TLT: Massive opportunity within renewables for the next decade

I think it is time to take a position here. The renewables and ESG theme is gaining traction very rapidly in Europe and I expect this to flip over into other jurisdictions. The green opportunity is an amazing tool for politicians to boost growth, create jobs and find reasons for borrowing money. I believe for Europe, the "Green" transition is a real solution to get out of years of austerity and a new way of delivering growth. In that regard. Australia is lagging but I guess it is just a matter of time we will have more people getting interested in TLT and the renewables opportunity in Australia. The recent acquisition of Infigen by Iberdrola just demonstrated where the music plays.

TLT: Citing from UBS on TLT:

Company Description
Tilt Renewables was formed in 2016 from a de-merger of the New Zealand and Australian wind assets of NZ-listed Trustpower (TPW). Tilt's Australian assets comprise the 101MW Snowtown 1 wind farm in South Australia, 54MW Saltcreek in Victoria, plus a further 15MW in NSW. Annual output in Australia is around 1360 GWhrs. In NZ Tilt, has 197MW (161MW in the North Island Tararua range and 36MW at Mahinerangi in the South Island). NZ output is around 660 GWhrspa. Dundonnell (Aust) is being commissioned (330MW) and Waipipi (NZ) is being constructed (133MW). Major shareholders: Infratil 66% and Mercury 20%.

Industry outlook
In Australia there is increasing investment in renewables expected over the next 10 years but in the short term there is substantial investment required to upgrade the transmission grid in Victoria, NSW and Queensland. In NZ the outlook is clouded by the expected closure of Tiwai Smelter and its impact on supply and demand.

Upside (NZ$4.50) In our upside case, we assume more bullish outlook for wholesale prices in Australia following upgrades to transmission grid. There is still some exposure to spot prices on Snowden 1. We also assume a larger development pipeline with 300MW of capacity being built over the next five years given stronger demand for renewable energy in Australia and more stable grid capacity. Our DCF valuation in 12 months' time is NZ$4.50.

Bigger pipeline = Value creation
I believe TLT will be able to grow its pipeline faster than expected. Valuation wise the analyst tend to have debates of how to best value the renewables (discount rates, future pipeline etc.), hence some of the stocks running far ahead of several sell-side analyst targets. One way to see future value creation is to make an assumption of valuecreation between installation cost of ~xx/MW at the moment and value afterthe MW is commissioned. Also, with demand for projects in the region increasing, multiples will increase and TLT may achieve better than expected returns on farm-downs. One interesting thing would be also offshore, will TLT ever go offshore? GE has the largest offshore wind turbine 12MW, imagine how the economics improve with such beasts.

https://www.ge.com/renewableenergy/stories/new-wind-turbine-to-increase-efficiency-in-offshore-wind-farms

Low interest rates, PPA's = easy financing
Another point, growth can be achieved easily. Just one example here, imagine TLT is going for the project finance approach and decides to build 100MW, but given they may be very efficient installing banks provide almost 100% debt to the project. Then the project is commissioned at the end of this year. If you look at the ND/EBITDA, that could look very high if you look at the end of this year, but much more comfortable if they don’t install anything next year. But in this example, it is more important that operating cash flows are enough to pay 1) interest cost plus principal repayment. 2) pay equity holders. Given that TLT signs PPAs (usually for 10 years) banks have complete security they are going to receive all the money back and are willing to give financing. Renewables are very well placed in the current macro environment.

Key questions you may ask yourself? also cited from UBS.

Will TLT develop some of its renewable options in the next five years?
Yes, TLT has a number of consented development options in NZ and Australia. We have explicitly assumed that 150MW is built over the next five years. This takes into account challenges associated with upgrading the transmission grid in the East coast of Australia and possible exit of Tiwai in NZ.

Will TLT be significantly impacted by lower wholesale prices in NZ and Australia?No unlikely. TLT has a large proportion of its capacity in both countries under long term PPA's with fixed prices. The only exception is Snowdown 1 windfarm in Australia (101MW) which is currently uncontracted and annual rollover of Trustpower's five year PPA in NZ. However these two become relatively small in terms of overall output with the commissioning of Dundonnel (late2020) and Waipipi (early 2021). Also current NZ futures prices assume a recovery in NZ wholesale prices by FY23 and ~80% chance of a soft Tiwai smelter exit.