Atrato Onsite Energy plc (ROOF) Earnings Call Transcript & Summary

Good morning, and welcome to Atrato Onsite Energy's Interim Results Presentation for the 6-month Period Ending the 31st of March 2024. I'm Steve Windsor, Principal at Atrato Partners, the investment adviser to Atrato Onsite Energy. And joining me today from our Renewables team are Gurpreet Gujral, Managing Director; and Brett Pieterse, Finance Director. The format for today is a short presentation followed by Q&A. A very warm welcome to those of you joining us online. [Operator Instructions] So starting with the business highlights. We're proud of having built the U.K.'s lean platform in commercial and industrial solar, or C&I in short. Our operational capacity has tripled since March 2023. Our strong cash flow generation generates 1.4x dividend cover. And as a reminder, we increased our dividend by 10% in September to 5.5p per share. On to our offering as a company. We provide a solution to corporate energy transition needs. There are 3 core needs of just about every major corporation globally. Firstly, helping them achieve net zero. Our solution provides customers with 100% renewable energy and helps them deliver on their publicly committed net zero targets. Secondly, cost efficiencies. Given the high cost of energy, every corporate is seeking ways to source cheap energy. We supply green energy of material savings versus buying from the grid. We regularly save our customers 50% on their electricity bills. Thirdly and importantly is energy security. With more and more energy price volatility, our solution provides a fixed price dedicated supply of 100% traceable green energy, and we offer that for the long term under PPA. All this translates to a returns profile for investors, which is unique within the listed renewable sector. Our PPAs have an average term of 11 years. 93% of our revenues are under long-term contracts, and this provides a very low 4% sensitivity to volatile merchant power prices. This means within our [ February ], we have the longest duration, the highest contracted income and the lowest exposure for the volatile merchant power price. We also offer a highly sustainable investment with very strong ESG metrics. In fact, once our portfolio is fully operational, our investors will be directly responsible for 191 gigawatt hours of green energy generation per annum. That's equivalent to 41,000 tonnes of carbon emissions avoided, or to put it another way, equivalent to powering 71,000 residential homes with green energy. We are committed to sustainability. We [indiscernible] many leading stewardship schemes. We're especially proud we're one of the early adopters of the new Solar Stewardship Initiative, the first ever solar supply chain sustainability assurance scheme. I'll now hand you over to Gurpreet, who will take through the portfolio in more detail.

Good morning, everyone. As Steve mentioned earlier, this period has been an important chapter in our fund as we transition into having an operational portfolio. When we compare this period end with last year, we have increased the operational [indiscernible] by nearly 200%. You can see on the chart since March, this has grown further from 126 megawatts to 147 megawatts. This is a substantial increase from astounding start 2.5 years ago. In a matter of weeks, we expect this to increase to 204 megawatts as our next projects become operational. During the period, we have installed and energized 4 projects. The first box on the top left is our 20-megawatt project with Nissan. As a reminder, this is one of the largest behind-the-meter [indiscernible] in the U.K. This was followed by energizing our 19th Tesco store in our portfolio. We have more news about our strategic partnership with Tesco shortly. During the period, we also commissioned a 28-megawatt site for Britvic and a rooftop project for Huntapac. Huntapac is one of the largest vertically integrated food businesses in the U.K. It grows packages and delivers vegetables to major grocers and retailers all over the country. And finally, we will commission Project Skeeby in July alongside an additional 3 Tesco stores. This slide shows our current customer base across our portfolio, which as I mentioned earlier, has a total capacity of 204 megawatts. This portfolio, on an operational basis, will generate GBP 28 million of revenue per annum, which Brett will take you through later. You can see that the majority of the portfolio sits within the core income book, where we have long-term contracted income through our PPAs. On average, these PPAs have 14 years remaining, and it's worth highlighting a couple of new customers since we last presented. You can see that we now have a 24-year PPA with Bentley for a solar carport in its employee car park in the Northwest; and a rooftop solar project with Unipres, which is a Tier 1 supplier to the auto sector. As per the strategy set out at the IPO, we continue to blend our long-term cash flows with some exposure to the merchant energy market through our core plus portfolio, which have shorter-term PPAs with OVO Energy and Good Energy. I'm now going to take you through a few sector case studies. The first one shows the inroads we've made with the U.K.'s automotive sector. We have expanded our customer base in this sector with Bentley and Unipres. This complements our existing PPA with Nissan. In fact, the Unipres site is on the same campus as Nissan in Sunderland. We now have circa 30 megawatts of capacity installed in the auto sector with over GBP 15 million invested. The auto sector tend to have highly energy-intensive businesses and are perfect candidates for on-site solar. These customers are now benefiting from one of the cheapest sources of energy in the country, whilst taking them one step further towards achieving their net zero goals. The same can be said with the food and beverages sector. We have invested nearly GBP 50 million in this market over the last 2 years with 4 blue-chip customers, all of which now have significantly lowered their carbon footprint and their electricity bills. In fact, our project for Britvic makes up 75% of its energy needs in the U.K. We are now a well-recognized name in the food and beverages sector, and this momentum is self-fulfilling as we continue to generate further business leads. It's also worth highlighting that our customers are proactively introducing us to their supply chains to help them reduce their Scope 3 emissions. As promised, this is a deeper dive on our strategic partnership with Tesco. We commissioned our 19th store during the period. We currently have a further 3 stores in installation, which we expect to be commissioned and generating shortly, and we have a further 6 units at the design stage. I'm pleased to say that this includes a large distribution center, which is our first with Tesco's and shows that we are expanding our relationship to beyond just the stores. The proposed system is similar to the rooftop system we have on our Marks & Spencers distribution center in Castle Donington. As you can see, our rollout is accelerating under our Tesco's framework agreement. We expect this momentum to continue in the coming months, and I think it is fair to say that this has not gone unnoticed amongst its peers in the grocery sector. The next case study is on the residential rooftop sector. You'll remember that we've always said that individual residential rooftops are typically too small and a bit [indiscernible] for us. However, we would opportunistically look at large and aggregated portfolios in the [indiscernible] if the income stream is government-backed and of course, if the price is right. During the period, we announced the acquisition of the ASG portfolio. This was a collection of circa 9,000 rooftop systems, all of which provide Atrato Onsite Energy with government-backed contracted income for the next 10 years. Post balance sheet, we have further grown this portfolio to over 12,000 systems through an acquisition that we announced recently. These residential portfolios are earnings accretive and more importantly, increase our exposure to uncapped RPI income. In our last presentation to the market for our full year results, we highlighted the various options we have for growth. This is something that we and the Board are focused on, given our share price has traded at a persistent discount to that. We have discussed potential JV strategies with the private investors. We continue to investigate capital recycling opportunities where we can realize the gains in operational portfolios that could be reinvested into new development projects. And we are keeping under review the potential to dispose and subsequently return capital to investors. Front and center in all of these discussions is to deliver the best possible outcome for our shareholders. I'll now hand you over to Brett to take you through our financials.

Thank you, Gurpreet. Good morning. I'm going to start this morning by taking you through the statement of comprehensive income for the 6-month period to the March 31, 2024. In common with our peer group, the company does not prepare full consolidated financial statements. And as such, the investment income here represents dividend and interest income received from subsidiaries. As the portfolio has grown and more projects have been energized, this income has grown to GBP 3.7 million, up from GBP 2.5 million for the same period last year. This has increased earnings before fair value movements to GBP 2.3 million or 1.56p per share. There has been a downward shift in the fair value due to an increase in the discount rate from 7.4% to 7.9% in the period. This is due to the introduction of debt in the portfolio. Earnings after tax were GBP 0.9 million. As of the 31st of March, the company's portfolio value had increased to GBP 134.4 million, as new assets have been acquired and installation assets have been energized. At the period end, the company held GBP 10.5 million in cash, which has been used to acquire new projects since the balance sheet date. The net asset value has decreased from 92p per share to 90p per share, which I will take you through in the next slide. As mentioned, the net asset value at September '23 was 92p per share. So taking each component in turn from left to right, the roll forward of 2.3p per share is the impact of the passage of time as we move closer to [indiscernible] of cash flows and the discount rate unwinds. The portfolio generated net cash 1.6p per share during the period. Although portfolio income is highly contracted with inflation linkage, lower power prices and lower inflation have both negatively impacted the net asset value with a 1.3p and 1.2p reduction, respectively. As announced in September, the company has a revolving credit facility with NatWest. GBP 30 million of this facility was drawn during the period to acquire new assets. The introduction of leverage into the portfolio has increased the discount rate applied to levered projects and has decreased the net asset value by 1p per share. Finally, we paid 2.6p per share in dividends during the period. Moving on to the debt structure. At the period end, the company had GBP 86 million of debt, GBP 46 million of which is an 11-year project finance facility with a fixed 2% all in cost of debt. The company has a 3-year revolving credit facility with NatWest held at the holdco level, and the facility includes an accordion of GBP 20 million, of which GBP 10 million has been secured by taking available capacity to GBP 40 million. As previously mentioned, GBP 30 million of this facility had been drawn at the period end. This facility is secured across part of the operational portfolio at a floating rate with 1.3% margin over SONIA. And the further GBP 10 million accordion can be requested subject to the satisfaction of certain conditions to increase the availability of the facility to GBP 50 million. We thought it would be helpful to provide a pro forma cash flow to give you a better feel of the consolidated income of the company. The pro forma is on the basis of all projects, including those acquired since [ balance sheet ] date been fully operational for the full 12-month period. Once the portfolio costs inclusive of debt service have been taken into account, a free cash flow of GBP 14.4 million is generated. Accounting for the fund level cost of GBP 2.8 million, the net cash flow to shareholders is GBP 11.6 million, translating to a dividend cover of 1.4x. This assumes a current dividend level of 5.5p per share and is dependent on the portfolio assumptions and the weather conditions being met. Turning on to our sensitivities. On this slide, I show our standard sensitivity metrics. Our exposure to merchant power prices remains low and within [indiscernible] expected at IPO. Energy production has the highest impact on the [ value ] of performance. And our sensitivity to both inflation and operating costs are relatively low to around 2.5%. Our portfolio has a 4% sensitivity to discount rate applied across the portfolio, which is in line with the market. Lastly, I'd like to reiterate the highly contracted nature of our revenue. At 93%, over the next 10 years, we have contracted revenue. 91% of this revenue benefit from index-linked uplifts. I will now pass back to Gurpreet to conclude.

Thank you, Brett. So to conclude, we'd like to return to what makes us different. Our investment strategy is focused on commercializing clean energy through long-term offtake contracts with creditworthy blue-chip organizations. In the 2.5 years since we launched, we have established a portfolio worth nearly GBP 220 million. This has the longest contracted income profile amongst our peer group. We also have the highest contracted revenue. And as a result, we have the lowest exposure to merchant power prices relative to our peers. This ultimately provides shareholders with a high degree of surety over the generation of cash flows, which is the core characteristic of this fund. Thank you. And this brings us to the end of the formal presentation. We'll now turn to questions. [Operator Instructions].

Thanks, Gurpreet. First question comes from Chris Stevens. He asks, are you still seeing demand your PPA solution given the decline in wholesale power prices?

In short, yes. So yes, you're right. The short-term power prices have fallen from its peak 1 or 2 years ago. However, the long run curve hasn't changed drastically. And more importantly, the non-commodity element of an electricity bill has continued to grow, and that's the cost of essentially degrade in policy costs. So in a nutshell, the economics for on-site solar is very much still positive, and our pipeline has never been bigger. As our results show, we're currently sitting on a pipeline worth GBP 400 million or nearly GBP 430 million.