August 13

This Renewable Energy Stock Spiked After Solid Q2 Earnings, Should You Buy?

This Renewable Energy Stock Spiked After Solid Q2 Earnings, Should You Buy?

By Dan Kent

August 13, 2019

**The writer of this article may hold positions in the stocks listed below**


It was a strong second quarter for Pinnacle Renewables (TSX:PL) as the company reported second quarter earnings after the bell yesterday. The company is currently trading up 6% as of writing. So why the jump? Lets dig in.

Most analysts predicted the Canadian stock would post earnings per share of $0.01 this quarter, but Pinnacle surprised both analysts and investors with earnings of $0.06 per share. Revenue also came in 4% higher than expected at $104.2 million.

The company is seeing excellent year over year growth in numerous areas. Its backlog increased 35%, from $5.1 billion in the first quarter of 2018 to $6.9 billion as of yesterdays filing. Most of the company’s backlog is for work set to commence in the next couple of years, with $6 billion of it accounted for projects in 2021 and beyond.

Revenue is up 22.4% compared to last year, along with a 8% increase in adjusted EBITDA.

New international agreements in place

Pinnacle is expanding its international footprint, with new take-or-pay contracts in both South Korea and Japan, totaling over 220,00 MTPA (Million Tons Per Annum) of product.

As a result, Pinnacle has around 106% of its production capacity contracted through 2026. The company has robust international exposure, with 44%, 36%, 18% and 2% of its contracts coming from Japan, the U.K., South Korea and Europe respectively.

Diversification risks with Pinnacle

So far in 2019, the company has heavily relied on three customers, totaling 87% of its revenue. This is 10% higher than this time last year.

Any company that relies this much on major clients is one contract away from losing a large portion of its revenue stream. As such, it will be very important to follow the company’s diversification strategies.

Production facility update

Pinnacle is continually expanding its operational facilities, and its most recent project, High Level, is expecting to break ground in the third quarter of fiscal 2019.

The company had a setback at its Entwistle facility in early February due to an explosion, but the company states the costs will be recoverable through insurance. The incident cost the company over $2.3 million dollars in free cash flows, and is expected to cost a total of $21-25 million to get the facility back to its planned run rate.

Overall, most of Pinnacle’s production facilities are either meeting or exceeding production expectations, which is crucial considering the demand for the company’s product.

My take

Pinnacle is still in its infancy, but it’s heading in the right direction to be a long term player in the renewable energy industry. The stock is down over 25% year to date, but with a solid second quarter, we may see most of that deficit erased.

To go along with that, the company also provides a 6%+ dividend yield, with a payout ratio of around 86%. It’s dividend isn’t bulletproof, but I’ve seen some in a lot worse shape.

The closure at its Entwistle facility due to a dryer explosion is a setback, and the company needs to put measures in place to ensure it doesn’t happen again, but as was said, most of the costs will be recuperated from insurance.

A new product in a new industry is always a significant risk. Better technology, increasing production costs or new regulatory restrictions can have large impacts on a company’s top and bottom lines. But make no mistake about it, we’re heading toward greener and cleaner energy, and I’d say Pinnacle would be a strong bet. In fact, I even listed the company as a unique opportunity on my list of the best Canadian lumber stocks.

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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