Altus Should Power Through a Tough Market While Profits Keep Flowing

 

• Altus Power, Inc. (ticker: AMPS) recently reported quarterly results, reaffirming profit guidance

• Shares of Altus, which provides solar energy, still down from highs amid broad market sell off

• Altus faces headwinds that are likely short term: solar module shortages, choppy credit markets

• Altus still has good access to modules, thanks partly to smaller project sizes versus big utilities

• Long-term model remains intact as commercial customers seek to shrink carbon footprints

• Partnerships with CBRE, Blackstone continue to benefit Altus as it gets more large property leads

• Rising energy prices also a strong tailwind for Altus, should allow it to raise costs of solar in tandem

• Community solar (residential that offtakes from commercial) is 11% of portfolio, room to grow

• Altus remains highly profitable, thanks to installed base of modules and largely fixed-rate debt

• Stock looks reasonable at less-than 12x 2023 consensus Ebitda, according to Sentieo

By John Jannarone and Jarrett Banks

Green energy is undoubtedly the future. The challenge for investors: Identifying companies that can manage temporary market challenges and remain financially strong.

One such company that stands out is Altus Power, Inc. (ticker: AMPS), a solar-power provider that recently issued its second quarterly results (first quarter of 2022) as a public company and reaffirmed profit guidance. Altus has a unique model among public companies where it installs solar modules on places such as rooftops without an upfront charge to the customer, then profitably sells the customer power at rates below the utility grid price.

But while the Altus model has many advantages for the long term, there have recently been unexpected challenges – most of which Altus can navigate until they subside over time. Savvy investors who understand the short-term dynamic may discover an opportunity in Altus shares, which are down about 30% so far this year.

One obvious challenge that has impacted many companies is the rising cost of debt. With the 10-year yield effectively tripling from 1% to 3% in a period of months, negotiations have taken longer than usual on Altus’s asset backed debt used to fund new projects. But that volatility should ease soon and it’s worth noting that Co-CEOs Gregg Felton and Lars Norell have extensive fixed-income backgrounds from senior roles at top-tier Wall Street investment banks.

Second, there has been a bottleneck in the supply of solar modules, many of which come from Southeast Asia. The U.S. government is reviewing whether certain market participants circumvented rules by selling China-sourced modules through other countries like Vietnam. That has created a delay in deliveries that could last for months.

But Altus is positioned to manage the supply-chain trouble better than most. The company said on its quarterly investor call that it has adequate supplies secured to last through early 2023. And compared with major utilities that need massive amounts of modules, Altus has relatively modest needs. It also has better margins than those utilities because it sells power on a retail basis, giving it room to absorb some costs if needed.

Altus also should have room to pass costs onto consumers thanks to surging utility rates. With natural gas prices skyrocketing, traditional grid power prices likely will continue to increase in months ahead. That’s good news for Altus because 60% of its current portfolio is variable rate and all of its power is cheaper than the grid. In turn, it can ratchet prices higher but still offer customers advantageous terms.

It’s also important to remember that Altus has a steady flow of new potential customers thanks to its partnerships with Blackstone and CBRE. Blackstone was an early investor in the company and CBRE is tied to the SPAC that took Altus public. The combined partners have ties to billions of square feet of real estate and all indications suggest the partnership is working out as planned – or even better. On the recent investor call, Altus said it’s now offering solutions to more and larger prospective customers than it did before going public.

What’s more, sustainability is becoming a concern for more commercial and industrial property owners. Deals with big partners such as Dallas-based developer Trammell Crow Co., which will cover 35 million square feet of industrial space, provide a chance for Altus to scale quickly and establish a significant presence in key markets where more business may follow.

Altus will install solar panels on Trammell properties and make further investments in battery-storage capacity, electric-vehicle charging stations and other environmentally friendly technologies.  By 2026, Altus expects to install 300 megawatts of solar-generating capacity at industrial properties being developed by Trammell.

Trammell will collect rent from Altus for housing its solar panels, which will be installed on the roofs of industrial properties in 19 markets. The project will help Trammell reduce its reliance on the power grid and help the landlord attract tenants and investors who increasingly want buildings with low carbon footprints.

Deals such as the Trammell agreement create an additional marketing effect. Altus said on its investor call that it’s seeing signs of growing brand recognition as prospective customers have seen public announcements and contacted the company directly.

Another important growth area is community solar. There are plenty of customers, over 5,000, who live in residential areas and purchase solar power from Altus that’s generated on solar panels in locations such as Trammell’s commercial properties. That power is then sent to residential customers – both in single and multifamily homes. The power is cheaper than a solar panel installed on a house and of course many multifamily units don’t have sufficient room for their own panels.

Community solar also has social benefits that should appeal to ESG-focused investors. In some cases, Altus sends power to affordable housing in underserved communities, mollifying inflationary strains on budget-conscious families.

Right now, about 11% of Altus’s power is directed to community solar but that could increase quickly. Governments in eight of the 18 states in the Altus footprint allow the practice and the remaining 10 could soon give the green light, creating much more demand for Altus to meet.

Even before considering new projects, Altus is a cash-generating machine. The existing portfolio is funded with fixed rate debt and continues to generate healthy Ebitda – as the company has done since 2017. That means investors can look forward to continued positive cash flow even if the current delays drag on for a while.

Thanks to Altus’s profitable operating model, its balance sheet has remained strong. Net debt is roughly flat from the end of the fourth quarter and unrestricted cash stands at a healthy $318.2 million.

Investors keen to invest in Altus can do so now at a reasonable price. The shares trade at an implied enterprise value of 11.9 times 2023 consensus Ebitda, according to Sentieo, an AI-enabled research platform.

The green energy sector has seen many companies go public recently with high hopes to capitalize on the systemic shift in how we power our homes, drive cars and more. But many of them are also burning cash with no obvious ways to replenish it. While there may be some challenges left to overcome, Altus has plenty of fuel to make its vision a reality.

 

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