Company Overview: Ormat Technologies, Inc. (NYSE: ORA) operates as an electricity generation company using geothermal and recovered waste energy. With solar photovoltaic (PV) and energy storage systems, ORA provides hybrid electricity generation. Besides, the company also sells products and equipment for power generation such as turbo-generators, etc., and provides engineering, procurement and construction (EPC) services. Out of a total of 932 MW of generation capacity, the company had 647 MW operated in the US. Its 73 MW energy storage capacity spread across California, Texas, New Jersey, and Vermont.  

ORA Details

Solid Position in Geothermal Generation: Ormat Technologies is the largest geothermal operator with an aggregate global capacity of 932 MW operated in 25 geothermal, recovered energy generation (REG), and solar sites as of December 2020. Geothermal comprises nearly 94% of generation capacity. Its geothermal and REG plants were operated at a capacity factor of 87% and 59%, respectively in FY20, far higher than the capacity factor of wind and solar energy assets implying the strength of geothermal in renewable energy.

Figure 1. Global Share and Electricity Generation Capacity of ORA:

Source: Company Reports

Strong Pipeline in Energy Storage: ORA provides energy storage systems and services catered to the US market. The company’s 10 MW Vallecito project in Southern California is in the final commissioning stage. Its 5 MW Tierra Buena project in Northern California to reach commercialization by 2021-end. In addition, the company is expecting two more projects with a combined capacity of 27 MW to reach commercial operation by 2022. Further, it plans to begin construction for a 25 MW battery energy storage project before the end of 2021.

Ormat Technologies has 33 named prospects with a combined capacity of 1.2 GW pipeline projects lined-up which are expected to add a capacity of 200-300 MW by 2023-end. The company is well-positioned to benefit from the rapidly growing demand for energy storage systems in the US.

Figure 2. With 1.2 GW Pipeline Projects, ORA is Well-Placed in The Energy Storage Systems:

Source: Company Reports

Geothermal and Solar Projects: ORA plans to widen global reach for geothermal and solar projects. With higher coal & gas-fired plants and lower penetration of renewables, the management is targeting to accelerate growth in the Indonesian market. The company has various projects in different stages of development as of December 2020 with an aggregate capacity between 98 MW and 108 MW. ORA is targeting geothermal and solar capacity to reach between 1,182 MW to 1,202 MW by 2023. The company has substantial land positions across 31 prospects in the US and 10 prospects in Ethiopia, Guatemala, Honduras, Indonesia, and New Zealand, which are expected to support future geothermal development.

Figure 3. ORA is set to Add 250 MW to 270 MW of Geothermal and Solar Energy by 2023:

Source: Company Reports

Historical Financial Trend: ORA generated consistent profitability driven by diversified energy assets, adequate geographic diversification, and long-term fixed-price power purchase agreements (PPA) with renowned customers including municipalities, utility companies, and Community Choice Aggregators. These PPA contracts had a remaining term of ~16 years in December 2020. The counterparties had a healthy financial profile depicted by credit ratings. The geothermal power project usually has a higher PPA tariff as compared to other conventional energy. ORA experienced an increase in unit rates from $86.6/MWh in FY19 to $89.6/MWh in FY20.

Figure 4. Three-Year Financial Trend of Ormat Technologies:

Source: Company Reports

The acquisition of the Pomona energy storage asset as well as the commissioning of Rabitt Hill in Texas partly offsetted the decline in product revenues due to delay in the progress of third-party projects owing to COVID-19. Overall revenues plunged by 5.5% in FY20. ORA is focused on accelerating its position in the energy storage market by leveraging its capabilities to provide hybrid geothermal and solar PV as well as energy storage plus solar PV technology. Shut down at the Puna power plant resulted in a decline in the cost of revenue. The company continues to invest in the development of new projects. Its adjusted EBITDA improved by 9.3% in FY20 backed by new PPAs and an increase in tariff at its electricity segment. The company resumed its 10 MW Puna geothermal plant and is expected to reach full production in mid-2021.

Figure 5. FY20 Key Financial Highlights:

Source: Company Reports

ORA is expecting capex of $445 million for FY21. Its cash balance and unused credit lines totalled $900 million as of December 2020, which provides adequate cover to support growth targets. The company raised $759 million during the year, which comprised of $340 million equity fundraising, $290 million unsecured bond issuance, and $128 million under credit facility extension. It had closed the full-year FY20 with a cash balance of $537 million as of December 2020. The company had access to various sources of capital implying adequate funding flexibility. Its net debt to capitalization improved to 45% and net debt to EBITDA stood at 2.4x as of December 2020.

Figure 6. Surge in Cash Driven By Equity Fundraising and Placement of Debt:

Source: Company Reports 

Top 10 Shareholders: The top 10 shareholders together form ~61.32% of the total shareholding. Orix Corp. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 19.68% and 8.10%, respectively.

Figure 7. Top 10 Shareholders

Key Metrics: ORA exhibited decent revenue growth driven by long-term fixed-price PPA contracts and an increase in tariffs at its electricity segment. The company continues to invest in project development and new geographic expansion. It has ample pipeline projects to drive growth going forward. The pandemic resulting in a delay in project execution which had increased cash cycle days. But current ratio improved on the back of various fundraising during FY20.

Figure 8. Key Financial Metrics

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Outlook: Its product backlogs stood at $33.4 million representing projects to be completed by 2021. About 96% of the backlog related to geothermal projects with customers predominantly in Germany, Guatemala, Chile, among others. As mentioned in the latest earnings presentation, ORA is expecting its energy storage capacity to reach 273 MW to 373 MW by 2023. It has five new projects with a capacity of 67 MW to be added by 2022-end. The company has set a target to reach an overall capacity of 1,500 MW by 2023 (from 1,005 MW in 2020). It is projecting revenues in the range of $640-$675 million and adjusted EBITDA of $400-$410 million for FY21.

Key Risks: ORA is exposed to catastrophic events for geothermal energy – 2018 volcanic eruption in Hawaii impacted the Puna project which remained shut down until 2020. The company had sizeable international operations, which may be influenced by geopolitical tensions and foreign government regulations. Volatile merchant rates in the open market may impact its non-PPA revenues. Changes in tax subsidies or tax credits by government laws may invariably affect the electricity demand.  Increased competition from binary power plant suppliers, including major steam turbine manufacturers affecting product segment revenues particularly in New Zealand, Turkey, the US, Asia Pacific, and Central and South America. ORA has high counterparty credit risk with significant concentration exists – top three customers accounted for ~54.5% of electricity revenues in FY20. ORA has been reporting negative free cash flows on the back of sizeable capex spend. In the recent development, Hindenburg Research, an investment firm, has taken a short position on ORA, citing corruption by ORA senior officials. However, the management team of ORA have issued a statement mentioning that the comments by Hindenburg Research are inaccurate and misleading.

Valuation Methodology: Enterprise Value to Sales Multiple Based Relative Valuation (Illustrative)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: ORA has delivered positive 3-month and 6-month returns of ~9.54% and ~39.57%, respectively. The stock is trading below the average of the 52-week high price of $128.87 and 52-week low price of $53.44. On the technical front, the stock has a support level of ~US$70.474 and a resistance level of ~US$115.715. We have valued the stock using EV to 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 slight premium as compared to its peer average EV/Sales (NTM Trading multiple) given the diversified business and integrated hybrid model for electricity generation, strong pipeline projects in geothermal and energy storage segments, and expansion plans in Indonesia, Kenya, Ethiopia, and New Zealand. For this purpose, we have taken peers like Sunnova Energy International Inc. (NYSE: NOVA), Nextera Energy Partners LP (NYSE: NEP), Clearway Energy Inc. (NYSE: CWEN), to name a few. Considering the consistent profitability, high ROE over the Industry Median, adequate liquidity and funding flexibility, we give a “Buy” recommendation on the stock at the current market price of US$82.99, down 1.98% on March 2, 2021.

ORA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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