Portuguese renewables developer EDPR quietly upstages power giants

Reuters News
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Posted: Oct 28, 2016 10:58 AM

By Geert De Clercq

PARIS (Reuters) - The best performer in Europe's turbulent utilities industry is a little-known Portuguese renewables company whose media-shy chief executive has won the confidence of investors in an unpredictable industry.

EDP Renovaveis SA is a serial wind farm developer, bidding for land, licences and power purchasing agreements, raising finance, buying and installing turbines, connecting them to the grid and selling power to utilities.

Wind power relies on fickle state support, turbine technology changes quickly, local opposition often blocks development and connecting turbines to the grid requires dealing with lots of red tape.

Despite such challenges, EDPR has built a record for reliability, developing a strong relationship with private equity and expanding in North America to become the world's fourth-largest wind player with installed capacity of 9.7 gigawatts.

Analysts say its fast growth has been driven by Chief Executive Joao Manso Neto's focus on costs and financing.

With his long, grey hair and gaunt features, Manso Neto, who has been ranked among Europe's best energy utility CEOs by Institutional Investor magazine for the past two years, cuts a striking figure in a conservative industry.

Jose Ruiz at London-based Macquarie Research said EDPR had won the trust of funds by consistently selling them strong assets and agreeing to sell large stakes of up to 49 percent, holding on to just enough to keep operational control and consolidate the earnings.

"What is quite unique about EDPR, and that is 100 percent the merit of its management, is its capital recycling policy," Ruiz said. Many other wind farm operators tend to keep a larger part of their developments, which is more capital-intensive and limits growth.

CAPITAL RECYCLING

EDPR has partnered with several Canadian infrastructure players such as Axium, Borealis and Northleaf Capital Partners, fueling a rapid expansion in North America, where it has almost half of its installed capacity.

Northleaf infrastructure Vice President Olivier Laganiere, who has spent many years developing ties with EDPR, said the firm is responsive and provides quality reporting its partners.

"EDPR's strong oversight allows us to bid on their projects at our most competitive equity return requirement levels," Laganiere said.

EDPR has also signed major partnership deals with Vortex, the renewable energy investment platform of Egypt's EFG Hermes, one of the Middle East's largest investment banks, and Swiss utility Axpo, each time ceding 49 percent stakes but keeping majority holdings.

Analysts say EDPR's developments earn average returns of 12 percent, at the high end of sector averages. Once they are operational, it typically sells stakes of between 30 and 49 percent to funds, which are happy with returns of between 5 and 6 percent.

Between mid-2012 and the start of 2016, EDPR's share price tripled, while the Dow Jones Europe Utilities index rose around 10 percent, weighed down by German and French utilities' problems with coal and nuclear power stations.

Since then, EDPR's stock has been stuck in neutral gear as investors fret about a possible new tax on renewable energy in Portugal, which accounts for 13 percent of its installed capacity, and the risk to U.S. renewable energy subsidies should Donald Trump win the presidential election next month.

LITTLE MARGIN

EDPR's price-to-earnings ratio, a measure of how much investors expect profit to grow, is more than double that of its peers at 39 times expected earnings, according to Thomson Reuters data, leaving little margin for management error.

But fewer investors are willing to bet on a sudden stock decline than six months ago. Data from Markit shows bearish bets on it have been pared over the past few months, with short-interest in EDPR roughly half the level seen in May.

"The recent correction could be a buying opportunity," said one of the financial analysts with the best recommendation performance history in ThomsonReuters rankings.

The analyst, who declined to be identified, said EDPR is still a buy as it trades below investment cost as measured by enterprise value (market cap plus net debt) per megawatt.

EDPR is valued higher than most power grid operators, which for years have dominated the utilities valuation league, as their mid single-digit returns set by regulators are highly attractive to investors with long-term interest rates close to zero.

EDPR has no grids, but from a financial perspective, it operates much like one, as it sells the electricity it produces at fixed prices under long-term power purchasing agreements. But unlike grids, renewables offer huge growth.

"EDPR is a semi-regulated utility, 90 percent of their revenue is regulated. But they grow faster than the network operators, as there is no limit on the growth of renewables for now," Macquarie's Ruiz said.

With a market value of just under 7 billion euros and with 77.5 percent of its shares owned by parent Energias de Portugal (EDP), EDPR's shares are not very liquid. Yet they have scarcity value.

Spain's Iberdrola, France's EDF and Italy's Enel have all delisted or consolidated their renewable energy units in recent years, leaving EDPR as the only major listed pure-play renewables company in the utilities industry.

"The only way to play to play renewables in Europe is through EDPR," said Gonzalo Sanchez-Bordona of Banco Portugues de Investimento.

(Additional reporting by Arno Schuetze; Editing by Tom Pfeiffer and David Holmes)