Let's get to know the fallen star of the Warsaw Stock Exchange.
Some time ago, I came across an article with a headline saying how badly things are going in the Polish photovoltaic industry. Not too long ago, darlings of the market, where a rocket emoji was added to practically every company's name, are now hated companies. Some of them are diversifying their operations, focusing on large-scale energy storage projects. Columbus Energy reporting decreased revenues and a net loss in the first half of 2023. Other PV companies, including ML System and Grodno, also face challenges. The PV market for individual consumers has slowed, with over 90% of firms leaving or transitioning. Experts suggest the market is stabilizing after a boom in 2020-21, emphasizing the importance of steady development and integration with other technologies.
So I looked at the list of companies operating in the PV industry and started searching for good investment opportunities. That's when I began analyzing Novavis Group.
Novavis Group is a developer of large-scale photovoltaic projects in Poland. Their core business involves finding suitable land, securing all the necessary permits and approvals to construct solar farms that are over 10-20MW in size, and then packaging the "ready-to-build" projects to sell to investors/industry players who will handle the actual construction.
Novavis Group has an asset-light business model:
Land Leases: They lease land for projects rather than owning it. Lease expenses are fixed with periodic inflator-based escalation.
Limited Inventory: Solar components are procured by the investor building the project after Novavis sells the ready-to-build package. So inventory is minimal.
Outsourced Construction: Novavis focuses on project development and design. Actual project construction after sale is handled by the buying investor. So no CAPEX or construction risk are involved.
Pre-Funding: The agreement with Iberdrola provides upfront funding for project development, reducing need for substantial debt or equity investments by Novavis.
Operating Projects: Novavis transfers ownership rights after sale of ready-to-build packages. So very few operating assets on balance sheet.
The company aims to take most of the current pipeline to ready-to-build stage in 2024 - indicating revenue visibility. I won't go into more detail here for long, as fortunately, there is a comprehensive analytical report issued by Erste Group with a target price for Novavis Group at PLN 3.89. The report also includes an analysis of the PV sector in Poland. Anyone interested in the topic should read it.
Polish solar PV market expected to grow rapidly from 13GW now to 27GW by 2025, implying massive headroom for new projects. The current pace of additions makes Poland one of Europe's fastest growing solar markets, attracting many international investors and developers. Here is example of what large industry companies in Poland are planning:
Grupa Azoty has announced plans to construct the largest photovoltaic farm in Poland, named Solarfarm. The project aims to generate a capacity of 270-300 MWp. Currently awaiting approval from the general assembly, the company intends to sign a preliminary agreement to acquire 100% ownership in the project by mid-December. Despite financial challenges reported in the third quarter of 2023, Grupa Azoty emphasizes its commitment to the Solarfarm project and continues to explore renewable energy investments. The company's goal is to achieve a total renewable energy capacity of 380 MW by 2030, contributing to a 40% share of renewables in electricity production and avoiding an annual energy purchase cost exceeding PLN 200 million. (09Nov2023)
NVG acknowledges that Iberdrola represents about 85-90% of Novavis' revenues, through the solar project development contract. However, they position this as a strategic partnership with one of Europe's leading renewable energy majors who are taking a long term view on the Polish solar energy market. The agreement runs through 2027 with options to extend. Novavis sees strong demand from international solar companies looking to enter/expand in Poland but lacking local execution capabilities. Even if any unforeseen issues emerge with Iberdrola, management expressed confidence that their strong industry relationships and execution track record can help substitute revenues.
A highly interesting situation unfolded in the shareholders' structure in late summer 2023. In block transactions, the ownership of 3,188.832 shares, approximately 9,1% of the total, changed hands. Who acquired these shares? The CEO of Novavis revealed the mystery.
He claims that the buyers were financial institutions/funds. Furthermore, he wouldn't be surprised if there is soon a new disclosure in the shareholding structure exceeding the 5% threshold. The CEO himself participated in the mentioned block transactions, acquiring 50,000 shares at a price of 2.40. If I were to speculate, any potential increase in ownership by the mentioned financial institutions would likely occur with increased liquidity: upon announcing very good financial results for Q4-23 or earlier when providing pre-sales results or announcing the fulfillment of further milestones in cooperation with Iberdrola.
Overall, I think the situation is very interesting:
On the horizon, there is a significant cash flow with forecasted FCF yield for '24-'25 exceeding 30% and a DY in the double digits.
Business stability is practically already ensured for the next two years.
Concerning dividends, Novavis Group S.A. outlines its dividend policy for the years 2023, 2024, and 2025, aiming to contribute to the growth of shareholder value. The company plans to ensure shareholders participate in the net profit generated by the company. The dividend policy is based on strong financial results in the Q4-22 and Q1-23, along with positive outlooks for upcoming quarters. The key elements of the company's strategy for stable stock value growth include expanding land banks for photovoltaic and energy storage projects, increasing engineering and project teams, collaborating with strategic investors in renewable energy projects, venturing into new energy market segments, particularly hydrogen technologies, and ensuring effective financial management.
The recommendation for dividend payouts, spanning 2024-2026, will aim for at least 50% of the net profit from the previous fiscal year. The described policy is applicable for the fiscal years 2023, 2024, and 2025.
The management expects Q4 2023 to be the best quarter ever so far in terms of financial performance. Their revenues are linked to achievement of project development milestones which have longer turnaround times. Delays in some of these spill over to Q4 2023 as approvals come through. There is also expectation of securing grid connection agreements for some key large projects (70+ MW) by end of 2023.
At the end of 2023, Erste expects revenues to reach 41.6 million PLN and a net profit of 15.1 million PLN. Assuming a 50% payout ratio, this would result in a dividend yield of 10.17% today.
Does the Mr. Market see this? I don't think so. The hype for the industry has currently diminished. The company is not discovered yet.
What can also help bring bullish sentiment back to this sector? Well, in the parliamentary elections last autumn, a radical, pro-European left won, strongly supporting green transformation. I expect that new legislation supporting the industry will be introduced very quickly.