Enlight Renewable Energy Ltd.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

A global renewable energy platform focused on initiating, developing, constructing, and operating utility-scale renewable energy projects, particularly solar and wind, across diverse geographical markets.

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: Enlight Renewable Energy (ENLT) is a global renewable energy company involved in the full life cycle of renewable energy projects, from initial development to long-term operations, aiming to capture value at each stage.

  • Revenue Distribution: ENLT’s revenue primarily derives from two sources:
    • Electricity sales: From its operational projects, primarily through long-term power purchase agreements (PPAs). Revenue from this stream can vary with project capacity and prevailing tariffs, some of which are linked to inflation.
    • Construction and management services: Revenue recognized from the provision of these services to projects in the various phases of development.
  • Industry Trends:

The renewable energy industry is characterized by rapid growth fueled by government incentives and global awareness of climate change, pushing demand for clean energy solutions. However, rising project costs, supply chain disruptions, and intense competition create headwinds. * Growing Demand: The demand for renewable energy sources is expected to continue increasing rapidly. * Government Incentives: Government policies at multiple levels increasingly favor renewable energy sources, such as subsidies, renewable portfolio standards, and mandates. * Technological Innovation: Advances in solar, wind, and energy storage technologies are improving efficiency and reducing costs.

  • Competitive Landscape: The renewable energy market is becoming increasingly competitive with several large players and a growing number of private companies and startups.
    • The company’s competitors include both established and emerging renewable energy companies as well as traditional utility providers.
    • ENLT’s primary competitors are mainly European and Israeli project developers and are differentiated largely by their experience, project quality, and access to capital.
    • Many of these large renewable companies have an advantage because of their geographic reach and their ability to tap a much larger and lower capital base than ENLT can.
  • What Makes ENLT Different?:

ENLT differentiates itself through a focus on select geographic markets, such as the U.S., Western Europe, and Israel, where it has strong governmental support, and a business model encompassing projects at all stages of development, from origination to operation, and using long-term PPAs to provide stable revenues. The company also develops a lot of proprietary technology in a modular way, allowing them to integrate various systems into a scalable business model. They also make a major focus on building long-term relationships, and a value-creation philosophy. * They have a hybrid model that combines project development, construction, and operations for a larger portion of control of the overall profit margins. * They are one of the first to focus on solar and storage, the other areas they are looking towards include wind, and even hydrogen, and is positioning themselves to be a leader of green energy production. * The company is geographically specialized, and they choose specific markets where they have the expertise and political support to be successful, specifically focusing on the US and Israel.

  • They have a strong pipeline of projects in developed markets, specifically developed markets, that benefit from strong legal and financial support for those projects.

Financial Analysis: ENLT’s financial position and strategy are complex. The company faces challenges, primarily from high capital expenditures, reliance on outside investors and debt, and the need to maintain cash balances.

  • Revenue Growth: ENLT’s revenues have been highly volatile, particularly in the last few years, this is due to it being an emerging company with some large contracts. The overall trend of their revenue growth is positive, but should they experience issues in the projects or markets they operate, these revenue numbers will be volatile.
    • In 2022, ENLT reported revenue of $205 million, a notable increase of 65% compared to 2021. For the first 9 months of 2023, they’ve already surpassed that number, reaching $258 million.
  • Profitability: While revenues have been increasing, ENLT has yet to reach profitability, although their operating profit is showing considerable improvement, and they expect positive operating cash flow in the next year.
  • Despite the higher revenues, ENLT’s net loss for the first 9 months of 2023 was at $21 million, as compared to $41.5 million for 2022.
  • The company’s adjusted EBITDA is up 112.8% over the past year, but the expenses have gone up along with the revenue growth.
  • As the company has focused on project development in the past few years, that led to increased expenses, but as the projects come online, their recurring revenue and cash flows will increase.
  • They believe that from now on, they will have strong profit margins.
  • Capital Structure: They have a somewhat concerning capital structure, with over 1 billion in debt, which is about the same as their total assets. Their cash on hand is quite low, with only 250 million. Their debt maturity dates are mostly in between 2026 to 2033, which is something to keep in mind.
    • ENLT’s debt is primarily composed of long-term liabilities (around 1 billion USD), primarily consisting of long-term bank credit facilities and bonds. However, there is some short-term debt (around 350 million USD), primarily for operating capital. This debt is used to finance project construction and acquisitions.
    • They also have a small amount of convertible debentures which are convertible to ordinary shares, which is something to take note of.
  • The equity composition is mainly comprised of share capital, additional paid in capital and retained earnings, as well as their treasury shares. They are a little diluted due to employee stock options, but its is relatively small.
  • Liquidity:
    • Their free cash flow numbers are not good. The company reported a negative free cash flow for both 2022 and 2021, but expect to improve that into the future.
    • They have a rather small amount of cash on hand, and the majority of cash is being allocated for ongoing projects and other operational expenses.
    • ENLT has relied on debt, and equity financing, to fund project development. They will need further capital to meet their goals.

Moat Rating: 2/5 ENLT’s moat is limited and fragile: While they have some differentiation and a focused strategy, they operate in a very competitive industry with relatively low barriers to entry. Here is the breakdown of why they get a 2 out of 5 rating:

  • Intangible assets: They do not have any significant intangible assets beyond a name brand, they have to develop more technological knowhow and differentiation in their products.
    • They have a relatively well established brand and they are well-known in their sectors, giving them a minor advantage.
  • They also do develop proprietary software that helps their company be more efficient, but this is not an insurmountable advantage
  • Switching costs: There are minimal switching costs for their clients. A PPA is a long-term contract, but their clients are not particularly obligated to continue with ENLT.
  • Network effects: There are no network effects involved with the business.
  • Cost advantages: The company does not seem to have a substantial cost advantage compared to its peers.
    • ENLT does seem to try and have a low-cost model, and leverage their expertise to find better deals, however, there doesn’t seem to be anything substantial in this category.

Risks to the Moat and Resilience:

  • Increased Competition: A major risk to their moat is the intense and growing competition in the renewable energy space, potentially eroding pricing power and market share. ENLT is not the biggest company in this industry, and there’s more than enough companies with better capital that they will have to compete against.
  • Technological Disruption: The rapid pace of technological change means new competitors with better technology could render their current offerings obsolete and make their business model irrelevant.
  • Since the company operates and builds infrastructure with long-term projects, a change in the technology may make their projects useless, which creates a big risk.
  • Regulatory Changes: Changes in government regulations and incentives could affect the profitability of existing and future projects. Changes in environmental policies could slow down the business or change their structure.
    • ENLT has relied on favorable tax laws and government subsidies and mandates. These can change.
  • Financial Instability: The dependence on borrowed capital and the inability to consistently generate profits make the company financially vulnerable in a downturn and is a huge risk.
    • If ENLT cannot get enough funding at favorable rates or if they have a downturn in their market, then they will be in big trouble.
  • Execution Risk: ENLT’s success relies on completing projects on time and within budget, but issues could arise in construction, land use, regulatory, and other unforeseen variables.
  • Their rapid growth rate may cause execution errors and hurt profits.
  • Currency Risk: Given its operations in multiple currencies, they are exposed to currency fluctuations, which can dramatically impact their revenues and costs. They will need to use currency hedges to limit their risk.
  • Interest Rate Risk: Interest rates are highly correlated to the cost of their debt, and rising interest rates can directly affect the profitability of the company. They will need to be mindful of this risk.
  • Geopolitical Risk: There is geopolitical risk in countries like Israel and Ukraine that is something that ENLT has to deal with.

Understandability: 3 / 5 ENLT’s business model is moderately complex. It is not hard to understand how they operate. However, understanding all the various projects and regulations that they face does make it a bit difficult to fully understand.

  • A deep understanding of energy markets is essential to properly grasp ENLT’s potential, which will be daunting to more novice investors. The company is not in the traditional utilities or energy production sector.
  • The level of understanding needed for valuations on these types of businesses is a little more complex than a traditional business because the valuation depends on not only the market and financials, but also on the government regulations.

Balance Sheet Health: 2/5 ENLT’s balance sheet is currently not very healthy and shows high leverage, reliance on debt, and low levels of cash. This may create problems with the company if interest rates rise, or market volatility causes the debt markets to freeze.

  • Their debt-to-equity ratios are very high.
    • They have been increasing the amount of debt for expansion.
  • They will need to use their assets efficiently and effectively to continue growing and turning a profit.

Recent Concerns/Problems:

  • They have been issuing more debt and shares for expansion. The increased expenses associated with the growth may negatively affect earnings in the short term. The markets have shown a negative outlook to these expansions, and their stock has decreased.
  • The company has some risks associated with its international exposure and volatility in market conditions, which is something to keep in mind.
  • A major concern from the latest earnings call is how the company will turn the increasing revenue into real cash profits. Investors are not completely happy with the profitability metrics, and it is a question that investors want to see answered in future earnings.

That is all for the analysis.