Company Overview:  Clearway Energy, Inc. (NYSE: CWEN) invests in renewable energy infrastructure and storage projects with a portfolio of 4,200 net MW of solar and wind generation projects. CWEN segments its business into conventional energy generation (36% operating revenue FY20), renewables energy generation which encompasses solar and wind projects (47% operating revenue FY20) and the thermal & chilled water business (17% operating revenue FY20).

CWEN Details –

Provident Third-Party Acquisitions: Acquiring additional 35% stake in the Agua Caliente Solar Project is expected to add 290 MW project portfolio at a cost of US$202 million corporate capital. The transaction is estimated to contribute five-year average annual asset CAFD of US$20 million at Asset CAFD yield of ~9.9%. Moreover, geographic diversification with the Acquisition of Mt. Storm Wind Project (264 MW), complemented with a 10-year energy hedge, presents leverage to existing 55 MW Pinnacle Repowering project and 110MW Black Rock project in the same region, thus promoting operational efficiency.

Infrastructure Developments to Optimise Capacity: CWEN achieved a consolidated commercialization of 1.3 GW, where Rattlesnake Wind Project, Langford Wind Project and Rosamond Central Solar Project were significant contributors. Construction of Black Rock (110 MW), Pinnacle Repowering (55 MW) and Masquite Sky (345 MW) wind projects are estimated to materialise in FY21, adding to portfolio capacity. In FY20, CWEN contracted 1,281 MW, complemented by 2.25 GW assets.

Historical Financial Trend:

CWEN illustrated a sustainable historical growth while keeping value proposition intact. The Operating revenues have been growing since FY17 with concrete contracts with investment grade customers. Operating revenues shot up from US$1,035 million in FY16 to US$1,199 million in FY20, reflecting a 3.7% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

First Quarter FY21 Performance:

For the aforesaid period, total operating revenues nosedived to US$237 million from US$258 million. Adjusted EBITDA and cash flow from operating activities declined from US$225 million to US$198 million and from US$84 million to US$47 million on PcP basis, respectively. Adjusted EBITDA decline reflects the disclosure of Texas winter event, partially offset by growth investments, and robust renewable production in west coast of the US. Renewables generation sales increased from ~1.68 million MWh to ~2.53 million MWh on PcP basis while thermal energy sales marginally declined to ~624,000 MWh from ~628,000 MWh on PcP basis.

Figure 2: Financial Performance Against Prior Comparative Period

Source: Company Reports, Analysis by Kalkine Group

On a Balance Sheet front (as of 31 March 2021), CWEN exhibits strong funding and liquidity position with cash and cash equivalents amounting to ~US$144 million coupled with economical debt levels. Long-term debt increased from ~US$6,585 million as on 31 December 2020 to ~US$7,463 million as on 31 March 2021.

Full-Year FY20 Performance:

During the aforesaid period, adjusted EBITDA inclined to US$1,082 million from US$963 million in FY19. With improved revenues from energy & capacity and stable cost of fuels, gross margin improved from US$958 million in FY19 to US$1,126 million. Consequently, cash flow from operating activities inclined to US$545 million from US$477 million in FY19. Renewable energy generation sale increased to ~7.46 million MWh from ~6.58 million MWh, while thermal energy sale declined to ~68,000 MWh from ~176,000 MWh levels in FY19.

Top 10 Shareholders: The top 10 shareholders together form ~48.59% of the total shareholding. The Vanguard Group, Inc. and Mellon Investments Corporation holds a maximum stake in the company at ~9.44% and ~7.78%, respectively.

Figure 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics: Consistent growth in sales volume across renewables and thermal has translated into long-term sustainable growth levels. Steady cost of fuels has streamlined gross margins, exhibiting a sustainable growth rate across years. CWEN’s liquidity position has improved while manifesting negative cash cycle days as per industry standards.

Figure 4: Key Financial Metrics

Outlook: CWEN has increased estimates for CAFD per share to ~$1.85 from ~$1.80, primarily driven by optimized balance sheet through refinancing activities and execution of third-party acquisitions. For FY21, CWEN seeks to embark upon DPS growth of 5 – 8% (closer to upper bound). CWEN aims to add value to the California natural gas portfolio by improving fleet’s weighted average contract tenor. By H2FY21, CWEN may position their expansion pipelines with IC queue position application for wind, solar and standalone storage and with preliminary siting campaigns.

Key Risks: Operational breakdowns forms the major source of risks and hence, hindering the revenue streams. Recent fluctuations in energy prices may further assume declining operating revenues, irrespective to increased capacity. Furthermore, changing climate and weather conditions may play a dominant role in energy build-up.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: CWEN has delivered 3-month and 6-month returns of ~+0.377% and ~-16.142%, respectively. The stock is trading below the average of the 52-week high price of $37.23 and the 52-week low price of $22.06, indicating an accumulation opportunity. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a premium compared to its peer average EV/Sales (NTM trading multiple), considering stable operating revenue, refinancing facilities at disposal, and sustainable operating cash flows. For this purpose, we have taken peers such as Nextera Energy Partners LP (NYSE: NEP), Sunnova Energy International Inc (NYSE: NOVA), Brookfield Renewable Corp (NYSE: BEPC), to name a few. Considering the optimized balance sheet, asset portfolio diversification, lucrative third-party acquisitions, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the current market price of $26.65, on 21 June 2021.

CWEN Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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