RE Royalties and Solar

An opinion piece by Tarik Dede (Apaton Finance GmbH).

RE Royalties has adapted a business model established in the mining industry to the renewable energy sector. The Canadian company provides project developers with capital to build solar parks or wind farms and receives license fees, known as royalties, in return. This benefits both parties. The project developer does not have to immediately give up shares in their company. RE Royalties, in turn, receives a share of revenue over the entire lifespan of the project, which often operates for 20 years or longer. The key point: Since gross revenue serves as the basis rather than profit, RE Royalties faces no disadvantages from rising operating costs. The royalty is typically coupled with a short-term loan (6 months to 3 years), from which interest income is generated. In the long term, the company builds up many cash flow streams in this way without taking on operational risks. The portfolio is strongly focused on North America and now comprises ~120 projects. In addition to solar and wind energy, the focus is also on battery storage and biogas. The current pipeline of potential investments has grown to a total of CAD 200 million.

The stable revenue has made RE Royalties a solid dividend payer. The company will soon have paid a dividend to shareholders for 30 consecutive quarters. In January, the company paid out 1 cent per share. Calculated on an annual basis, with a payout of 4 cents, this results in a current dividend yield of 10.9%. Consequently, management is dissatisfied with the stock's performance; the market capitalization stands at only around CAD 17 million. A strategic review has now been announced to "identify opportunities to maximize value for shareholders." This involves evaluating a broad range of potential alternatives, including partnerships, co-investments, and even the sale of the company. For this reason, management has commissioned PricewaterhouseCoopers to conduct the strategic review.

After a strong start to the year, the stock has recently been trading sideways. At CAD 0.365, however, it remains far from its 5-year high of over CAD 1. Should a sale actually take place, there would likely be at least a takeover premium.

Read the full article here.