Ellomay_ a systematically undervalued utilities micro-cap – ellomay capital ltd. (nysemkt_ello) _ seeking alpha

Once in a while, I find micro-caps that no one has ever heard of, with almost no coverage and very low visibility. High profit margin I love these situations because there are quite a few bargains in this space. High profit service business The small market cap precludes institutional investors from owning stakes in these businesses, and the lack of coverage means information asymmetry is amplified – if you bother to do the research, it is likely that there is an under-appreciated opportunity in neglected micro-caps. Low investment high profit business in delhi I believe this systematic undervaluation is currently happening with Ellomay Capital (NYSEMKT: ELLO).


ELLO is one of those under-the-radar stocks with a high quality business. Low cost business ideas with high profit in india The company has almost zero coverage, no investor engagement and has a market cap of just $75M. High profit business in india Contrary to what the company’s name suggests, their main business is actually the operation of solar PV plants in Italy and Spain. Low cost high profit The company has a 22.6MWp of installed capacity across a dozen plants in Italy, and 7.9MWp of capacity in a few plants in Spain. Items with high profit margins Hence, main revenue stream relies on Feed-in-Tariffs (FITS) paid by the Italian and Spanish government for generating clean energy and selling it to the national grid.

Besides their clean energy operations, ELLO also invests in other energy projects, such as the Dorad natural gas combined cycle plant in Ashkelon, Israel. High profit home business They essentially financed part of the project with cash in exchange for a 49% stake in the parent company (Dori Energy), thus giving them an 9.4% indirect stake in Dorad Power Station.

Although it seems unremarkable, ELLO has significant upside potential and currently trades at very cheap levels for a utility business with high revenue visibility, low risk and little leverage. Small scale business with high profit in india They also hold roughly $36M in tax loss carryforwards which do not expire, allowing them to claim tax rebates for much of the foreseeable future.

Moreover, ELLO’s share of profits from Dorad is likely to increase as the plant’s majority owners are seeking to expand the operation to add ~500MW of additional generation capacity. High profit online business Given the stable growth in demand for electricity in Israel, Dorad is poised to benefit from rising tariffs as the second-largest private power plant in the country. High profit products to sell online Aside from these positives, ELLO also holds significant long-term swap contracts that would benefit from a rising rate environment.

Also, ELLO has several upcoming pumped storage projects in the pipeline, which will provide an additional revenue stream when it comes online. High profit industries Similar to the Dorad deal, ELLO financed part of the construction and licensing of these projects in exchange for significant equity stakes.

ELLO derives substantially all of its current revenue from their solar energy generation from assets in Spain and Italy. Small business with high profit This segment of the company has very high revenue visibility as FiT rates are set by the respective governments. High profit farming ELLO has been continually adding capacity whilst keeping CapEx to a minimum, allowing for a very high ~79% operating margin.

In 2015, the Italian government decided to lower FiT rates due to budgetary concerns and low fossil fuel prices. Low investment business with high profit However, the negative impact on ELLO was minimal as revenue barely dipped (in euro terms). High profit selling When adjusted for currency translation, revenues actually grew 5% due to increased generation capacity in Spain. High profit business ideas Given that most of their plants were built around 2011 and 2012, they have a minimum viable life of ~20 years remaining.

This segment alone provides a gross profit (after operating expenses and depreciation) of roughly $6-$7M per year on a market cap of $77M, which is decidedly cheap for a quality business. High profit greenhouse crops In summary, this is a stable growth, high margin, low maintenance business trading at ~11x P/E.

In 2010, ELLO invested roughly $14.1M in Dori Energy, which subsequently allowed them to gain a 9.2% indirect stake in the Dorad Power Plant (this was subsequently increased to 9.4%). High profit business in malaysia In exchange for financing its construction, ELLO is currently reaping roughly $2.5M in annual profits – a superb rate of return that should increase as Dorad hits full capacity. High profit margin products to sell on ebay (Note that profits from the Dorad Power Plant are accounted using the equity method, which means profits are directly added into the statement of income).

The beauty of this deal is that management spotted the long-term potential to finance this natural gas plant and purchase a portion of its future income stream very cheaply. Low investment business with high profit in india With a 20-year electricity generation license and land lease, ELLO will essentially collect an undiscounted rate of return of roughly 17- 18% annually on its investment (assuming tariffs keep pace with inflation).

This project is essentially a hydroelectric pumped storage facility that stores energy in the form of gravitational energy in periods of low electricity demand and high production. High profit margin foods It then converts the energy back to electricity during peak demand periods and feeds it into the national grid. High profit margin products to sell online This allows the electrical grid to balance loads between periods of high and low demand. Low investment high profit business in pakistan This essentially allows the company to arbitrage the electricity market (buy when prices are low, generate and sell when prices are higher).

To date, ELLO has committed to pay ~$17M to acquire a 75% stake in Ageuva Sheuva Electra L.P, which holds the ownership interest in the Manara Project. Business with small investment and high profit Interestingly, ELLO only has to make payment after the 75% stake has already been transferred. Small scale business with high profit At the time of the deal, I think this mechanism served as a warranty in case the project failed to receive regulatory approval (ELLO announced that the project has been granted a conditional license). Low overhead high profit business The language was particularly telling, as it stated that ELLO would make payment “upon the fulfillment of certain conditions.” This was an extremely shrewd move by management because they effectively reserved a 75% stake in the project whilst taking on very little financial risk since ELLO would only need to pay much later.

Now that the project has been granted conditional approval, we can expect construction to be finished swiftly, and it should start making meaningful contributions to the bottom line within a year or two. High profit business ideas india Given that it has a huge 340MW capacity, the cash flows are likely to be significant.

Furthermore, of the $3.8M SG&A expenses in 2015, $1M was in connection with the Manara project. Business with low investment and high profit This means we can expect a significant cost reduction once construction has been concluded, thus providing a boost to free cash flow.

Given that we are uncertain of the exact amount of revenue the Manara project will generate, a conservative approach would be to see this as a free optionality embedded in ELLO’s equity. High profit plants However, given prevailing tariff rates and the facility’s generation capacity, it is likely to be in the millions.

In my experience, it’s rare to encounter micro-caps with strong management. High profit small business ideas 2013 However, ELLO’s excellent track record could be largely attributed to smart deals, financial engineering and foresight.

The most salient example would be when management purchased a bunch of solar-generating assets from an insolvent German company in 2014. High profit margin business india They sensed that there was a fire sale, and managed to purchase the solar assets at $13M, which was $4M below tangible book value. High profit online business ideas In the prior year, they netted a similar deal by purchasing PV assets in Spain for $30M, which was $10.2M below tangible book value.

These are just a few examples of interesting dealmaking – the 20-F is littered with examples of financing deals, small acquisitions and purchases, etc. Business with low overhead high profit ELLO seems to be a lean, well-managed operation with executives being very active in its operations. High profit business for sale Unsurprisingly, insiders hold ~63% of the stock, giving them a huge stake in the company’s success. Business ideas with low investment and high profit in hindi Last year, they approved a new policy that would obligate the company to return 33% of their annual distributable profit either through dividends or share buybacks. High profit companies Given the large amounts of free cash flow (relative to market cap) that they generate, this bodes well for investors who like cash generative businesses.

Much of ELLO’s capital comes from their public issue of $35M non-convertible debentures at a fixed interest rate of 4.6% a year. Items to sell with high profit margins Hence, their cost of capital is extremely low compared to the yield received from investing these funds in a portfolio of clean energy generation assets. Low risk high profit business ideas The company currently holds ~$18.7M in cash and ~$6.5M in short-term investments, which provides more than sufficient liquidity to fund new projects or buy energy generation assets from insolvent companies (as they have done in the past).

We value ELLO using a simple DCF model without taking into account the potential upside from pumped-storage in the future. Low cost business ideas with high profit This provides a very conservative estimate of ELLO’s intrinsic value based purely on their equity investment in Dorad and their portfolio of energy assets. Low investment high profit business in chennai Although there is a likely SG&A step-down after 2017 since consulting fees for the Manara project will be substantially reduced once it nears completion, we disregard this effect to arrive at a very conservative estimate.

Taking an extremely conservative estimate that ignores potential revenue streams from pumped storage projects and SG&A step-down, we arrive at these projections for FY2016 – FY2018. Small business high profit At first glance, these figures seem uninspiring. High profit small business ideas However, we need to take into account a few crucial facts.

First, ELLO’s capital expenditure needs are almost zero because most costs associated with maintenance and upgrading of their PV assets in Spain and Italy are accounted for in operating expenses. High profit products to sell on ebay These PV assets will depreciate over their remaining useful life of ~20 years whilst continuing to provide strong cash flows.

Also, ELLO holds a sizeable number of swaps that perform well in a rising rate environment. High profit business In the projections, we assumed there is no net currency fluctuation and that interest rates hold constant. Low price high profit shares However, in a rising rate environment, ELLO is likely to benefit by roughly $850,000 per 1% rise in US interest rates. High profit margin products in india Although this figure seems small, it is sizeable considering the company’s small market cap and the long-term nature of these swap contracts.

I think the most accurate way to view the business is as a capital allocator. Low investment high profit business ideas Management is essentially using cash flows derived from PV assets to finance expansion in other power generation assets that tend to give stable, high yields over long periods of time. High profit business in india 2012 Hence, much of the company’s fate depends on whether management can make savvy, smart investments over time. What is a high profit margin So far, their track record has shown astute foresight (bargain purchases and success from Dorad project).

Hence, the more accurate way to view ELLO’s financials would be to take EV/EBITDA, given their capital structure and very low CapEx needs. Highest profit margin products on ebay On that basis, ELLO currently trades at ~10x EV/EBITDA, which seems very cheap for a utility business with high revenue visibility and a strong pipeline of projects. Low capital high profit business On a free cash flow basis, ELLO generates an FCF yield between 8% and 9% (after accounting for interest expenses). Low risk high profit business In the context of the conservative projections presented above, I think ELLO should be fairly valued at $11-12 per share, and this value should materialize over the next 2 years with the accumulation of profits and potential success of pumped-storage projects.

Companies like ELLO tend to be systematically undervalued given the structure of the stock market and investor psychology. Business ideas with low investment and high profit The company’s small scale actually gives it an advantage – operations are less complicated, they are able to make investments quickly and flexibly, and their main revenue stream is more shock-resistant since any potential cuts in Feed-In-Tariffs are likely to hit larger projects harder than their trove of smaller PV generation assets (the exact thing happened with the Italian FiT rates in 2015). High profit business opportunities This combination of unique characteristics enhances ELLO’s attractiveness as an investment.

However, a drawback is that ELLO’s free float represents only 31% of shares outstanding, and has a fairly low daily volume. Business with high profit Retail investors can still build a meaningful stake, but larger amounts may face liquidity constraints.

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