RE Royalties and the Energy Sector

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

The Canadian company pays out CAD 0.04 per share annually and currently offers a dividend yield of more than 10%. Its business model is extremely efficient. The company has adapted the royalty model from the oil and mining sectors to the renewable energy sector. RE Royalties has now invested in more than 130 individual projects and shares in their revenues.

The company is fully committed to green solutions. Its investments span solar and wind farms, battery storage, renewable natural gas, and hydropower, as well as infrastructure projects that improve energy efficiency. As is customary in the energy sector, investments are made over long time horizons; many projects run for 20 years or more. This makes the business model incredibly predictable.

Specifically, RE Royalties provides capital to bring projects to fruition and, in return, receives a share of future revenues from its partner. In addition, the company also acts as a provider of short-term bridge financing. RE Royalties focuses entirely on this niche to avoid intense competition from other financiers such as banks or private equity firms. The company typically acts as a financier for projects with a volume of around CAD 10 to 20 million. According to the company, it has invested more than CAD 80 million since 2016—the return on invested capital averages more than 19%. By way of comparison, this roughly corresponds to the returns from the cloud businesses of major tech giants.

Management, which owns approximately 25% of the company's shares, believes the current share price does not adequately reflect the company's value. In response, the company has engaged PricewaterhouseCoopers to help review and optimize its strategic direction. According to the company, options under consideration include strategic partnerships, co-investments, and optimizing the capital structure through equity or debt financing. A sale to a larger industry player has also not been ruled out. For investors, RE Royalties offers two potential attractions. First, the stock currently provides an approximately 10% dividend yield, an increasingly rare level of income. Second, a strategic transaction or takeover could provide additional upside through a potential acquisition premium.

Read the full article here.