Geothermal Dividends from Resilient Ormat

The last time Ormat Technologies (ORA:  NYSE) was featured here was in late 2018, after the company had suffered a major setback at its Puna Geothermal Power project in Hawaii.  The Kelauea volcano erupted in May 2018, forcing Ormat to shut down the Puna power plant and plug the geothermal wells.  In November 2018, the article declared “Ormat Steams On.”   Investors seeking renewable dividends are well served by a check back to find out if Ormat is still steaming.

The Puna Power Plant in Hawaii actually contributed to financial results in the most recently reported quarter ending March 2021, after being restarted in November 2020.  The plant started delivering 2 megawatts to the Hawaii Electric grid in November 2020, with plans to ramp to 15 megawatts following connection of a new geothermal well in 2021.  Throughout the current year, Ormat has been working on an additional well and a new electricity substation.  No doubt the pandemic slowed recovery at the Puna plant, but Ormat has indeed ‘steamed on’ in Hawaii.

In the twelve months ending March 2021, Ormat squeezed $74.7 million in net income or $1.40 per share from $679.6 million in total sales from a mix of solar, geothermal and wind power.  The topline slipped in the last year and a half, in large part due to pandemic conditions that had kept people at home and many businesses idled.  However, that has not been a problem for Ormat, which made up part of the shortfall in sales with an improved gross margin, reaching 39.5% in the trailing twelve months compared to 36.1% in calendar year 2019 before the coronavirus took over.  The profit expansion was not frittered away at the operating level.  Ormat’s operating margin was expanded from 25.9% in 2019, to 27.2% in the trailing reported twelve months.

Impressive profit margins are good, but cash is truly king.  In the twelve months ending March 2021, Ormat converted every $1.00 in sales to $0.37 in operating cash flow.  Now we are impressed.  In 2019, before the misery of the coronavirus pandemic, Ormat was only getting $0.31 from each sales dollar.  A 6% improvement in the sales-to-cash conversion ratio during a period of economic and health challenges is an important testimonial to management’s execution skills.

Investors will hear more about the Puna plant progress during the company’s conference call on August 4th after Ormat announces financial results for the second quarter ending June 2021.   The three analysts who publish estimates for Ormat are all calling for a decline in sales and earnings compared to the same quarter in the previous year.  The disappointing comparison is likely to keep the stock stepping sideways as it has been since early May 2021.

It might be shortsighted for investors to dwell only on existing operations. Ormat is poised to grow dramatically through the July 2021 acquisition of TG Geothermal Portfolio for $171 million. The deal gives Ormat two geothermal power plants in Nevada totaling 67.5 megawatts capacity as well as an undeveloped asset the included an underutilized transmission line between the site and California.  The two Nevada power plants are expected to contribute $55 million in incremental revenue for Ormat in 2022, providing $37 million in cash earnings.

The deal will help support the company’s annual dividend payout of $0.48 per share.  At the current stock price that represents a 0.7% dividend yield, which helps supplement the 18.0% growth delivered by the stock price over the past year.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.