Description

Abengoa SA (ABG SM | ABG/P SM | ABGB) (“ABG”) is a construction and concession company focused on energy and water infrastructure.  The company’s stock presents a compelling opportunity to invest in a yieldco restructuring aimed at unlocking approximately €4bn in hidden asset value associated with ABG’s concession portfolio.  

The following analysis is from the perspective of Abengoa's Class B  shares (ABG/P SM)  as they are the most liquid. 

ABG’s operations are split between Corporate and Concession segments:

Corporate includes:

• Engineering and Construction
  • Segment specializes in the construction of solar thermal, traditional and waste-to-energy power plants, desalination facilities, water infrastructure, biofuel facilities and high voltage transmission lines
  • €6.8bn E&C backlog, 54% of which will be realized in 2014
  • €139bn E&C pipeline with an expected 10% conversion ratio over the next 24 months
  • Approximately one half of ABG’s backlog is comprised of orders to build energy and water infrastructure assets for third parties.  The remainder is set to build concession assets which ABG owns and operates.
  • Business should generate ~€580mm in 2014 EBITDA excluding €193mm in required concession equity investments
  • Global peers trade ~8.0x EV / EBITDA
• Industrial Production
  • Operates a number of biofuel plants in the US, Europe and Brazil
  • Business generated ~€100mm in EBITDA during 2013
  • Peers trade ~6.0x
• €2.5bn in corporate net debt
• Implies an equity value of €2.65bn or €3.00 per share (based on a share count of 860mm and the current Class B / Class A discount) against a stock price of €3.19 for the B shares

Concessions includes:

• 41 assets currently in operation including concentrated solar power, Latin American transmission lines, wind farms, traditional power plants and water desalination facilities
  • Represents €2.8bn in invested equity underwritten to return 10-15%
  • Assets are contracted under 20-30 year agreements with investment grade counterparties
  • ABG expects the assets to generate €580mm in fully ramped EBITDA
  • Based on the disclosed asset ownership structure we estimated ~€410mm of this is ABG-owned EBITDA
• ABG expects to invest an additional €1.1bn in equity thru 2016, which could add over €375mm in incremental EBITDA (€250mm in owned EBITDA)
• Segment currently has €6.3bn in net non-recourse debt implying ~6.5x leverage on a fully ramped basis
• We estimate the portfolio will generate over €225mm in owned cash available for distribution
• Valuing it at book, ABG’s €4bn investment in concessions assets would be worth ~€4.60 per share
• ABG has historically monetized these assets in one-off sales at an average price of 1.2x book value. 
• Based on their plans to move the assets into a yieldco we expect that ABG will accelerate the monetization process and achieve higher values going forward

Abengoa Yield PLC (“ABY”)

• In early April, ABG filed an F-1 highlighting its plan to IPO a portion of the concession portfolio through ABY
• Based on the performance of NRG Yield (NYLD) and Pattern Energy Group (PEGI), a yieldco will provide ABG with an advantaged cost of capital to house  concession assets
• We believe the assets’ attractive attributes will result in ABY trading inline or at a premium to public yieldco peers
  • 26-year weighted average remaining contract life
    • Peer average is approximately 17 years
  • Strong growth prospects
    • We estimated €140mm in owned EBITDA associated with the identified ROFO assets planned to be dropped down in 2015 and 2016; implying + 40% EBITDA growth
    • Over €200mm in owned EBITDA associated with ABG’s development pipeline supplying drop down inventory post 2016
  • 6.5x normalized non-recourse leverage is comparable with peers
• Assuming ABY prices its IPO at a 7% yield, on run-rate distributions, and subsequently trades at  5 %, ABG’s stake and cash proceeds would total €1.9bn or €2.10 per share
  • A sale of the ROFO assets at a conservative 11x EBITDA could lead to an additional €625mm in proceeds or €0.70 per ABG share

Summary

• Investors currently view ABG as an over-levered Spanish construction company with an asset intensive business model where the concession assets do not earn returns above ABG’s cost of capital
• A successful IPO of ABY will reduce the company’s cost of capital and accelerate ABG’s shift to an asset light operating model
• Today, ABG’s E&C and biofuel businesses account for nearly all of the company’s stock price
• ABG’s concession assets are well-suited for a yieldco
• Ignoring the value of ABG’s retained concession assets, the development pipeline and the upside associated with drop down accretion to ABG’s stake in ABY we believe ABY will unlock €2.80 in value implying 80% upside to ABG’s current share price
• IPO and drop down proceeds will allow ABG to meaningfully delever its corporate balance sheet resulting in improved credit ratings and further reductions in the cost of capital
  • With €1.8bn in outstanding bonds costing ~8.6%, deleveraging and refinancing high cost debt will have a meaningful impact on corporate free cash flows
• Post the IPO of ABY we believe the company can continue to unlock value through drop downs, accretive capital allocation, and the spin / sale of their biofuels business however at its current stock price ABG presents a compelling investment on the yieldco IPO alone

Catalyst