Company Overview: Ormat Technologies, Inc. (NYSE: ORA) is engaged in electricity generation using geothermal energy, solar PV, and recovered energy-based power plants in the US. The company operates in three segments – electricity generation, products sales, and energy storage. Under the Electricity segment (77% of FY20 revenues), ORA operates power plants with an aggregate capacity of 932 MW, with geothermal comprising ~94%.  In the Product segment (21% of revenue), ORA provides Engineering, Procurement and Construction (EPC) of power plants with sizeable revenues generated from outside the US. In Energy Storage (2% of revenue), ORA provides both products and related services, including Operations and Maintenance (O&M) of energy storage assets. This segment predominantly caters to the US market. Overall, Ormat Technologies generated ~63% of revenues from the US and 37% from Rest of the World.

ORA Details

Vertically Integrated Operations: ORA is a renewable energy player with vertically integrated lines of business. The company has over 1,000 MW of energy portfolio in geothermal, storage, solar PV and recovered energy generation (REG) plants. Its Electricity segment operated through long-term Power Purchase Agreements (PPAs) with customers in utilities and municipal governments. The PPA has a remaining weighted average life of over 16 years as of December 2020. Globally, the installed capacity of geothermal power plants stood at 13.5 GW. Ormat claims to be the second-largest geothermal owner and operator, as mentioned in the Investor Presentation for FY20.

 Figure 1. Well-Integrated Lines of Business:

Source: Company Reports

ORA manufacture components for its own power plants under the Product segment. Over the past several years, the company builds ~190 power plants and installs about 3,200 MW of geothermal and REG power plants. In the Energy Storage segment, ORA has installed a capacity of 83 MW with operations in California, Texas, Vermont, New Jersey. The company plans to expand to New York and PJM markets going forward. It had released 27 MW for construction in the New Jersey market, which is expected to hit commercial operation in H1 FY22.

Figure 2. 83 MW of Energy Storage Assets:

Source: Company Reports

2023 Growth Strategies: ORA plans to achieve 50% growth in installed capacity to reach 1,455-1,575 MW of operating assets by 2023. In geothermal and solar energy, the company intends to add 250-270 MW of capacity. On project pipelines, ORA has over ten geothermal projects with 143-148 MW of capacity under development, with long-term PPAs. For solar, it has over four projects and a 40 MW AC capacity. In energy storage, ORA has a potential capacity of over 2 GW with 40 named prospects. It aims to add 200-300 MW of capacity by 2023. On projects, the company has four projects under development with 57 MW of capacity, with a commencement date between 2021 and 2022.

 Figure 3. ORA Expansion Plans by 2023:

Source: Company Reports

Historical Financial Trend:

ORA has been adding capacities in geothermal and solar energy aided by adequate land positions across 31 prospects in the US and ten prospects in Ethiopia, Guatemala, Honduras, Indonesia, and New Zealand. It also progressed to achieve a diversified customer base with municipal governments and commercial & industrial users. It seamlessly integrates its operations to provide EPC, O&M and to the extent of financing the energy storage systems. The company’s ~99% of Electricity segment revenues were from fixed-price PPA contracts, which are not affected by variability in energy commodity prices.

Figure 4. 5-Year Financial Performance Trend:

Source: Company Reports

Quarterly Performance:

The company’s Product segment underperformed with a $9.9 million reductions in gross margin. Resumption of operations of Pune operations and new capacity from the Steamboat Complex helped to post a 1.5% growth in revenue from the Electricity segment. The energy Storage segment posted a robust growth aided by power crisis during February in Texas, which had spurt demand for storage systems. ORA’s 10 WM Vallecito Battery Energy Storage System began commercial operation. Shut down of Ormat’s product segment negatively affected operating income. There was a $14.5 million one-off expenses towards mark-to-mark losses, hedging losses, and provisions related to the Power Crisis.

Figure 5. Q1 FY21 Performance:

Source: Company Reports

On the balance sheet, ORA had a cash and bank balance of $376.6 million as of March 2020. Out of the total sanctioned credit limit of $623 million, it had $182.5 million outstanding under various facilities. The company has various restrictive convents against its borrowing facilities. Nevertheless, ORA remains compliant. Together with restricted cash and available credit lines, the company has liquidity of over $900 million, which is adequate to fund nearing debt obligations.

Full-year FY20 Performance:

Delay in third-party projects owing to the pandemic dragged the Product segment revenues in FY20. Electricity revenues were benefited by an increase in the average energy rate per MW ($89.6 in FY20 vs. $86.6 in pcp). The company posted a 6.9% growth in adjusted EBITDA to reach $109.2 million, mainly led by insurance income of $20.7 million towards recoveries related to the Puna power plant. It had raised $340 million through equity issuance, which was utilized to fund the acquisition of shovel-ready projects in energy storage that had increased the capacity to 73 MW in FY20. During the year, ORA restarted its Puna geothermal plant after Kilauea volcanic disruptions occurred two and a half years before. The commencement of operations of the Puna plant was completed during the Q1 FY21 with an additional geothermal capacity of 20 MW.

Figure 6. FY20 Financial Summary:

Source: Company Reports           

Top 10 Shareholders: The top 10 shareholders together form ~56.28% of the total shareholding. Orix Corp and BlackRock Institutional Trust Company, N.A. hold a maximum stake in the company at 19.63% and 10.05%, respectively.

Figure 7. Top 10 Shareholders

Key Metrics: Consistent capacity addition, tariff rate pass-through and fixed-cost PPAs helped to post steady revenues over the past five years. The company’s margin profile has been growing at a stable pace driven by an integrated business model and renowned customer base (with investment-grade credit ratings). Issuance of common stock totalling ~$339.5 million lifted the current ratio in FY20.

Figure 8. Key Financial Metrics

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: ORA has a backlog of $37.2 million in its Product segment. The company is expecting capital requirements of $360 million for the rest of 2021. It plans to ramp up capacity in battery storage to 2GW by 2023. Revenue is projected between $645 million and $680 million for FY21, with electricity revenues in the range of $570-580 million, product revenues of $50-70 million, and storage revenues of $25-30 million. Adjusted EBITDA is projected in the range of $400-410 million.

Key Risks: ORA has a high customer concentration, with the top three customers accounted for ~54.5% of FY20 revenues. The company is dependent on geothermal energy for electricity generation. The risk of landslides, flood, storm, and other natural catastrophes may cause disruption to the operations of the power plant. Ageing of power plants and maintenance may drain profitability. The company hedges the wholesale energy prices through commodity derivative contracts. It had incurred losses in the past on such hedging activity.

Valuation Methodology: EV to Sales Multiple Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: ORA has delivered 3-month and 6-month negative returns of ~44.04% and ~19.80%, respectively. The stock is trading below the average of the 52-week high price of $128.87 and 52-week low price of $53.44, indicating an accumulation opportunity. We have valued the stock using EV to Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a slight premium compared to its peer median EV/Sales (NTM Trading multiple), considering its backlogs, ongoing projects, and energy storage commitment for 2023. For this purpose, we have taken peers such as Clearway Energy Inc. (NYSE: CWEN), Nextera Energy Partners LP (NYSE: NEP), Sunnova Energy International Inc. (NYSE: NOVA), to name a few. Considering the capacity addition plans, consistent EBITDA generation, strong ROE over peers, and adequate financing flexibility, we give a “Buy” recommendation on the stock at the current market price of US $65.97, up ~0.96% on May 18, 2021.

Technical Overview

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.