Sunday, March 1, 2020

A Current AIM Small Cap Equity Holding: Ormat Technologies (ORA, $86.37): “Puna Plant Plague is Nearly Over”

Ormat Technologies (ORA, $86.37): “Puna Plant Plague is Nearly Over”
By: Tyler Bomba, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Ormat Technologies, Inc. (NYSE: ORA) is a renewable energy provider that owns and operates geothermal power plants and engages in recovered energy generation (REG).  Revenue is derived primarily from the U.S. (45.7% of 2018 revenue), with Africa and the Middle East accounting for 40.7% of 2018 revenue.

• ORA operations of the Puna Plant in Hawaii are still recovering after the eruption of Mt. Kīlauea in May of 2018, with full restoration of the plant expected very soon.

• Ormat recently announced that an amended power purchase agreement (PPA) had been reached with Hawaii Electric Light.

• Management acknowledges the impact some of the older plants are having on output and margins and has plans to update most of their power plants with their new advanced technology.

• Ormat Technologies is on pace to add 120-135 megawatts by the end of 2021.

Key points: 
Ormat Technologies has seen success, even with the impact of the volcano eruption in 2018. Revenues have been increasing due to expanding power generation. In 3Q19, production was increased by 4.9% to 1.4 million megawatt hours. This is due to expansion projects, like McGinness Hills Phase 3 and Tungsten Hill. In addition, ORA has focused on increasing margins, raising overall margins to 32.5% compared to 29.3 in the same quarter last year.

The company is nearing the end of the repairs to the Puna Plant. Reconstruction efforts are expected to be complete soon with the ability to deliver energy from the plant via temporary lines. By the beginning of 2Q20, the firm expects the plant to be completely operational, bringing back the income lost to Mother Nature.

On January 6, 2020, ORA announced that it reached an amended PPA with Hawaii Electric Light. This new agreement, subject to PUC approval, will expand the contracted capacity by 21%. That expansion will bring the total capacity to 46MW. The contract also extends the term by 25 years. The current PPA remains in place until the expansion is complete, expected 1H22.

Management has estimated an approximate $17 million in capital expenditures for the purposes of maintaining current operational plants in the final quarter of 2019. This is about 31% of all capital expenditures for the quarter and shows management’s acknowledgment of the need to maintain and improve the power plants.

What has the stock done lately?
Recently, the stock price has been driven up from the PPU with Hawaii Electric Light. On January 13, 2020, ORA announced that a 10-year PPA with Silicon Valley Clean Energy and Monterey Bay Community for the CD4 plant. Both of these events have had positive effects on the stock. Since the initial announcement on January 3, the price is up over 16%.

Past Year Performance: 
Over the past year, ORA has increased to $86.37, representing over a 49% return for the past year.  With all of the bad news coming form the Puna Plant shut down, the stock has finally made a rebound. The stock is currently trading at a forward price to earnings of 37.5x, which is high. However, the market has been reacting positively to all of the news from the company in the last year.

Source: FactSet

My Takeaway:
Ormat Technologies, Inc. is finally recovering from the damages of the Mt. Kīlauea explosion. The plant is on plan to open soon and with the new PPA from Hawaii Electric Light, ORA should continue to see revenues increasing. Ormat Technologies is also increasing capacity, further contributing to growth. In addition to top line growth, margins have been expanding, with Management guidance suggesting that trend to continue. Ormat Technologies is well positioning to see further stock price appreciation and should stay in the AIM Small Cap fund for the foreseeable future.

Source: FactSet