Encavis AG (DE:HWAG) continued its growth in H1, with weather-adjusted EBITDA and EBIT up 17% y-o-y. FY19 guidance was increased again, mostly reflecting the positive impact of favourable weather conditions in H1. The company has a strong growth track record (c 35% EBITDA and EBIT CAGR 2018–19) and a large pipeline to drive future earnings progression and dividends growth. It offers a 3% dividend yield in FY19e, with growth prospects.
Low-risk portfolio and large growth pipeline
Encavis acquires ready-to-build, turnkey projects or existing wind and solar parks and operates them over their technical and commercial lifetime. The increasing geographical diversification of the portfolio improves earnings predictability and limits risks, while the focus on assets with fixed and long-term feed-in tariffs or power purchase agreements insulates the portfolio from cyclical wholesale price volatility. As of May 2019, Encavis had a three-year project pipeline of c 950MW, thanks to strategic partnerships in the UK (Solarcentury) and Ireland (Power Capital/Ireland Strategic Investment Fund) and including a 300MW solar PV project in Spain. The execution of this pipeline would boost installed capacity by 50%. The company sees renewable project returns ranging between more than 5% post-tax equity IRR in Germany and more than 8% in Iberia, Italy and the UK.
H1 results confirm strong growth track record
Encavis has experienced strong growth historically, reflecting the increased installed base, driving c 35% EBITDA and EBIT CAGR over the period 2014–18. Growth continued in H119 with EBITDA and EBIT growth of 17% y-o-y, on a weather-adjusted basis. Encavis increased its EBITDA guidance again for FY19 by 4% (it had already been raised at the H1 results), although this was mostly driven by the positive impact of favourable weather conditions in H1. FY19 EBITDA is now expected to be >€218m and EBIT >€132m. We expect consensus earnings estimates, currently lower, to catch up with the new guidance. Net debt/EBITDA of c 6.0x at H119 (based on the company’s FY19 EBITDA target) is slightly higher than renewable peers (c 5x).
Valuation: 3% yield with growth
Based on company targets, we calculate that the stock trades on c 11x FY19e EV/EBITDA, at a small premium to listed renewable and yield stocks (c 10x). The company expects dividends to grow, reflecting the increase in profit and cash flow, with a yield of 3.0% in FY19e (broadly in line with peers) growing to 3.6% in FY21. Consensus estimates for dividends appear to be consistent with company targets.
Business description
Encavis is a European independent power producer from renewable sources with >1.9GW installed capacity. More than 75% of the portfolio is solar, while the rest is from windfarms. Around 90% of the portfolio is based on a feed-in tariff. Encavis operates in 10 European countries. Four German families currently own 36% of the shares, while the free float is 64%.