EAM - EAM Solar

[klarmanite]

Looks like EAM yields from 12-15.8% this year:

 

From the Q1 report released today:

 

Dividends

Based on the Company by-laws, recent change in

Norwegian company law, and the decision made by the

Company’s extraordinary general meeting the 17th of

December 2013, the Board of Directors in EAM will

distribute dividends on a quarterly basis in 2014. 

 

 

EAM Solar will distribute a dividend of EUR 0,36 per

share (NOK 3) in conjunction with the 1st quarter report.

The dividend will be distributed to shareholders in week

20. Share will trade ex. dividend from Monday 12th of

May.

 

Based on the closing of the P31 Portfolio acquisition, EAM

expects to pay dividends following each quarterly report

in 2014. The dividend payments in 2014 in addition to the

1st quarter dividend will be in the range EUR 0,84 to 1,2

per share (NOK 7 to 10).

[klarmanite]

Having recently met with management I thought it would be informative to post an update. The P31 transaction will be closed this quarter, most likely. The future growth pipeline is looking better than I thought, I think they'll do at least one or two more deals that are larger than the current P31 deal over the next few years. These will have to be funded with new equity and debt since all fcfe is paid out as dividends. Management pledged not to issue stock again until yield pricing is below 10% (implies a stock price of 100-130 since dividends should be 10-13 NOK/share. The first dividend is payed next week (3 NOK).

 

So now you have a stock yielding 12-16% per year of which 85% of revenues are from govt contracts, with opportunites to grow their asset base through accretive deals. If their size increases, there is more room to cut costs and run more efficiently as well as issue bonds and refi on better terms that way, which means fcfe could be even higher.

 

I stand by my bullish call on EAM.

[klarmanite]

EAM has experienced lots of problems in the last few months. I think a short update is in order. What has basically happened is that the seller of the P31 portfolio has been accused of document fraud. As a consequence, the tariffs paid by GSE have been suspended. As a result, the stock of EAM is down over 20%. EAM is defined as a victim in the case, which is currently only an investigation run out of the DA's office in Milano. The seller claims to be innocent, and so far, EAM has not been able to establish guilt. What will happen next is that EAM will have its filing for reinstatement of the tariffs processed in Italian court in early december. If the outcome is positive, EAM will get back payments of tariffs that have been held back and will be back on track. If they do not, the future is more unclear. Current cash flow needs are met with operating cash flow from the plants that are not affected and transfers from the seller, with which EAM has a stand-still agreemnt in place with for now (they are holding off on taking legal action until guilt is established/more likely).

 

The outcome of this process is unclear at the moment. The risk is that this mess results in a long, drawn out legal battle between EAM and the seller.

[klarmanite]

EAM has now finally gotten court dates for treatment of their complaint against the GSE which is holding back their subsidies. The interesting thing is that the burden of proof is on GSE now: they must show that holding back the subsidy was justified. Which I don't think they can. However, they may cut it completely which starts new proceedings apparently. I don't know if that's better or worse.

 

Also and more importantly, a fraud case is being built against the seller by the D.A. in milan who will hold a hearing on the matter in june (we'll see if they indict the seller finally). EAM is reviewing the D.A.'s evidence now to see if they will take civil legal action.

 

Anyway, this story is still terrible with great uncertainty, but I expect it will ultimately be resolved since EAM is now formally defined as a victim of contractual fraud by the D.A. This should help if further legal action is taken against the seller. If the seller is convicted of fraud by an Italian criminal court, there's no way EAM will lose a civil suit. I thus expect them to settle with the seller at some point, but I have no idea when.

 

 

[awindenberger]

Is there any dividend being currently paid? Or are the GSE subsidies being held back affecting a large enough portion of their portfolio?

[klarmanite]

No. I would refer you to the annual report for 2014 and the Q1 report for details on the withheld subsidies and what plants are affected.

[klarmanite]

Unfortunately no more clarity yet on important issues here.

 

I would mention though that Capital Stage, which is a German listed solar and wind park operator just bought nine Italian parks with a total capacity of 29.1 MW. In terms of pricing,the EV was EUR100m implying EUR3.44/MW in EV value. The average feed-in tariff for these parks are EUR0.284/Kwh. Since EAM Solar operates 27 MW in Italy at an average feed-in tariff rate of EUR0.31/kwh we can assume it would be valued higher, were it not for the current issues affecting the company. Not making this adjustment, EAM Parks should be valued at a EV of EUR92.8m based on this transaction comp, which implies a share price > 83 NOK. (The current EV is about EUR63m).

 

So basically, there's 250% + upside here if the fraud / tariff issues are solved. I still believe they will be, hopefully by the end of the year.

[Pelagic]

Unfortunately no more clarity yet on important issues here.

 

I would mention though that Capital Stage, which is a German listed solar and wind park operator just bought nine Italian parks with a total capacity of 29.1 MW. In terms of pricing,the EV was EUR100m implying EUR3.44/MW in EV value. The average feed-in tariff for these parks are EUR0.284/Kwh. Since EAM Solar operates 27 MW in Italy at an average feed-in tariff rate of EUR0.31/kwh we can assume it would be valued higher, were it not for the current issues affecting the company. Not making this adjustment, EAM Parks should be valued at a EV of EUR92.8m based on this transaction comp, which implies a share price > 83 NOK. (The current EV is about EUR63m).

 

So basically, there's 250% + upside here if the fraud / tariff issues are solved. I still believe they will be, hopefully by the end of the year.

 

Thanks for keeping this updated, it's an interesting situation they're in now. Would you mind expanding a little on what you see as the worst case scenario should the fraud/tariff issues not get resolved? I'm just trying to get a sense of what kind of margin of safety today's price offers since it looks cheap compared to the other transaction you cited.

[klarmanite]

Hi

 

I'm a little pressed for time right now but will try to give you an adequate answer (not sure I can) next week.