Amara nZero - Astronauts - Initiatio

All,

Please find our initiation of Amara here.

Amara | Live Discussion

Wolfgang Felix - Senior Analyst, Head of Desk

Tuesday, 25 Feb, 3 pm UK time | 10 am ES

When not a single EU member hands in their NDCs to the Paris Agreement, something’s afoot, and it’s not good for renewables. We’ve found it hard to contain the long list of negatives engulfing this softly drafted bond, but concede it would be an expensive short. The market for bonds in no-man’s-land is strong these days, but we think this one will come down just a bit more before operations stabilise. There should be something to do here around summertime.

Investment Rationale:

- We like Amara, but we think we can get it cheaper if we wait until June. We don't see the company turn around in the first half of the year, even if the Spanish windfall tax has been abolished. A glut of cheap solar panels from a US tariff on Chinese imports might further depress revenues in Europe and margins along with it.  

- Regarding a short, provided there is borrow, a yield of 17% is very high and the market is very buoyant.

- We think Amara can scale their business to be profitable at these lower levels and that volumes should rise again, albeit at a slower rate following the demise of the Paris Accord. So Amara should have sufficient liquidity, and if not, sufficient baskets to remain solvent through the maturity of its RCF, which we see the company draw this year. With no material assets beyond WC, Amara should struggle to value far higher than €200m, which should put the bonds at 60c/€ and lower if the banks rank sr. to the notes after all. We don't think we should be there soon, but it’s worth waiting for the continued negative results Amara should present us with while the Spanish renewables sector is scrambling to get back on its feet.

Summary:

- Spanish specialised distributor of renewables and electrification equipment and materials with revenues dominated by Spain (>50%) and Solar (>50%). Its remaining exposure is spread mostly across South and Latin America with notable operations in the US, Italy and China. The company was formerly owned by Iberdrola, whose warehouses it manages in a now unprofitable contract. Amara has virtually no hard assets and operates from one central and 14 regional warehouses in Spain, as well as central warehouses in Brazil, Mexico and since the Dec. '23 acquisition of Sungry, also in the USA.

- The astronauts at Cinven bought the fast-growing Spanish distributor in 2023 on a 16x Adj. IFRS 16 EBITDA, only to discover that business had been boosted by high energy prices following the start of the Ukrainian war.

- Amara is now struggling to generate positive FCF and its liquidity only covers two years of interest before baskets should buy it time through RCF maturity in early 2028. There are no further triggers.

Key Value Drivers:

- Generally, renewable energy and electrification are secular tides that will float all boats in the sector. In time therefore Amara should grow, even if its idiosyncratic strategy is not blessed with success.

- Sungry Acquisition in the US to help diversify away from Spain and benefit from US tariff shield vis-a-vis Chinese competition.

- Margin expansion through diversification away from highly competitive Spain and away from Photovoltaics towards Wind and Electrification.

- Return of the Spanish Photovoltaics market and Iberdrola to it following the end of the windfall tax on energy.

- Strong market position in Spain and deep supplier relationships ensure Amara's competitiveness at home.

- Management have signalled that the Iberdrola contract may not return to profitability soon. The contract runs until 2027 and Amara needs to renegotiate. Plans are to possibly extend it to the US in 2025.

Key Risks:

- Even though the Spanish windfall tax on energy is off the table now, we don't expect the sector to just resume where it left off in 2023. We forecast 2025 to be another soft year before growth returns.

- Liquidity should run out in the next two years unless something changes. On the lower revenue profile, the company generates negative FCF and without volume growth, Solar will shrink further. However, Amara has sufficient baskets to arrange for facilities that should see it through maturity of the RCF in early 2028 and that would rank sr. to / layer the Notes.

- Tailwind from EU renewables target could pause during Trump. None of the European countries have handed in their Nationally Determined Contributions (NDCs) for 2025 to the Paris Climate Accord.

- Slow-down of European demand for solar panels following reversal of high energy prices from the Ukrainian war. The current level of demand may therefore be the new normal - no bounce.

- High Supplier Concentration: Five suppliers account for half the business. In its quest for higher margins, Amara will be tempted to deepen ties to biggest suppliers even further.

- Small Scale: Amara is a reasonably sized independent Photovoltaics specialist, but the space is dominated by large international general distributors who also carry solar and wind equipment. Spain still accounts for over 50% of revenues, which is dominated by five Chinese solar suppliers and an unprofitable contract with Iberdrola.

- US Tariffs could lead to Chinese dumping of solar volumes onto the European market. Generally, this would drop revenues and margins along with it.

- Other than NWC of less than €150m, the company has virtually no assets to speak of.

Looking forward to discussing this name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk