Do We Finally Have A "Green Dot" Renewable Energy Stock?

Ever since this site started 4 years ago, I’ve been looking for a renewable energy play that meets the "green dot" criteria: revenue growth, recurring revenue, competitive advantages, and strong management.

There have been a handful of options show up on the Green Screen. They have mostly been solar equipment plays, though, and we went in depth on why these are not the best investment options.

This week a new Green Screen stock in the sector showed up: Enlight Renewable Energy (ENLT).

Enlight is different, because it actually constructs and operates wind and solar plants, earning revenue from the sale of electricity generated from them. That covers one of the big missing pieces from the equipment plays: recurring revenue.

Lack of competitive advantages was another issue, and here too Enlight can claim a better investment profile than solar equipment stocks. More on this later.

Let’s do a deeper dive into the business…

How Enlight Makes Money

Enlight’s basic business is not hard to understand. The company builds and operates renewable energy power plants in the U.S. (which is 57% of capacity), Europe (29%), and Israel (14%). The company is what is referred to as an "independent power producer", or IPP, which means it is not a public utility but owns electricity production capacity. The electricity generated is then sold to utilities for distribution.

80% of revenue comes from power purchase agreements (PPAs) with utilities. In these cases, Enlight has a signed, long-term agreement to sell power at either fixed or variable rates before they even begin construction on a site. The remainder of sales come from the "merchant" model, where there is no standing agreement and power is sold to whoever needs it at the time (at market rates).

53% of its operating or under-construction plants are solar plus battery storage, which mitigates much of the natural fluctuations in solar power generation (due to weather and other natural factors). 29% are wind farms, and the remaining 18% are solar without storage. Most of its focus going forward is in the solar+storage space.

It is also important to note the development side of the business. Enlight does pretty much all of the development work on new plants - identifying and acquiring sites, getting the regulatory paperwork done, sourcing suppliers, building the plants, and hooking them into the electricity grid. As you can imagine, there are HUGE upfront costs involved in this that require several forms of financing. We will touch on this a little more in the "financials" section below.

Growth Potential and Revenue Recurrence

Growth is one aspect of this investment I’m not too concerned about. At present, its operating power plant portfolio has a capacity of 5.4GW of generation and 5.7GWh of storage. Compare that to the capacity of their entire in-development portfolio, which will reach over 20GW of production and 31GWh of storage. That’s nearly 4 times the capacity of current revenue producing assets! This should lead roughly to a 4x increase in revenues as these projects are completed and come on-line.

Enlight has the history to back up this kind of growth, too. The firm went public in Israel in 2010 with just 2MW of production. By the time in went public in 2023 in the U.S., it had close to 5,400MW capacity - a staggering 84% ANNUAL compound growth rate in 13 years! They have a proven track record in scaling the business.

Acquisitions have been a key part of the growth strategy. This is something we usually take a skeptical eye towards, but for asset-heavy businesses like this, acquisition is necessary to grow at any reasonable speed. The big purchase was the 2021 deal for Clenara, which expanded Enlight’s business into the U.S., creating a huge growth opportunity. More recently, Enlight has purchased Aria Energy, a rooftop solar equipment firm, and Electra Power, which is focused on selling solar to households.

Simply put, I expect substantial growth in Enlight’s revenues over the next 5+ years, with relatively high confidence.

As for recurring revenue, well, it’s about as recurring as it gets. Revenue comes from selling electricity to utilities under long-term purchase agreements. It is hard to imagine a scenario where electricity is no longer needed!

Is There A Moat?

One reason I didn’t like solar equipment stocks was because of the massive amount of competition, particularly low-cost competition from overseas, and the constant technological disruption in the industry. Enlight actually BENEFITS from these two dynamics!

To be fair, there is no "slam dunk" moat to point to here. Renewable energy is a competitive space, with a lot of demand from governments and investors drawing in other IPPs, construction firms, and incumbent utilities. If too many renewable plants are built, it is conceivable that the over-supply of electricity could drive down prices, hurting everyone’s revenue in the process. There isn’t much Enlight could do about this risk over the long term.

Nevertheless, I would consider this a "narrow" moat company, for a few reasons. First, the long-term PPA agreements underlying most of its revenue create iron-clad switching costs for utilities, and lock in rates over a reasonably long period of time (10-25 years). Also, as the operator of some of the largest renewable energy projects in its target geographies, Enlight has an opportunity to build out scale that will give it many advantages, including being a provider of choice (for both utilities and government regulators), and securing cost-favorable deals with suppliers.

Management and Financials

The management team looks very strong. Gilad Yavetz is CEO and one of the co-founders of Enlight. He has been at the helm for the company’s impressive rise from nothing into a world-leading renewable energy developer. At only 53, he should have many more years ahead running the firm, if he chooses.

Another co-founder, Amit Paz, is still in a leadership position as VP of Engineering, Contracting, and Procurement. He has decades of proven experience building out large-scale utility projects.

We are looking for proven, competent, preferably founder-led management teams and that’s exactly what we have here. No concerns at all.

From a financial standpoint, Enlight is quite a bit different than our typical company. Because it takes a lot of upfront capital to build power plants, the balance sheet looks far more like a utility than a SaaS software company, with $2.5 billion in various forms of debt and a high 220% debt-to-equity ratio. I’m not too concerned - the firm’s operating profit is covering interest expenses by about 3 times (a safe ratio), and being able to sell electricity is about as sure a thing as there is in business. Cash returns on equity are over 7%, a very good figure for the industry.

Risks

Enlight is not without risks. We would be looking for significant growth out of this one. Growth means building or acquiring new plants, and that is where the uncertainties in the business lie. Will it be able to continue acquiring land, financing, and power purchase agreements at attractive rates? Can it procure the equipment it needs despite supply chain and geopolitical challenges? Will governments phase out investment and production tax credits that make renewable energy an attractive investment? All these questions present potential risks.

I’m also a little concerned about recent acquisitions that are focused outside of the firm’s utility-based expertise. While residential rooftop solar is a growing space, few firms have been able to pull a profit out of it. I’m skeptical Enlight will be able to buck the trend, and in the process may miss opportunities in its core business.

Conclusion

I’ve been looking for an attractive Green Screen stock in the renewable energy space for some time. The industry is just one of the very few that is almost certain to continue growing at rapid rates over the next 10, 20, 30 years and beyond. While it is by no means a perfect stock, and has some business risks we haven’t dealt with in many of our current stock selections, it still meets the "green dot" criteria to make the cut for the Watch List!

Now, what is the stock worth? Given its substantial project backlog and proven ability to execute, I expect Enlight will grow sales by close to 30% annually over the next 5 years. I modeled for 31% free cash flow profitability (in line with current results), and share dilution at 3-4% annually. The discount rate is our standard 10.5%, which is already well above long-term interest rates and any reasonable cost-of-capital calculation. Put it all together and I see the stock worth $15.50 per share. As it trades just slightly above that at present, we will park ENLT in the Watch List and wait for a better price to buy in.