On Thursday, CNBC reported that Jeff Ubben (Trades, Portfolio) of ValueAct Capital disclosed an investment in Hawaiian Electric Industries (HE, Financial).
This is reportedly the largest position in ValueAct's new VAC Spring fund, a fund with social goals in addition to monetary ones. Utilities tend to be rather boring investments. Apparently not this one. Ubben compared its growth potential to that of Amazon (AMZN, Financial) and said it had been a long time since electricity had been a growth market. Ubben cited three primary reasons for the investment in Hawaiian Electric:
1. Renewables are cost competitive in sunny and windy Hawaii.
Ubben reportedly quoted an independent study claiming the state could run on more than 80% renewables and save up to $6.5 billion. Instead, Hawaii is buying petroleum. The slides are from a company presentation, and these also indicate that renewables can be cost competitive.
2. Low cost of capital.
Hawaiian Electric is unusual because it also runs a banking division, which according to Ubben could use its deposits to fund rooftop solar infrastructure. The bank has one of the lowest costs of deposits of any bank in the U.S. This is likely because it has a large market share within a closed community. This is potentially a sustainable situation. The slide below shows costs of funds are very low. This could help Hawaiian Electric to achieve much better profit margins compared to other utilities. Cost of capital is one of the most important problems to solve for utility executives.
3, Energy is a growth market.
Between electric vehicles and climate change there is something to the idea that utilities could become a more sexy industry in the future. Electricity consumption is likely to grow, especially in Hawaii. The company is forecasting only limited earnings per share growth, which leaves some room for ValueAct to make a big score.
Earnings per share growth can be achieved through multiple means. If cost of capital goes down, that will do it. If the cost of renewable energy goes down further in the future it should also drive margin expansion. Volume growth in electricity consumption will also do it.
There are many ways to win here and at 20x forward earnings, the company isn't trading all that richly for a utility.Â
Disclosure: no position.
