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:

• Recent Acquisition Update: On April 20, 2022, the company announced that it has signed a Share Purchase Agreement (SPA) for Potentia Renewables Inc. which would acquire a 32.0 MWdc operational solar project named Canoa, located in the Barahona Province, Dominican Republic. The Canoa project has a 20-year power purchase agreement with Edesur Dominicana SA (EDESUR), a local distributor in Dominica.

• Robust Profitability margins: In FY21, the company reported its EBITDA margin and operating margin of 71.1% and 29.1%, 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 0.9%.

• Positive Macros: 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 within which it operates. 

 FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• PIF announced its full-year result, wherein the company posted revenue of 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 declined to USD 15.9 million in FY21 from USD 56.8 million in pcp 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:

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 is commendable as the company’s operation is capital intensive in nature. Moreover, the PIF stock carries a dividend yield of ~4.151% on an annualized basis, which looks impressive considering the persisting interest rate scenario.

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 Northland Power Inc, Montauk Renewables Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of PIF at the last closing price of CAD 18.39 on April 27, 2022.

One-Year Technical Price Chart (as on April 27, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

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