Renewable Energy Firm To Expand Capacity To 28 GW, Leveraging Tax Credits

Key Takeaways

• Strategic acquisitions and infrastructure improvements are enhancing operational performance, positively influencing future revenues and earnings.
  
• Expansion in the Energy Storage sector and leveraging tax credits are expected to boost margins, supporting growth and profitability.
  
• The company's exposure to tax volatility, unplanned outages, market price fluctuations, net debt levels, and policy changes could strain financial performance and strategic flexibility.

Catalysts

Engages in the geothermal and recovered energy power business in the United States, Indonesia, Kenya, Turkey, Chile, Guatemala, Guadeloupe, New Zealand, Honduras, and internationally.

• Ormat's acquisition of Enel assets and improvements in the Puna facility are contributing to increased operational performance and EBITDA, which could lead to higher future revenues and earnings.
  
• The company is progressing in stabilizing and expanding its Energy Storage business, as demonstrated by new tolling agreements and recent commercial operations, potentially boosting future revenues and margins.
  
• Ormat expects to capitalize on increasing demand for renewable energy by securing additional long-term contracts at elevated prices, which could improve profitability and revenue growth over time.
  
• The company's focus on reaching a portfolio capacity of 2.1 to 2.3 gigawatts by 2026 and 2.6 to 2.8 gigawatts by 2028 indicates significant planned expansion, which should enhance revenue and earnings.
  
• The company benefits from monetizing ITC/PTC tax credits, which reduces capital intensity and supports growth, positively impacting net margins and financial performance.

Ormat Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ormat Technologies's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.3% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $154.1 million (and earnings per share of $2.5) by about December 2027, up from $118.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $137.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 41.2x on those 2027 earnings, up from 36.4x today. This future PE is greater than the current PE for the US Renewable Energy industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.51%, as per the Simply Wall St company report.

Ormat Technologies Future Earnings Per Share Growth

Risks

• The company's decrease in net income due to changes in Kenyan tax laws highlights potential volatility in its tax-related expenses, impacting net margins.
  
• Unplanned outages at facilities like Dixie Valley could lead to unexpected drops in revenue and EBITDA, affecting overall earnings negatively if not properly managed.
  
• Despite growth in the Electricity segment, the decline in revenue from the Energy Storage segment due to lower market prices in ERCOT indicates vulnerability to market price fluctuations, which could strain revenue growth.
  
• The increase in net debt to approximately $2.2 billion and debt service obligations could pressure cash flow and limit future investments or dividend distributions, impacting future earnings.
  
• Although the PTC and ITC benefits help with current capital intensity, any changes in government policies or delays in monetization, such as those related to the Heber Complex, could affect the company’s financial strategies and net margins.

Valuation

• The analysts have a consensus price target of $86.14 for Ormat Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $106.0, and the most bearish reporting a price target of just $75.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.2 billion, earnings will come to $154.1 million, and it would be trading on a PE ratio of 41.2x, assuming you use a discount rate of 6.5%.
• Given the current share price of $71.47, the analyst's price target of $86.14 is 17.0% 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.