Docstoc

Research Note Etrion Corporation

Document Sample
Research Note Etrion Corporation Powered By Docstoc
					                                                                                                                                 Research Note
                                                                                                                                                                            May 14, 2012




                                                                                                                    Company Profile (C$)
    Etrion Corporation                                                                                              Sector                                      Industrial Products
                                                                                                                    Ticker                                                    ETX‐T
    Q1 Solid Cash Flow – Growth Focused on Northern Chile
                                                                                                                    Stock Rating                                                     Buy
                                                                                                                    Closing Price                                                    $0.43
 Financial Summary (US$)                                                                                            12‐Mth Target                                                    $0.85
                                                                                                                    Potential ROR                                                      98%
                                                                                                                    Shares O/S Bsc (M)                                               205.7
  Paradigm Estimates                                                                                                Shares O/S FD (M)                                                210.8
  (y/e Dec.31)      Revenue(M)                         EPS        EBITDA (M)  EV/EBITDA                P/E          Mkt Cap, Bsc (M)                                                   $88
  FY10                    11.6                       (0.11)             4.3      nmf                   nmf          Mkt Cap, FD (M)                                                    $91
  FY11                    51.9                       (0.14)            28.5     14.5 x                 nmf
                                                                                                                    Cash (M)                                                          $38
  FY12e                   58.8                      (0.06)           45.4     9.1 x                 nmf
                                                                                                                    Net Debt (M)                                                     $363
  FY13e                   88.5                       (0.07)           65.7     6.3 x                 0.0 x
                                                                                                                    Enterprise Value (M)                                             $454
  Consensus Estimates
  FY12e                           60.9               (0.03)               51.5          8.0 x           nmf
  FY13e                           78.2                0.00                60.2          6.9 x           nmf         Company Description
 All figures in US$, unless otherwise noted. 
                                                                                                                    Etrion is a unique company in that it is a
 Source: Company filings, Paradigm Capital Inc., First Call Consensus estimates 
                                                                                                                    producer of only solar-generated electricity.
                                                                                                                    The company’s operations are only in Italy and
Investment  Thesis. Etrion provides Canadian investors with the opportunity to participate in the growth in         it currently has 60MW of production with a
solar-produced electricity through a pure play. The company only operates in Italy, which has one of the            strategy to move towards 150MW in 2013. It
highest Feed In Tariff programs and high electricity costs. The economics of solar in Italy have stalled with FIT   is listed on the TSX and the NASDAQ OMX
                                                                                                                    Stockholm exchanges.        Etrion is well
caps, and the company is pursuing growth in South America through PPA’s to move toward 150MW of solar
                                                                                                                    sponsored by the Lundin family.
capacity over the next few years, which should result in strong EBITDA and thus share price growth.
 
                                                                                                                    Research Team
Event                                                                                                               J. Marvin Wolff, CFA       416.361.3376
Etrion released its Q1/12 financial results, which slightly better than expected.                                                   mwolff@paradigmcap.com

Details 
    Etrion reported Q1 revenue of $11M and an EPS loss of $0.01, versus our estimates                              1-Year Stock Chart
                                                                                                                                 Etrion Corp. (ETX-CA)
     of $9M and a loss of $0.04 — the difference being better solar performance, lower                                 1,600
                                                                                                                                 Volume (Thousands)                           Price (CAD)
                                                                                                                                                                                            0.65
     G&A cost and a tax recovery.                                                                                      1,400                                                                0.6

    Etrion exited 2011 at 60MW of solar capacity. We still expect the company to                                      1,200
                                                                                                                                                                                            0.55

     complete solar park purchases totaling 25MW, with Spain and Italy being the likely                                1,000

                                                                                                                           800
                                                                                                                                                                                            0.5

     site candidates. On a larger scale, the company is now focusing future growth in                                      600
                                                                                                                                                                                            0.45


     South America with PPA’s (power purchase agreements) rather than FITS (feed-in                                        400
                                                                                                                                                                                            0.4

                                                                                                                                                                                            0.35
     tariff programs).                                                                                                     200

                                                                                                                            0                                                               0.3
                                                                                                                                   Nov     Dec        Jan       Feb   Mar      Apr
                                                                                                                                     Volume      Etrion Corp.
                                                                                                                                                                        Source: FactSet Prices
Conclusion 
It now appears that 2012 will be a year of low growth in megawatts for Etrion. It should
                                                                                                                    Estimate Changes (C$)
be able to exit the year with 80MW of output capacity but, more importantly, it will be                                           NEW                                               OLD
the contracts that it can sign during 2012 for 2013 as it focuses on South American PPA’s.                                               FY12e              FY13e      FY12e            FY13e 
While PPA’s receive lower prices that FIT programs, the cost of purchasing solar electricity                        Rev. (M)             58.8↑               88.5           57.7            88.5
capacity has dropped significantly, allowing attractive return opportunities. We are                                EBITDA(M)            45.4↑              65.7↑           38.4            60.7
adjusting our 2012 and 2013 revenue and EPS estimates slightly to reflect lower G&A                                 EPS                   -0.06↑            -0.07↑          -0.12           -0.10
costs. We maintain our 2013 forecast output exit rate of 130MW. We maintain our Buy                                 Source: Paradigm Capital Inc. 
recommendation and $0.85 target, based on 8.5x EV/EBITDA our 2013 estimates.




Paradigm Capital Inc, IIROC/TSX member                                                 1
Our disclosure statements are located at the end of this report
                                                                                                            Research Note


Etrion Repositions Growth toward South America 
With European solar FIT programs capped, Etrion is now focusing its future on PPA’s in
South America. The highlights of the current strategy include:

 South America has plenty of growth opportunities for solar power as the economies
  expand, as there are many off-grid locations requiring power, particularly in the
  resource sector.
 Etrion’s CEO, Marco Northland, worked for several years building telecommunication
  infrastructure networks in Chile and has many contacts in the country.
 The Lundin Group has assets in Northern Chile, which are doubling capacity and could
  together use 12MW of solar capacity.
 While PPA’s receive lower prices than FIT programs, the cost of purchasing solar
  electricity capacity has dropped significantly, allowing attractive return opportunities.
 Countries such as Brazil and Argentina are prospective areas of interest as well.

2012, A Year of Slower Growth, but Positioning for Growth Acceleration 
in 2013–2014  
Figure 1 summarizes Etrion’s solar output growth and shows a resumption of growth from
current levels to 80–85MW in 2012. The Q3/11 growth of 13MW was from projects
completed in Italy with FITS and an 18-year non-recourse bank financing. The 20–25MW
projected growth for 2012 is expected to be from asset purchases. Growth in 2013 is
expected to come from South America, specifically Northern Chile. We have used a
growth assumption of 50MW for 2013, but we expect that opportunities of larger
proportions could ensue.
 
    Figure 1: Etrion Growth Summary


           Etrion Corp. Solar Capacity Growth MW


     140




     120




     100




      80




      60




      40




      20




      0
               H1-2010       H2-2010      H1-2011    H2-2011   H1-2012   H2-2012   H1-2013       H2-2013




    Source: Company filings, Paradigm Capital Inc.




Paradigm Capital Inc, IIROC/TSX member                              2                        May 14, 2012
                                                                                                         Research Note


 
Solid Q1 EBITDA and Cash Flow Generation 
In Q1/12, Etrion generated solid EBITDA of $9M (vs. $5M in Q1/11) and $3M of free cash
flow. While the assets performed well (see below), the G&A and corporate costs were
much lower than in previous quarters. These are expected to remain low and reflect less
travel, lower corporate and professional fees, and fewer employees.

Assets Performed 16% above Corporate Budget 
Etrion’s solar assets in Q1/12 produced 16% more output than originally thought — 12%
due to better solar incidence experienced and 4% due to solid operations and operational
efficiency. While the solar incidence is an uncontrollable variable, the company expects
the operating efficiencies to continue through Q2 and beyond.

Solar panel revenue is greatly influenced by the seasonal variance in solar incidence,
which can be large. In Figure 2, we show the solar incidence for Etrion’s Italian solar parks
by month. On a quarterly basis, this equates to Q1 having 20% higher solar incidence than
Q4, which translates directly into revenue variance.

Figure 2: Etrion Italian Solar Parks Incidence


           Etrion Italian Solar Parks Solar Incidence (expressed as monthly % of yearly total)
    16.0




    14.0




    12.0




    10.0




     8.0




     6.0




     4.0




     2.0




     0.0
             Jan     Feb      Mar        Apr     May   Jun        Jul   Aug     Sep      Oct     Nov   Dec


Source: Company filings, Paradigm Capital Inc.

 
 
 
 
 
 
 
 
 
 

Paradigm Capital Inc, IIROC/TSX member                        3                        May 14, 2012
                                                                                                 Research Note


 
Opportunities in Chile Looking Promising 
In discussions with management, the opportunities in Chile for solar parks are looking
very attractive. Some of the interesting points on this topic include:

         Industrial users in Chile are required to move from 5% renewable energy sources
          in 2012 to 10% in 2020, with a $0.03 charge/kWh for non-compliance.
         A bill is before the Chilean government to boost the target to 20% by 2020.
         Long-term interest rates are 6–7% and contracts are signed in USD with USD debt
          funding available.
         In addition to the PPA rate, there is a $0.02/kWh renewable credit plus a $0.01–
          $0.02/kWh grid administration payment. Consequently, there is $0.03–
          $0.04/kWh in additional revenue for the electricity producer above the PPA

Etrion is focusing on projects in Northern Chile, which have additional attractive elements,
including:

         PPA’s in Northern Chile range between $0.10 and $0.14/kWh
         Solar radiation is 28–30% higher in Northern Chile than it is in Southern Italy due
          to:
              o Higher altitude, therefore less dense air and summer temperatures that
                   seldom exceed 30–35°C.
              o Drier air (the Atacama desert covers most of Northern Chile)
              o Closer proximity to the equator

          This higher incidence is a direct additive to the IRR, as it means that close to 30%
          more electricity can be produced from the same solar panel as in Etrion’s Italian
          projects.


Bottom Line: Northern Chile can provide Etrion with solar projects with a 12–15% target 
levered rate of return. 


Balance Sheet Reflective of Utility Financing 
In Figure 3, we summarize Etrion’s balance sheet. The company currently has a 99% debt-
to-equity ratio and a solid cash position of $38M as of March 31. Interestingly, on March
30, Etrion’s CEO, Marco Northland, converted his 10% direct holding in Solar Resource
Holding Sarl (SRH) into 18M shares of Etrion. This increases Etrion’s shares outstanding to
206M from 188M, and Mr. Northland now owns 9% of Etrion directly, and the Lundin
family, through various trusts, owns 22% of the shares outstanding. We view these two
positions as strong endorsement of Etrion’s future growth.




Paradigm Capital Inc, IIROC/TSX member                   4                        May 14, 2012
                                                                                                    Research Note


    Figure 3: Etrion Debt Summary


    Balance Sheet Net Debt Calcualtion

    Debt $m
                                                      Sept 30th       Dec 30th    Mar. 31

               Non recourse solar bank debt               286.6           328.4       337.2

               Corporate debt (bond issue)                 83.5            78.4        82.8

               Lundin Bridge Loan                          37.8              0              0

               Debt before IFRS adjustments               407.9           406.8       419.9

               VAT Facility                                                26.2        25.8
               Accued Interest                                              3.4         4.6
               Transaction Fees                                           -11.6       -11.7

                                                          407.9           388.8       401.2
               Cash                                          39            39.7        38.2

               Net Debt                                   368.9           349.1        363

               Equity                                      22.9             2.5         2.1

               Debt/Debt+Equity                            94.7            99.2        99.2

    Source: Company filings , Paradigm Capital Inc.



Maintaining 80MW Exit Rate for 2012, 130MW for 2013 
Our forecast capacity, revenue, EBITDA and EPS estimates are shown in Figure 4. We have
improved EBITDA from our prior forecast to reflect better operating efficiencies and lower
G&A costs. Our 80MW exit rate assumes 20MW of purchased capacity this year. Our
130MW exit rate assumes 50MW of new projects in Chile to be on line in 2013.
  
    Figure 4: Forecast Summary

                                  Current                        Prior
    Dec yr. end.           Q2-2012E    2012E       2013E      2012E      2012E
    Exit MW                         60          80        130         80       130
    Rev. US$m                     18.6        58.8       88.5       57.4      88.5
    EBITDA(corp)                  15.2        45.4       65.7       38.4      60.7
    EPS                         $0.00      ($0.06)      -0.07    ($0.12)     -0.10

    Source: Company filings, Paradigm Capital Inc.

 
Valuation 
We are using a valuation of 8.5x EV/EBITDA, based on our 2013 estimates, giving us a one-
year target price of $0.85 (unchanged). We maintain our Buy recommendation, as we
believe that Etrion’s management team has the ability to find and secure solar projects
with attractive economics, which will put the company back on an aggressive growth path
toward 200MW+ annual capacity over the next 2–4 years.




Paradigm Capital Inc, IIROC/TSX member                            5                  May 14, 2012
                                                                                                                       Research Note



 Income Statement


  Etrion Income Statement
                                                     2010         2011       Q1-2012      Q2-2012E    Q3-2012E      Q4-2012E        2012E       2013E
  Period Ending MW                                    47           60          60            60          60            80             80         130
  $000's
  Revenue                                            11,565        51,910       10,738       18,650       18,950        10,500       58,838        88,500
  Op Costs                                            6,502        20,772       5,597        5,850        5,950         7,150        24,547       35,250
  Gross Profit                                        5,063        31,138       5,141       12,800       13,000         3,350        34,291       53,250

  G&A costs                                          19,113        15,143         2473        2650          2775          2915       10,813        14560
  Impairment                                                        9,672
  Other Income                                                      3,187        1,403                                                1,403
  Operating Income                                   (14,050)       9,510        4,071      10,150       10,225            435       24,881       38,690

  Dep and Amort                                       5,990        18,992        5,076       5,105        5,150         5,175        20,506       27,000
  EBITDA (corporate)                                 (8,060)       28,502        9,147      15,255       15,375         5,610        45,387       65,690
  Margin %                                               nmf        54.9%        85.2%       81.8%        81.1%         53.4%         77.1%        74.2%
  Corporate Costs                                    16,496        19,109          645         800          950           975         3,370        6,500
  EBITDA (operating)                                  8,436        47,611        9,792      16,055       16,325         6,585        48,757       72,190
  Margin%                                             72.9%         91.7%        91.2%       86.1%        86.1%         62.7%         82.9%        81.6%

  Finance income                                       5,462        1,805          664         750           825           850        3,089
  Finance costs                                      (10,121)     (32,096)      (7,484)     (7,850)       (8,300)      (10,125)     (33,759)     (45,000)
  Net Finance income (costs)                          (4,659)     (30,291)      (6,820)     (8,173)       (8,374)       (9,275)     (32,642)     (45,000)
  Pre-tax income (loss)                              (18,709)     (20,781)      (2,749)      1,977         1,851        (8,840)      (7,761)      (6,310)

  Income tax                                            (588)       5,508         (448)      1,900         1,850         1,100        4,402        8,750
  %                                                       nmf          nmf          nmf         nmf           nmf           nmf          nmf          nmf
  Net Income(loss)                                   (18,121)     (26,289)      (2,301)         77             1        (9,940)     (12,163)     (15,060)
  EPS                                                 ($0.11)      ($0.14)      ($0.01)      $0.00         $0.00        ($0.05)      ($0.06)      ($0.07)
                                                  158,501,000   184,511,956 205,746,419 205,746,419   205,746,419   205,746,419   205,746,419 205,746,419

 Source: Company filings, Paradigm Capital Inc.




Paradigm Capital Inc, IIROC/TSX member                              6                           May 14, 2012
                                                                                                   Research Note



 Balance Sheet
  Etrion
  Balance Sheet                                     2009          2010      2011      Q1-2012

  Assets
  Non-current assets
  Property, plant and equipment                       855       341,225   364,109       370,680
  Intagnible assets                                 5,631        14,785    13,669        13,945
  Available for sale investments                   10,000        10,401     2,061         2,061
  Derivative financial instruments                    231         1,247
  Deferred income tax assets                                                3,683         3,634
  Trade and other receivables                         753        20,176    24,622        25,431
  Total non-current assets                         17,471       387,833   408,144       415,751


  Current assets
  Trade and other receivables                       1,334        13,359    19,776        21,502
  Cash and cash equivalents                        23,447        45,023    39,656        38,178
  Total curent assets                              24,779        58,383    59,432        59,680

  Total assets                                     42,250       446,216   467,576       415,751


  Equity and liabilities
  Attributable to owners of the Company
  Share capital                                   107,557        16,741    23,293        32,270
  Contributed surplus                              10,341        15,296    15,998        10,012
  Other reserves                                     -375         2,741    -9,429       -11,542
  Accumulated deficit                             -87,889                 -27,300       -29,061
  Total equity                                     29,634        34,777     2,562         2,139

  Liabiilities
  Non-current liabilities
  Borowings                                         1,279       260,868   390,825       400,049
  Derivative financial instruments                                8,830    25,213        26,176
  Deferred tax liabilities                            773         8,762     4,038         3,486
  Provisions and other liabilities                    701         1,285     3,799         5,809
  Total non-current liabilities                     2,753       279,745   425,696       435,520

  Current Liabiliites
  Trade and other payables                          9,062        35,931    12,791         5,349
  Current tax liabilities                              92         1,997     4,165         4,347
  Borrowing                                                      88,090    16,030        19,867
  Derivative fiancial insturments                    710          4,807     5,462         7,339
  Provisions and other liabilities                                  870       870           870
  Total current liabilities                         9,864       131,694    39,318        37,772

  Total liabilities                                12,616       411,439   465,014       473,292

  Total equity and liabilities                     42,250       446,216   467,576       475,431


 Source: Company filings, Paradigm Capital Inc.

 Cash Flow Statement




Paradigm Capital Inc, IIROC/TSX member                      7                       May 14, 2012
                                                                                                            Research Note


  Etrion Corp.
  Statement of Cash Flows                                        2009       2010        2011    Q1-2012

  Cash flow from operating activities
  Loss for the period                                       (58,980)     (18,121)    (26,289)     (2,301)
  Adjustments for:
   Depreciation and amortization                               234         5,990     18,992        5,076
   Impairment of investments                                44,047                    9,672
   Current income tax recovery                                                                      (627)
   Current tax expense                                            92         429       7,257
   Deferred tax income                                                    (1,016)     (1,749)       179
   Disposal of fixed assets                                                   35
   Interest income                                                           (53)      (262)
   Interest expense                                                        4,938     18,707        5,314
   Interest expense (swaps)                                                3,337      6,216        1,477
   FOREX loss                                                                298        391         (198)
   Early redemption fee                                                               3,246
   (Gain)/loss on derivatives                                    416      (4,696)       239          (92)
   Other income (exchange right)                                                                  (1,403)
   Loss on changes in fair value of warrants                                 (11)
   Amortization of transaction costs                            11           531         887         213
   Share-based compensation expense                          1,567         5,644       1,105          79
   Decrease in trade and other receivables                   5,535         4,715     (13,010)       (411)
   (Decrease)/inc. trade & other payables                    6,860        (1,166)    (22,621)     (2,225)
    Income tax paid                                                                   (4,934)
  Total cash flow used in operating activities                   (220)      853       (2,153)      5,081

  Cash flow from investing activities
  Purchase of property plant and equipment                     (478)     (22,495)    (52,665)       (111)
  Purchases of intangible assets                             (1,909)      (2,310)       (750)
  Purchases of investments                                                  (368)
  Acquisition of subsidiearies (net of cash)                 (2,995)     (42,453)
  Acqusition of assets                                                    (9,096)
  Acquisition of non-controling interest                                    (181)
  Dividends received from avaialable for sale investments     1,125
  Total cash flow used in investing activities               (4,257)     (76,904)    (53,415)       (111)

  Cash flow from fiancing activities
  Interest received                                                           53         263
  Interest paid                                                           (4,009)    (18,493)     (4,421)
  Interest paid relating to swaps                                         (3,336)     (6,934)     (1,821)
  Repayment of borrowings                                                (20,501)   (131,307)     (3,538)
  Proceeds from private placement                                         15,051
  Proceeds from borrowings                                   1,257       111,219    207,254        2,242
  Porceeds from the issuance of shares                                       144        560
  Settlement of share-based payments                                        (439)
  Total cash flow from financing activities                  1,257        98,182     51,343       (7,538)

  Net increase/(decrease) in cash and cash equiv.            (3,220)      22,131     (4,225)      (2,568)
  Effect of exchange rate differences                                                (1,143)       1,090
  FOREX differences                                                         (555)    (2,817)
  Cash and cash equivalents beginning of period             26,667        23,448     45,024       39,656

  Cash and cash equivalents at end of period                23,448        45,024     32,656       38,178



 Source: Company filings, Paradigm Capital Inc. 




Paradigm Capital Inc, IIROC/TSX member                       8                           May 14, 2012
                                                                                                                                    Research Note


Disclaimer Section
1.      Paradigm Capital Inc. expects to receive or intends to seek compensation for investment banking services from
        the subject companies in the next 3 months.
2.      Paradigm’s disclosure policies and research distribution procedures can be found on our website at
        www.paradigmcap.com.
3.      Paradigm Capital research is available on First Call, Reuters or at www.paradigmcap.com. Issued by Paradigm
        Capital Inc.

Stock Coverage History
11/17/11 Target lowered ($0.85) FY11-12 EPS lowered
05/11/11 Target price lowered ($1.25)
07/26/10 Initiating target price ($1.85)

Research Rating System
Paradigm Capital uses the following rating recommendation guidelines in its research:

                      # of     % of
Recommendation      Companies B/H/S   What our ratings mean:
Buy                    143      68%   Buy – Expected returns of 20% or more over the next 6 to 12 months.
Buy (Spec)              37      18%   Speculative Buy - Expected returns of 20% or more over the next 6 to 12 months on high-risk development
                                      or "pre-revenue" companies, such as junior mining and early stage biotech companies.
Hold                    24      11%   Hold - Expected returns of +/-20% over the next 6 to 12 months.
Sell                    5       2%    Sell - Expected returns of -20% or more over the next 6 to 12 months.
Total                  209


About Paradigm Capital Inc.
Paradigm Capital is a research-driven, independent, institutional equity investment dealer focused on sectors and companies
that have attractive long-term secular growth prospects. Paradigm Capital’s research is available on our website at
www.paradigmcap.com. Please speak to your Sales or Trading Representative if you require access to the website.

The analyst (and associate) certify that the views expressed in this report accurately reflect their personal views about the
subject securities or issuers. No part of their compensation was, is, or will be, directly or indirectly, related to the specific
recommendations expressed in this research report.

Analysts are compensated through a combined base salary and bonus payout system. The bonus payout is determined by
revenues generated directly or indirectly from various departments including Investment Banking, based on a system that
includes the following criteria: reports generated, timeliness, performance of recommendations, knowledge of industry, quality
of research and investment guidance and client feedback. Analysts are not directly compensated for specific Investment
Banking transactions.

The opinions, estimates and projections contained herein are those of Paradigm Capital Inc. (“PCI”) as of the date hereof and
are subject to change without notice. PCI makes every effort to ensure that the contents herein have been compiled or
derived from sources believed reliable and contain information and opinions, which are accurate and complete. However, PCI
makes no representation or warranty, express or implied, in respect thereof, and takes no responsibility for any errors and
omissions that may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on
this research report or its contents. Information may be available to PCI, which is not reflected herein. This research report is
not to be construed as an offer to sell or solicitation for or an offer to buy any securities. PCI, its affiliates and/or their
respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal
or agent. PCI may act as financial advisor and/or underwriter for certain of the corporations mentioned herein and may
receive remuneration for same. Paradigm Capital Inc. is a member of The Toronto Stock Exchange, The TSX Venture
Exchange and The Investment Industry Regulatory Organization of Canada (IIROC).

Any products or services mentioned on this website are made available only in accordance with local law (including applicable
securities laws) and only where they may be lawfully offered for sale. Paradigm Capital Inc. will not open accounts except in
jurisdictions in which it is registered.

To U.S. Residents: This report was prepared by Paradigm Capital Inc. which is not subject to U.S. rules with regard to the
preparation of research reports and the independence of analysts. Paradigm Capital U.S. Inc., affiliate of PCI, accepts
responsibility for the contents herein, subject to the terms as set out above. Any U.S. person wishing to effect transactions in
any security discussed herein should do so through Paradigm Capital U.S. Inc.




Paradigm Capital Inc, IIROC/TSX member                                  9                                 May 14, 2012

				
DOCUMENT INFO
Categories:
Tags:
Stats:
views:0
posted:5/19/2012
language:
pages:9