Atlantica Sustainable Infrastructure (AY) –as its name indicates– is a sustainable infrastructure company, with the majority of its operations concentrated on investing in and operating renewable energy assets. The company is based in Brentford, UK, though it is listed on the Nasdaq.
Atlantica’s primary goal is to be a major player in the continuous shift toward a more sustainable world while yielding long-term value for its stockholders, mainly in the form of dividend income.
The company has been rather successful in that regard. Since its initial public offering, Atlantica has managed to support growing dividend payouts supported by its low-risk cash flows that are backed by multi-year PPA (Power Purchase Agreement) contracts.
In my opinion, Atlantica ticks all the right boxes when it comes to serving conservative, income-oriented investors sufficiently. That said, investors should note that Atlantica shares lack the potential for astounding total returns over the long run, as its future cash flows are more or less predetermined.
As a result, I am neutral on the stock.
A Low-Risk Asset Base
As of Atlantica’s latest results, the company’s asset base currently comprises 39 assets featuring 2,044 MW of total renewable energy installed production capacity.
In particular, Atlantica currently operates 26 renewable energy sources like solar and wind farms (70% of cash flows available for distribution), three efficient natural gas projects (15% of CAFD), seven transmission and transport projects (12% of CAFD), and three water projects (3% of CAFD).
The whole of Atlantica’s revenues produced by these assets is contracted under long-term PPAs, whose weighted average remaining contract life stands at 15 years. Consequently, the company features very predictable and high-quality cash flows. In terms of its geographical diversification, 46% of Atlantica’s revenues are sourced from North America. Europe, South America, and the Rest of the World (RoW) account for 31%, 15%, and 8% of the rest of the company’s revenues, respectively.
Additionally, one of the highest qualities of Atlantica’s asset portfolio is the reliable underlying off-takers, or customers, of each asset. Atlantica’s off-takers are exceptionally creditworthy, thus limiting the company’s counter-party risks.
Some of Atlantica’s off-takers include:
- UTE (The National Administration of Power Plants and Electrical Transmissions in Uruguay)
- CNE (National Energy Commission of Chile)
- Sonatrach & ADE (Algeria’s state-owned oil company)
- Enel Generacion Chile (publicly traded with robust and transparent financials)
- The Government of Peru
- The Kingdom of Spain
- Eskom (again, publicly traded with robust and transparent financials)
Additionally, around 88% of Atlantica’s assets have their contractual cash flow rates linked to inflation, an inflation-based formula, or are indexed to a designated number of escalations over time. Therefore, Atlantica is relatively well-protected from the continuing elevated inflation levels of the past several months. Finally, even though many of the company’s assets and off-takers are located overseas, more than 90% of its CAFD are sourced either in USD or are hedged against their local currencies (e.g., Euro, or ZAR). Therefore, Atlantica also features limited foreign exchange risks.
Atlantica stepped into fiscal 2022 on a high note, with its latest results exhibiting its assets’ strength and cash flow stability. Adjusted EBITDA came in at $173.6 million in Q1-2022, 4.8% higher year-over-year.
Consequently, cash available for distribution rose 6.3% year-over-year to $54.4 million. On a per-share basis, CAFD increased by 4.0% to $0.48 during the quarter.
The mismatch between the aggregate CAFD and the per-share metric is attributable to an increased number of shares outstanding that were issued by Atlantica to finance the investments and acquisitions that took place over the past four quarters. Nevertheless, with the company recording growth on a per-share basis, it’s clear that these investments were accretive to the bottom line and thus beneficial for stockholders.
Dividend Coverage & Valuation
Due to the predictability of Atlantica’s cash flows, the company has been able to increase its dividend regularly, occasionally more than once per year. That said, all these intra-year dividend hikes have generally been by just a cent.
Atlantica’s most recent dividend hike was once again by a cent, or 1.1%, to a quarterly rate of $0.44. Assuming an annualized CAFD rate close to $2.00 and an annualized dividend rate of $1.76, the company’s payout ratio should be standing close to 88%. While this shouldn’t allow the company to pursue more aggressive dividend hikes, it should indicate that the dividend is relatively well-covered. The dividend is likely to keep growing at a modest pace, in line with the underlying CAFD/share growth.
The company’s CAFD/share should continue to grow over time via accretive acquisitions and the contractually secured rate increases attached to its assets, thus facilitating such humble dividend hikes.
While Atlantica’s dividend growth prospects are rather thin, however, with the stock yielding hovering close to 5.3%, conservative income-oriented investors are likely to be satisfied with the regular and slowly growing payouts.
Still, I am somewhat unsettled with the stock’s valuation. Atlantica is trading close to 10.6 times its forward EV/EBITDA, which is a substantially loftier multiple than its five-year average. Considering its predictable cash flows lack the potential for extraordinary growth prospects, the stock may not be able to sustain the current premium moving forward. Consequently, investors may be subject to valuation contraction risks moving forward, which is something to be wary of.
Wall Street’s Take
Turning to Wall Street, Atlantica Infrastructure has a Hold consensus rating based on one Buy and five Hold ratings assigned in the past three months.
At $36.33, the average Atlantica Infrastructure stock projection implies 11.07% upside potential.
Generally speaking, I see Atlantica Infrastructure as a useful vehicle to get exposure to the rapidly expanding renewable energy industry with limited risks. Its diversified portfolio of high-quality assets and contractual rate hikes should keep producing robust revenues for decades to come. Consequently, investors should also keep enjoying relatively rich and well-covered dividends.
That said, shares are not necessarily cheap, despite the high yield. Further, taking into account that the underlying dividends should constitute the bulk of investor returns moving forward, the stock lacks any extraordinary total return potential.
For this reason, while Atlantica could have a place in some conservative, income-oriented portfolios, its overall investment case could be somewhat underwhelming.
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