EDP Renováveis

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

EDP Renováveis (EDPFY) is a global leader in the renewable energy sector, focusing on the development, management, and operation of wind and solar power plants.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

EDPFY is a major player in the global renewable energy sector, with a focus on wind and solar power generation. The company operates across various regions, including North America, South America, Europe, and Asia.

  • Revenue Distribution: EDPFY’s revenue is primarily generated from selling electricity produced by its renewable energy plants. The geographical distribution is key as their revenues depend on regional power prices and local incentives.
  • Industry Trends: The industry is seeing continued growth, driven by increased demand for clean energy and government policies favoring renewable sources. However, competition is fierce, with several players vying for market share.
  • Margins: The company has recently reported strong operating margins of around 40% across their portfolio of operating assets. However, this will be affected by inflation and rising costs of debt and new project equipment.
  • Competitive Landscape: The renewable energy sector is becoming increasingly competitive, as other businesses become more interested in generating clean energy. The company competes with both established players and emerging market entrants.
  • What Makes the Company Different: EDPFY differentiates itself primarily through its experience, its geographical reach, and its diverse and established project portfolio. They’re also focused on integrating energy storage with their plants, and are pioneers in emerging renewable technologies, such as floating wind farms.

Financials

EDPFY’s financials highlight a company with an increasing asset base and healthy cash flow. Here’s a breakdown:

  • Revenue Growth: Revenue growth is impressive, with 2023 annual revenues reaching €3,724 million, an increase of 20% vs. 2022. Their growth is tied to both growth in electricity volumes sold and higher electricity market prices.
  • Profitability: Net profit for 2023 increased to €642 million, almost doubling from 2022 (€341 million). Increased revenues, an increase in operational efficiency and a decline in corporate taxes helped the profits grow significantly. However, a lot of its profit increase came from one-time benefits from the tax credits.
  • Operating Expenses: As of the end of 2023, their operating expenses were €2,172 million, around 58% of their operating revenues.
  • Debt: The company has a sizeable debt position, with net financial debt at €11.7 billion. It’s important to note that over 90% of the company’s debt is long-term (more than one year), which helps them in case there’s a sudden increase in interest rates. It’s also important to note that all of the company’s debt is fixed interest, which provides some stability in a rising rate environment, and the debt to net assets ratio is well below 50%.
    • The management has stated that their long-term target for debt reduction is to return to a level of around 3 times EBITDA.
  • Cash Flow: The company is able to generate good cash flow, with the company’s operating cash flow in the 2023 year clocking in at €2.4 billion.
  • Dividend: The company had proposed a dividend per share of €0.19 in their 2023 annual report, which when divided with the stock price as of the end of the year results in a dividend yield of about 1.09%.

Moat Analysis

EDPFY possesses a moderate (3/5) moat, characterized by some of the economic moat characteristics mentioned in the “Little Book That Builds Wealth,” and some threats to its moat.

  • Intangible Assets (Narrow Moat): The company’s brand is not a key factor in its competitive advantage as buyers don’t usually choose a renewable energy provider because of name recognition. However, they have a sizeable patent portfolio which they keep on developing, this helps them stay on the cutting edge of clean energy production. These patent assets do provide an edge.
  • Switching Costs (Low Moat): Once utilities sign up with a renewable energy producer, switching to another provider entails some transaction costs (paperwork, change of vendor), which adds somewhat of a friction point to the system.
  • Network Economics (Limited Moat): The network effects are not applicable to EDPFY because there are no network effects that could limit other businesses from competing.
  • Cost Advantages (Moderate Moat): They manage to secure land at low prices and build facilities in lower-cost areas of the world, enabling them to generate power with lower capital expenses. The scale of the production and operations is also a factor in reducing the costs per unit. This cost advantage seems sustainable to some degree as its geography cannot be simply replicated, even though their process itself isn’t necessarily protected. However, as seen in the past, large, more well-established incumbents can catch up quickly in low-tech industries like solar and wind power.

Risks to the Moat and Business Resilience

Several legitimate risks could impact EDPFY’s moat and resilience:

  • Regulatory Changes: The renewable energy sector is heavily dependent on government subsidies and policies. Changes in these regulations could reduce the attractiveness of their projects and harm returns.
  • Technological Disruption: New technologies could disrupt current dominant technologies, and improve the capabilities and reduce the cost of other companies. As they are still new to the emerging technology space, they’re vulnerable to having more efficient competitors emerge.
  • Competition: An increasingly competitive market could drive down prices and margins, making it harder for EDPFY to generate excess returns in the future.
  • Rising Cost of Debt and Equipment: Rising cost of materials, components and financing could negatively impact returns in the future, as this would mean it will be more expensive for them to start and operate new projects.
  • Slowdown in Global Economy: A global economic slowdown could lead to decreased demand for energy.

Understandability: 2/5

EDPFY’s business is fairly straightforward to understand at a high level, focusing on renewable energy generation. However, understanding its geographic diversification, the nuances of their specific technological implementation, tax implications, government incentives, etc. makes the detailed financial analysis very complex, making the business a bit more difficult to understand fully.

Balance Sheet Health: 4/5

EDPFY’s balance sheet is relatively healthy. The company has a lot of assets, while also maintaining a strong cash-generating business that has an adequate coverage ratio and a debt to asset ratio below 50%, which is reasonable.

  • However, the debt is fairly high, and it’s an aspect that you should follow in future quarters and years.
  • The company is well-positioned to manage its debt given that it is mostly locked in at fixed interest rates for the long-term.

Recent Concerns and Management Response

Here are some recent concerns and management’s views as shared in latest earnings calls:

  • Geopolitical Risks: The war in Ukraine and continued instability in Europe has lead to higher costs of capital for some of the company’s projects, and these factors have been acknowledged as a key concern in the risk report from the company’s latest annual report. However, management has said they’re doing what they can to reduce costs, and the company’s overall portfolio is spread geographically across regions with less geopolitical risk, as well.
  • Supply Chain Issues: There have been some supply chain issues leading to increase costs for the new solar and wind projects. However, management believes the company is well-positioned to manage the current situation and there have been no major hiccups in their ongoing construction plans.

Key Points from the Latest Earnings Call

  • 2023 results were very strong, driven by increased sales, strong pricing and better operational management and efficiency.
  • They have exceeded their goal of developing 4 GW of new assets per year.
  • Management has expressed confidence in continued growth of both revenues and profits.
  • They’ve signed a deal to create a new joint venture in Poland for wind energy projects with a Polish oil and gas producer, which reflects their willingness to go into new markets.
  • They plan to have energy storage systems in 16 to 20% of their projects in 2025.
  • The company’s management aims to reach an ROIC between 11% and 14% in the future.

In summary, EDPFY is a solid player in the growing renewable energy market, and is actively exploring more advanced business and technology solutions that have the potential to expand the moat even further. However, there are some external factors and risks that could severely impact their margins, growth, and share prices, and need to be carefully tracked for potential adverse impacts on their financials. It’s important to see how those develop, especially in terms of their capital allocation and management ability.