Guatemala Permits And Elevated Power Prices Will Drive Stronger Long Term Renewable Cash Flows

Catalysts

About MPC Energy Solutions

MPC Energy Solutions develops, owns and operates renewable energy projects with a focus on solar power assets in Latin America.

What are the underlying business or industry changes driving this perspective?

• Once the Guatemala solar plant finally receives permits and starts testing, the project should immediately add sizeable energy output under a long term power purchase agreement. This is expected to lift consolidated revenues and push the group across key profitability thresholds.
• Persistently elevated electricity prices in core markets such as El Salvador, combined with record plant performance and very high availability, position the existing portfolio to continue generating outsized project EBITDA and support further expansion of operating margins.
• The substantial structural reduction in overhead costs, now trending toward an annual run rate of roughly 2.5 million dollars, means a greater share of project level EBITDA will flow through to group EBITDA and net earnings as revenues grow.
• Ongoing divestments of lower margin and higher risk assets in Colombia, together with potential earn out upside, are expected to recycle capital into higher quality projects and shareholder distributions. This is aimed at improving return on assets and supporting earnings per share.
• The combination of an under leveraged balance sheet, rising free cash at both project and holding levels, and planned cash distributions provides capacity to fund disciplined growth while enhancing shareholder returns. This should support higher valuation multiples on future revenue and profit streams.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming MPC Energy Solutions's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -144.5% today to 36.5% in 3 years time.
• Analysts expect earnings to reach $4.6 million (and earnings per share of $0.2) by about December 2028, up from $-15.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $8.3 million in earnings, and the most bearish expecting $0.0 thousand.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from -1.8x today. This future PE is lower than the current PE for the NO Renewable Energy industry at 50.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent permitting delays for the Guatemala project highlight weak visibility on local regulatory processes and could postpone the largest asset in the portfolio from contributing power for multiple quarters, depressing revenue growth and delaying the expected step change in group earnings and net margins.
• Reliance on currently elevated electricity prices in key markets such as El Salvador means that a cyclical or policy driven decline in regional power prices would erode the exceptionally high project level margins and reduce project EBITDA and overall net profit sustainability.
• Ongoing divestments and impairments in Colombia, including voluntary write downs on Planeta Rica and future earn out uncertainty, point to execution and country risk in parts of the portfolio that could lead to further asset value erosion and weaker return on assets and earnings quality over the long term.
• The strategy of returning significant cash to shareholders while remaining under levered and still facing potential additional funding needs for delayed projects may constrain reinvestment capacity, limiting long term portfolio scale up and capping future revenue and earnings expansion.
• Even with strong project EBITDA, structural items like VAT locked in Guatemala until operations begin and interest costs classified within operating cash flow under IFRS create a gap between accounting profit and cash generation, which could keep operating cash flow and free cash flow weaker than headline EBITDA and delay a sustained improvement in net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NOK16.0 for MPC Energy Solutions based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $12.5 million, earnings will come to $4.6 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of NOK12.85, the analyst price target of NOK16.0 is 19.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.