12 Apr 2019
Begin with the End in Mind
By: Chris Jordan, Business Development Manager. Sasfin Wealth
Steven Covey says that we should “Begin with the End in Mind”, so that all our actions are taken with a clear vision of achieving our ultimate goal.
Load shedding, two of the most feared words in SA, should therefore be the starting point from which to envisage a “brighter” future.
One step forward, two steps backs
Eskom was established in 1923 as the Electricity Supply Commission. In 1925 it built its first power station, a hydroelectric facility, followed in 1928 by the commissioning of the first power station in the world to burn pulverised coal. While this was an exceptional innovation at the time, it appears that Eskom’s reliance on coal has now become its Achilles heel.
Traditional energy generators are out of favour because of the high cost and the long lead times associated with the construction of new facilities, the cost of maintaining existing facilities, and the global demand for cleaner energy generation.
Albert Einstein is quoted as saying “The world as we have created it, is a process of our thinking. It cannot be changed without changing our thinking.”
Our reliance on Eskom for the last 93 years may have left us stuck in our historical paradigm, but rather than being overwhelmed by negative external factors that we cannot change, such as load shedding, a more appropriate response is to change our thinking and focus on the opportunities created by the change in global energy generation trends.
There are two shares listed on the Johannesburg Stock Exchange that can benefit from the transition from fossil fuels to solar and wind power.
Investment opportunities in the maelstrom
GAIA Infrastructure Capital (GAI) has minority holdings in the Dorper Wind Farm in the Eastern Cape and the Nobelsfontein Wind Farm in the Northern Cape. Both these facilities have agreements with Eskom to provide electricity directly into the national power grid. GAIA also has interests in three solar photovoltaic farms. The share price is currently at a 40% below its net asset value (NAV), and they pay a healthy annual dividend of around 10%. The price earnings ratio (p/e) is about 9.6, which is relatively inexpensive.
Alviva Holdings (AVV) is probably better known as an information technology company, but it is also active in the renewable energy sector through Solareff, its renewable energy division. Solareff has installed numerous solar photovoltaic energy solutions, grid tied and off grid, in shopping centres and office parks throughout South Africa and in Namibia. In 2017 they acquired a 75% stake in GridCars, a leading service provider in electric vehicle charging. Alviva’s share price is down about 5% over the last 12 months, but this has largely been compensated for by its dividend payments. It is currently trading on a p/e of 6.2, which under normal market conditions should result in strong buying activity.
Internationally there is a wider selection of companies in the renewable energy sector, and based on their share price performance over the last 12 months two of the more promising investments appear to be Sunrun Incorporated (RUN) listed on the Nasdaq in the United States, and Scatec Solar (SSO), listed in Norway. Both companies offer photovoltaic solutions, although Sunrun is focussed more on the domestic market in the US and Scatec’s market is in industrial applications across various geographies from Brazil to the Ukraine.
Sunrun’s share price has appreciated by 148% over the last 12 months, and it is now trading on a p/e of 26.7. It did not pay a dividend in the last financial year. The share price of Scatec Solar has increased by 61% over the same period, but it is now on a very demanding p/e of 134.9, with a dividend yield of only 1%. Both companies appear expensive but their future growth prospects may justify their high valuations.
In general, investments in the renewable energy sector have not yet produced outstanding returns, but the drive to reduce the use of fossil fuels in energy generation will intensify in the future, and the use of solar and wind to supplement the existing power infrastructure will ultimately be endorsed by governments and gain greater acceptance amongst consumers.
Steven Covey says that “every human has four endowments – self-awareness, conscience, independent will and creative imagination. These give us the ultimate human freedom … the power to choose, to respond, to change”.
Perhaps the crisis at Eskom will be the catalyst for change in energy generation in SA, and over the long term investors may be well rewarded for their early investment into the alternative energy sector.