDA margin and operating margin of 74.8% and 36.9%, respectively, higher than the industry median of 54.3% and 25.7%, respectively. This indicates improved cost-structure, which is a key positive for the company. Moreover, the company’s net margin stood higher at 15.8% in Q1FY22, as compared to the industry median of 9.0%.

• Positive Macros: 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 underutilization 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 where it operates. 

  Q1FY22 Financial Highlights:

Q1FY22 Financial Highlights (Source: Company Reports)

• In Q1FY22, the company posted its revenue USD 15.6 million, with no change from the previous corresponding period.
• Operating income stood at USD 5.9 million in Q1FY22, increased from USD 4.4 million in pcp due to lower general & administrative expenses, and lower depreciation & amortization costs, partially offset by an increase in direct costs.
• Total earnings and comprehensive earnings stood at USD 2.5 million, as compared to a net loss of USD 0.9 million in pcp. This was primarily due to higher operating income, partially offset by higher finance expense.

Valuation Methodology (Illustrative): Price to Earnings

Analysis by Kalkine Group 

Stock Recommendation:

Moreover, the PIF stock carries a dividend yield of ~4.115% on an annualized basis, which looks impressive considering the persisting interest rate scenario. The company reported a lower cash conversion period of 57 days in Q1FY22, as compared to 63.6 days in Q4FY21, which indicates that the company is taking lower time to convert its investments to cash flows, due to higher operational efficiency.

We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like Boralex Inc, TransAlta Renewables Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of PIF at the last closing price of CAD 18.55 on May 11, 2022.

One-Year Technical Price Chart (as on May 11, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

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