Utility-grade Solar Infrastructure Play With Huge Runway For Growth

| Actions | Perspectives

We launched our Climate Transition Strategy a year ago because the world is changing and the importance of addressing the climate transition has come into sharp focus. Changing consumer demands and macroeconomic factors such as the war in Ukraine and the recent covid-induced supply chain issues have been a wake-up call for governments. Associated policy actions, such as the Inflation Reduction Act (IRA) in the US, have created a sustainable tailwind for companies which provide climate transition solutions, potentially providing fantastic investment opportunities.

But how can we identify the companies best-positioned to benefit? We believe the best way to access growth potential as the world moves more quickly towards a lower carbon future is by owning (a) companies that are best placed to navigate the transition (mitigators) and (b) those who create the products that allow for that transition to take place (enablers).

To do so, we identify a number of overarching Climate Transition Themes and more granular sub-themes. We then analyse the various layers of the value chain within the sub-theme to identify the best-positioned companies.

Take, for example, one our themes: Renewable Energy. Society’s goal to decarbonise will require a significant renewable energy infrastructure build out. Solar energy (one of our sub-themes) will play a central role in this transition.

A recent Princeton University report stated that utility-scale solar deployment may accelerate from 10 GW of capacity added per year in 2020 to 49 GW per year by 2024. Solar deployment may be well over 100 GW per year by 2030.

Array Technologies is a perfect example of what makes a company an Enabler. Array manufactures solar trackers for utility-grade solar arrays, which generate electricity as a system. Solar trackers enable a solar array to tilt as the position of the sun changes, maximising total energy production. They can increase the output efficiency of an array by, on average, 25%, with only an 11% increase in total project cost.

Because of these efficiency gains, we are seeing solar tracker demand growing 36% faster than the overall solar market as attach-rates increase.

Array has a 45% market share in the US – its product is patent-protected and uses fewer components than competing tracker technologies, this in turn reduces the number of points of failure and also shortens installation times, lowering operating and maintenance costs by 30%.

The company is also well-positioned to benefit from the recent Inflation Reduction Act tax credit proposal given its domestic US manufacturing footprint.

Of course, the difference between a good company and a good stock is the price you pay. Sustainability at a Reasonable Price is a core tenet of our strategy and we therefore must assess the market’s pricing of the opportunity.

Bottom-up fundamental analysis allows us to look beyond the simplistic nominal valuation metrics. We analyse the underlying revenue growth outlook (a function of stable pricing power and the large volume opportunity) and the prospect for margin improvement (driven by economies of scale) to realise better than expected future earnings growth. This renders the simplistic one year forward consensus P/E multiple less useful when it comes to properly valuing the opportunity.

While, on this basis, Array does trade at a premium to the market (the stock trades at 22x CY 23 EPS while the market trades at 17X), when we factor in the underlying growth opportunity this valuation premium disappears.

In conclusion, the combination of a multi-year investment cycle in utility-grade solar installations and higher attach rates for solar trackers is an attractive proposition. Array Technologies is in a position to take market share while realising economies of scale, which in turn can drive margin improvement, resulting in a double-digit compound annual growth rate of earnings.

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