Massif Capital – Polaris Renewable Energy:  Focused On Doubling EBITDA By 2028

The following segment was excerpted from this fund letter.

Currently, the portfolio has roughly 11% allocated across two utilities, AES and Polaris Renewable Energy. In the case of both equities, we have experienced disappointing 2023 market results, and in the case of AES, it is the long-book’s worst performer YTD, dragging down the overall portfolio by -2.09%. Polaris contributed a positive return of 0.21%. These two positions represent investments in similar assets but very different businesses, which explains much of the divergence in this year’s results.

Polaris Renewable Energy (OTCPK:RAMPF)

Polaris has generated a total return of 5.9% this year, driven entirely by its 8.5% gain in the second quarter. This great second-quarter move is explained primarily by the market’s reaction to the company’s strong first-quarter results. We suspect the move was powered by the year-over-year first-quarter revenue growth, which was 25%, and year-over-year net income growth of 88%.

The revenue growth is the first evidence that the firm’s long-term growth strategy is beginning to pay dividends. When we first invested in Polaris in 2019, we expected, based on discussions with management and assessing the opportunity set of small and mid-size electricity-generating assets in Latin America, that the growth potential for a platform aggregating such assets was robust. Covid threw a wrench into management’s timelines, but we remained patient and believe last year’s burst of activity represented a potential shift in a slow-moving train.

The revenue growth during the first quarter was driven by long-planned expansions of existing assets and growth via acquisitions made last year. The firm’s Nicaraguan Geothermal facility’s expansion started up in December and produced a 10% increase in MWh versus the same quarter last year. In addition, acquisitions of a Dominican solar facility and an Ecuadorian hydroelectric plant last year produced an additional 25,000 MWh of electricity, a 14% contribution relative to the first quarter of 2022.

Polaris continues to pay a dividend of roughly 5.5%, which has been stable since the fourth quarter of 2017. Additionally, the firm has several more capacity additions coming online in the next 24 months, totaling between 60 and 70 MW. This capacity expansion comes with offtake agreements that should increase firm EBITDA by 26%. Management also remains focused on its long-term goal of doubling EBITDA by 2028 to roughly $100 million. The goal is ambitious, but we are comforted by the fact that expansion of existing assets can get the firm 50% of the way to its goal. Currently, its stock is trading at just 4.7x the potential EBITDA arising from the organic EBITDA component of the growth plan.

We remain uncomfortable with Polaris’s interest costs, which have a weighted average of roughly 10% and an operating income coverage ratio of just 2x. At the same time, the debt is all at the project level and thus non-recourse to the company, providing some insulation in various worst-case scenarios. We would like to see Polaris suspend the dividend for a few years and accelerate the debt repayment. While our engagement with them has always been informative and productive, we have no expectation they will take our input on the matter.