Etrion (TSX:ETX) is an independent power producer that develops, builds, owns and operates utility-scale power generation plants. The company currently has four solar projects in operation with a net installed capacity of 57 megawatt (MW) and a 45 MW solar park under construction in Japan. It also has a project with an estimated capacity of 60 MW and several projects under evaluation, which may become part of the company’s backlog pipeline in the years to come.
The company has a price to earnings ratio of 6.35, price to book ratio of 5.33 and market capitalization of $133 million. Debt is high at Etrion as evidenced by a debt to equity ratio of 1.61. The company has skewed performance metrics with an operating margin of (6.27)% and a return on equity of 143.70%.
Unique Japanese exposure
In Japan, all the company’s revenues are derived from 20-year fixed-priced contracts with local utilities, also referred to as purchase power agreements (PPAs). Etrion’s strategy is focused on operating in a low-risk jurisdiction and achieving revenue stability. The company is focused on developing and expanding business in Japan since the Japanese market presents a low-risk environment with attractive economics. Management has determined that Japan provides an ideal investment environment to enter and eventually exit if desired.
Japan has implemented a program that offers 20-year fixed-price PPAs for all energy produced by solar generators. Such a PPA structure provides ideal conditions for Etrion to secure low-cost financing, predictable revenues and cash flows.
Japan is among the top three largest energy consumers in the world. A material percentage of the country’s capacity is imported making it an ideal environment for alternative sources of energy. Renewable energy is an important source of diversification for the Japanese government which has adopted recent policies supporting additional growth.
Superior business model
Etrion’s business model focuses on long-term contracts with stable revenues in low-risk jurisdictions. The company forms strategic partnerships to lower equipment cost and operating expenses. Deals are structured with low cost of debt and long term project financing in an attractive liquid market. Etrion has grown the company’s renewable energy business significantly through co-development partnerships and internal development of several solar power projects located in Japan.
The company’s stock is listed Sweden to provide marketability. Etrion has corporate bonds listed in Germany and Norway.
Bright future outlook
Etrion’s future growth is dependent on the development and acquisition of additional renewable energy projects under long-term contracts in Japan. The company is currently dependent on the continued performance of the power purchase agreements signed with utilities by Project Mito, Project Shizukuishi, Project Misawa and Project Komatsu.
The future growth of Etrion is dependent on the company’s ability to complete the construction of the 45MW Project Niigata and the development of all backlog projects. The company’s anticipated growth and development activities will also depend on Etrion’s ability to secure additional financing through corporate debt and equity financing, vendor financing or non-recourse project loans.
If Etrion manages to secure new projects or obtain the required financing when needed, the stock price could easily triple from current prices.
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