MONTREAL--(BUSINESS WIRE)--Converium Capital Inc. (“Converium”) today sent a letter to the Board of Directors of Polaris Renewable Energy Inc. (TSX: PIF) (“Polaris” or the “Company”) highlighting the Company’s undervaluation and urging the Company to commence a substantial issuer bid to repurchase at least 10% of the outstanding shares. Converium believes that a change in capital allocation will lead to significant shareholder value creation with the potential for the stock to more than double to CAD $30 per share.
The full text of Converium’s letter is below.
October 11, 2023
Polaris Renewable Energy Inc.
7 St. Thomas St., Suite 606
Toronto, ON M5S 2B7
Attention: Jaime Guillen, Chairman
Marc Murnaghan, Chief Executive Officer
Dear Jaime and Marc,
Funds managed by Converium Capital Inc. (“Converium” or “we”) are one of the largest shareholders of Polaris Renewable Energy Inc. (“Polaris” or the “Company”). At Converium, we seek to identify companies that have fundamentally sound operating businesses but have some identifiable issue weighing on their valuation. We strive to work collaboratively with management teams and boards to develop creative solutions to resolve the underlying valuation overhang and to maximize value for all stakeholders.
We are enthusiastic shareholders of Polaris, and we appreciate the time you have spent with us recently discussing the Company’s business. In our view, Polaris has an attractive portfolio of Latin American renewable power projects that operate with long-term power purchase agreements, denominated in or linked to the US dollar, and that are almost all indexed to inflation. Polaris has runway for growth through the expansion of existing projects and new development projects. We have known the Company’s management for many years and have considerable respect for their accomplishment of growing Polaris in a disciplined manner. Most importantly, in our view Polaris’ shares are significantly undervalued.
Polaris currently trades at less than 6x forward EBITDA. This valuation is far below Canadian and global renewable power companies, which on average trade at 11x forward EBITDA. Polaris also has a history of carrying low leverage (less than 3x EBITDA compared to more than 5x EBITDA for peers) and generating robust free cash flow. The Company’s shares trade at more than a 20% forward free cash flow yield. 1
This valuation is far too low for a high-quality, well-managed renewable power company.
*****
Despite Polaris’ strong fundamental performance, the Company has simply not gained traction with investors. Earlier this year, Polaris outlined a plan to grow from its current $60 million of EBITDA to $100 million of EBITDA in 2028. We expect that Polaris can easily achieve this plan, but given that the four other Canadian listed renewable power companies generate $350 million to $2.5 billion of annual EBITDA today, it is not obvious that investors will care when Polaris reaches its target in five years.
In addition, Polaris’ valuation of less than 6x forward EBITDA is the lowest we have found among any renewable power company in the world. If investors are so materially undervaluing Polaris today, why does management assume that investors will alter their valuation in the future?
While we admire management’s abilities and agree that Polaris should grow over time, we do not believe that the cost of acquiring or developing the proposed $40 million of “growth EBITDA” represents the best opportunity available to the Company today. Given Polaris' low valuation, it has already been a challenge for the Company to acquire or develop projects that are financially accretive. And it is unlikely that power purchase prices have increased sufficiently over the last year to absorb the higher cost of financing projects, causing new projects to be less financially attractive.
An alternative and more accretive use of capital would be a significant share buyback. We believe Polaris should commence a substantial issuer bid to repurchase at least CAD $30 million of stock.
By repurchasing its shares, Polaris would effectively acquire assets that it knows intimately at a large discount to their intrinsic value and at a 20% free cash flow yield. We believe this yield is meaningfully higher than the returns available to the Company today on new projects. A share repurchase would drive earnings per share accretion, increase the per share value of the Company, and likely lower the Company’s cost of capital which in turn would potentially enable Polaris to use its shares as a currency for growth in the future. The current strength of the US dollar provides an added benefit as the Company can use its US dollar denominated cash flows to repurchase even more Canadian dollar denominated shares.
We recognize that Polaris has a normal course issuer bid in place, however the Company has not repurchased any shares under such bid to date and is limited to purchasing a nominal number of shares thereunder each day. Polaris’ valuation and cash flow warrant a more aggressive form of buyback.
The initial CAD $30 million we propose represents roughly three-quarters of our estimate of the Company's free cash flow after all debt service over the next twelve months. A buyback of this size means that Polaris will have sufficient financial resources to fund committed growth projects such as Canoa II and high-return optimization projects that collectively should increase EBITDA by approximately 20%. As a result, Polaris’ leverage should not increase. Yet, the Company would repurchase 10% of its outstanding shares at highly attractive prices. Polaris could repeat this exercise should its valuation remain depressed.
We believe this approach positions Polaris to unlock significant shareholder value despite today’s higher interest rate environment, with the potential for the stock to more than double to CAD $30 per share.
*****
Polaris has tremendous “in place” value that investors do not appear to appreciate today. We believe a change in capital allocation from growth initiatives to aggressive share repurchases will position Polaris to both unlock and grow this value. We would be pleased to discuss the ideas above with you at your convenience.
Best regards,
Michael Rapps
Managing Partner
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About Converium Capital
Converium Capital is a multi-strategy opportunistic investment firm. Converium aims to deliver positive and uncorrelated returns regardless of macroeconomic conditions by investing in distressed and event-driven opportunities globally and across the capital structure.
Disclaimer
The views expressed in this announcement and the letter to which it refers represent the opinions of Converium Capital Inc. (“Converium”), which may change at any time and are based on publicly available information with respect to Polaris Renewable Energy Inc. (the “Company”). Converium disclaims any obligation to update the data, information or opinions contained herein. Financial information used herein has been derived or obtained from publicly-available sources, including filings made by the Company or by other companies that Converium considers comparable, and from other third-party sources.
Although data and information contained herein have been obtained from sources believed to be reliable, Converium does not guarantee their accuracy, completeness or fairness. Converium has relied upon and assumed, without independent verification, the accuracy and completeness of all data and information available from public sources. No warranty is made that any data or information contained herein is accurate, whether derived or obtained from filings made with a regulator or from any third party.
There is no assurance or guarantee with respect to the prices at which any securities of the Company will trade, and such securities may not trade at prices that may be implied herein. Clients of Converium hold positions in the securities of the Company. Converium may sell all or a portion of its clients’ exposure to the Company’s securities or may cause its clients to buy additional securities of the Company at any time (whether in open market or privately negotiated transactions, or otherwise). Converium reserves the right to take any action with respect to its clients’ investment in the Company as it deems appropriate, including communicating with the board of directors or management of the Company, or with other investors. Neither these materials nor anything contained herein is intended to be, nor should it be construed or used as, investment, tax, legal or financial advice, an opinion about the appropriateness of any security or investment, or an offer, or the solicitation of an offer, to buy or sell any security or investment.
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1 Forward EBITDA and free cash flow figures for Polaris are Converium’s estimates. EBITDA and leverage figures for peers are derived from Bloomberg. Free cash flow throughout this letter is calculated excluding growth capex. All values in this letter are in USD unless otherwise noted.