Investment Analysis | MPC Caribbean Clean Energy Ltd. – Rights Issue
With just over eleven (11) months transpiring since the company began accepting investment subscriptions for its Initial Public Offering (IPO), much has changed with Jamaica’s first listed infrastructure/energy utility company. The risks inherent in an investment today are identical to those risks which presented themselves at the time of the IPO. Additionally, the positive regional outlook and appetite for clean energy infrastructure remains virtually unchanged. Therefore, much of the characteristics of the company which we favoured and were wary of in the past remains unchanged.
We are still of the opinion that in investment in MPC could offer investors an opportunity to diversify their portfolio by industry, and would also help with geographical diversification. That is, because the investment company in which MPC Caribbean Clean Energy would invest (and from whom it would derive its cash flow) would potentially be geographically diversified by investing in renewable energy infrastructure projects throughout the CARICOM and Latin American region and not therefore would not solely be isolated in Jamaica.
The outlook for renewable energy solutions in the CARICOM and Latin American region also remains favourable as the exposure to such projects, at this time, are low (i.e. large scope for growth) while the need and appetite for said projects are growing. This appetite is enhanced by the fact that much of the region’s energy generation infrastructure is aging, inefficient and in specifics jurisdictions, inadequate to supply sufficient electricity to meet the population’s demand. Therefore, it is our opinion that the industry presents strong potential for growth. However, it remains unclear which company will be able to take advantage of the favourable market conditions.
We continue to view favourably the Investment Company’s business strategy of engaging in long term contracts with off-takers, such as JPS. This is because these contractual agreements, called Power Purchase Agreements or PPAs, help to reduce the uncertainty of cash flows. This is because under the terms of PPAs, independent power producers (IPP) like MPC do not get paid for selling the energy it generates to the off-takers like JPS. Instead, they gets paid for their ability to generate electricity for transmission and to remain on standby. Under the agreement, off-takers does not necessarily have to take the energy produced by the IPPs assets, nonetheless, the IPP gets paid either way.
Despite the positives outlined, an investment in this company is not without material risks. There is significant execution risk associated with the company. Any failure to raise the requisite amount of capital and to execute projects on budget and on schedule would likely have a negative impact on cash flows. For instance, MPC attempted to raise approximately US$50M by selling an identical amount of shares at the time of its IPO. Instead, the company was only able to sell 11,424,160 shares, rising an equal United States dollars (gross of fees); approximately a fifth of what they were originally seeking to raise. We conjecture that the inability to secure the initial desired capital has hindered the Investment Company’s ability to pursue other projects. We further conjecture that a continued inability to raise the requisite capital is likely to impede the Investment Company’s ability to grow its Renewable Energy Asset Base, and by extension impede its ability to generate adequate cash flows for shareholders.
Additionally, the nature of the projects which the Investment Company is likely to invest in are long term. Because of this, it is our opinion that investors are unlikely to see an optimal return on invested capital immediately or in the near term. Instead, investors would need to wait until deals originated by the investment company are closed (i.e. deal is fully executed) and/or for the physical assets (i.e. the solar plant or wind turbine facility) to be constructed and/or transfer of assets take place before the asset can begin generating returns. Consequently, an investment in MPC is one which we foresee as a long term investment, susceptible to the aforementioned execution risk at all stages from origination to operation. It is our opinion that on a fundamental basis that investors are unlikely to see significant capital appreciation on the stock as we expect that trading activity surrounding the security may be curtailed. Our basis for this conclusion stems from the fact that the present owners of the shares are unlikely to trade them. As at September 30, 2019, the top ten holders of MPC shares owned over 95% of the company’s Class B shares. The profile of many of these companies are also one that can be anecdotally thought of as being long term investors and therefore they are unlikely to trade their shares. Consequently, prices are likely to be restrained by a lack of trading activity. Conversely, the stock price is likely to be relatively stable because of the lack of trading activity
Based on our valuation of the company, it is our opinion that the shares are being offered above their fair value. Under our neutral case scenario, we computed the shares to be values at US$0.78 per share, or J$109.52 per share at an exchange rate of J$140: US$1.00. Therefore, the shares are being offered to the public at a premium of 27.83% relative to fair value.
Despite the positives outlined, it is the opinion of CUFMC that the stock is a SELL at this time. It is our opinion at this time that the risks which we outlined are associated with the investment outweigh the potential short term rewards. This negative assessment is further enhanced by our belief that the being offered at a premium to its fair value, further reducing the value proposition of the investment.
|Offer Price||J$140.00 (US$1.00)|
|Estimated Fair Value||J$93.09 to J$109.52|
|Potential Capital Gain/(Loss)||(27.83)% to (50.39)%|
|Estimated 2019 Dividend Yield @ Offer Price||1.92%|
|Estimated 2019 Total Return||-8.51% to 4.90%|