Goodwood Inc. is a fairly small fund manager that I follow in Canada. They are true value investors running a pretty concentrated portfolio. So for a stock to get into their fund there is more due diligence and consideration of permanent loss of capital than you would find in a typical well-diversified fund.
In their most recent letter they detailed a fund holding that they think is undervalued. That company operates in the renewable power area which has to be a line of business that is going to have the wind at its back for a long time. With a clean balance sheet to boot, this might be one for further investigation.
Here is the Goodwood commentary:
We spent most of the month of July between +1% and +2% only to see renewed macroeconomic concerns (primarily US debt ceiling negotiations and weaker European sovereign credits) pull the month’s results lower. It seems likely that these macro issues will be dealt with over time but their solutions are not likely to be supportive of economic growth in the short to medium term. Our focus continues to be on finding substantially undervalued, well-managed companies which are likely to continue to grow their earnings and/or generate free cash. Over time owning a portfolio of such securities, purchased at inexpensive prices, we expect will produce good returns particularly as these free cash flows eventually find their way into shareholders’ pockets (through dividends and/or share buybacks).
Boralex Inc. (“Boralex”) is an example of the foregoing and is trading well below intrinsic value and the valuations of its close comparables. The company also features significant insider ownership, something we value highly and that is prevalent in many of our core positions, as the Board’s ownership is 49.2% (including 34.8% owned by Cascades Inc., a company that is managed and significantly owned by members of the Lemaire family, Patrick Lemaire is president and CEO of Boralex). Boralex is a renewable power producer with a total installed capacity of greater than 700 megawatts (“MW”) in Canada, the Northeastern U.S. and France. As well, Boralex is committed through various power development projects both independently and with European and Canadian partners to add an additional 400 MW to its portfolio of wind, hydroelectric, thermal and solar assets. The Company plans to have a portfolio of 1,500 MW by 2015.
Of the 700 MW currently in operation, 252 MW from 21 sites are wind power, 136 MW from 15 sites are hydroelectric, 267 MW provided from 8 sites are wood-residue and, 45 MW from 2 sites are natural gas-fired. And, of this current portfolio, 73% operates under long term power purchase agreements with high quality counterparts such as Electricite de France, Hydro-Quebec and the Ontario Power Authority. As Boralex builds out its pipeline the proportion of its portfolio under these desirable, long term power purchase agreements will rise. For example, the 272 MW (phase 1) and 69 MW (phase 2) Seigneurie de Beaupre wind development projects in Quebec will move the mix materially towards contracted production. On a cash flow basis this mix shift towards contracted cash flows is even more pronounced and supports the argument that Boralex should eventually be valued more highly and more in line with its peers.
The highest valuations in the renewable independent power producer space are reserved for those companies that pay a dividend. Boralex currently does not pay a dividend preferring to maintain a healthy cash balance ($131.3 million as at March 31, 2011 versus a current market capitalization of $304 million) so that it can self-finance the equity requirements of its large pipeline. We believe that this valuation gap at approximately 4.6 EV/EBITDA multiple points (i.e., Boralex trading for roughly 8.1X while the comparables are averaging approximately 12.7X) is currently excessive and that, over time Boralex’s substantial looming growth in cash flows will attract investor capital. A partial closing of this valuation gap combined with strong growth in EBITDA could easily result in a greater than 60% move up in Boralex’s stock price.
In their most recent letter they detailed a fund holding that they think is undervalued. That company operates in the renewable power area which has to be a line of business that is going to have the wind at its back for a long time. With a clean balance sheet to boot, this might be one for further investigation.
Here is the Goodwood commentary:
We spent most of the month of July between +1% and +2% only to see renewed macroeconomic concerns (primarily US debt ceiling negotiations and weaker European sovereign credits) pull the month’s results lower. It seems likely that these macro issues will be dealt with over time but their solutions are not likely to be supportive of economic growth in the short to medium term. Our focus continues to be on finding substantially undervalued, well-managed companies which are likely to continue to grow their earnings and/or generate free cash. Over time owning a portfolio of such securities, purchased at inexpensive prices, we expect will produce good returns particularly as these free cash flows eventually find their way into shareholders’ pockets (through dividends and/or share buybacks).
Boralex Inc. (“Boralex”) is an example of the foregoing and is trading well below intrinsic value and the valuations of its close comparables. The company also features significant insider ownership, something we value highly and that is prevalent in many of our core positions, as the Board’s ownership is 49.2% (including 34.8% owned by Cascades Inc., a company that is managed and significantly owned by members of the Lemaire family, Patrick Lemaire is president and CEO of Boralex). Boralex is a renewable power producer with a total installed capacity of greater than 700 megawatts (“MW”) in Canada, the Northeastern U.S. and France. As well, Boralex is committed through various power development projects both independently and with European and Canadian partners to add an additional 400 MW to its portfolio of wind, hydroelectric, thermal and solar assets. The Company plans to have a portfolio of 1,500 MW by 2015.
Of the 700 MW currently in operation, 252 MW from 21 sites are wind power, 136 MW from 15 sites are hydroelectric, 267 MW provided from 8 sites are wood-residue and, 45 MW from 2 sites are natural gas-fired. And, of this current portfolio, 73% operates under long term power purchase agreements with high quality counterparts such as Electricite de France, Hydro-Quebec and the Ontario Power Authority. As Boralex builds out its pipeline the proportion of its portfolio under these desirable, long term power purchase agreements will rise. For example, the 272 MW (phase 1) and 69 MW (phase 2) Seigneurie de Beaupre wind development projects in Quebec will move the mix materially towards contracted production. On a cash flow basis this mix shift towards contracted cash flows is even more pronounced and supports the argument that Boralex should eventually be valued more highly and more in line with its peers.
The highest valuations in the renewable independent power producer space are reserved for those companies that pay a dividend. Boralex currently does not pay a dividend preferring to maintain a healthy cash balance ($131.3 million as at March 31, 2011 versus a current market capitalization of $304 million) so that it can self-finance the equity requirements of its large pipeline. We believe that this valuation gap at approximately 4.6 EV/EBITDA multiple points (i.e., Boralex trading for roughly 8.1X while the comparables are averaging approximately 12.7X) is currently excessive and that, over time Boralex’s substantial looming growth in cash flows will attract investor capital. A partial closing of this valuation gap combined with strong growth in EBITDA could easily result in a greater than 60% move up in Boralex’s stock price.
