Could Scatec’s share price power up on capacity expansion?

Scatec’s [SCATC.OL] share price has slumped so far in 2021, dropping by 28.4% through 29 March’s close. The Norwegian renewable energy company had a powerful start to the year, surging 16.4% to NOK397.60 on 8 January, but since then its share price has plummeted.

By the end of January, Scatec’s share price had fallen to NOK326 and by the end of February it had hit NOK251, 26.7% below its 4 January opening price. Despite some gains at the start of March, Scatec’s share price closed at NOK235 on 25 March, its lowest closing price of the year so far.

However, the longer-term picture is much more positive. Scatec’s share price closed 85.1% higher on 26 March than its price in the year-ago period and 193% higher than its closing price the same day in 2019. In other words, despite struggling in recent weeks, Scatec’s share price has seen an extended period of sustained growth, underpinned by growing revenues and increased consumer demand for clean energy.

Generating returns

Recently, Scatec announced ambitious investment plans to power a fivefold increase in its generation capacity over the next four years. The company plans to invest NOK100bn — circa $11.8bn — in increasing its three gigawatt-hours (GWh) of renewable energy produced in 2020 to 15 GWh by the end of 2025. It anticipates a 50% increase to 4.5 GWh by the end of 2021. In the past two years, Scatec’s project pipeline has increased from 4.2 GWh to 11.9 GWh, according to reNews.

The announcement follows the company’s purchase of SN Power for $1.16bn, which was completed at the end of January. The acquisition of SN Power was an important part of Scatec’s expansion strategy, providing new project opportunities such as floating solar plants on hydropower reservoirs.

The deal is also expected to generate “significant” cash flow and will increase Scatec’s hydropower output through the addition of SN Power’s hydropower facilities in Laos, the Philippines and Uganda.

Scatec also plans to increase its dividend to at least 25% of the cash its power plants yield from 2021. Scatec and SN Power generated a combined earnings before interest, taxes, depreciation and amortisation (EBITDA) of NOK2.5bn in 2020. Meanwhile, Scatec expects EBITDA for its power production segment to be between NOK660m and NOK680m in the first quarter of 2021.

“In line with our broadened strategy, we are developing renewable energy solutions and combining solar, wind, hydropower and storage to the benefit of our growing customer base of state utilities and large energy consumers,” Raymond Carlsen, CEO of Scatec, said in the company’s press release.

"we are developing renewable energy solutions and combining solar, wind, hydropower and storage to the benefit of our growing customer base" - Raymond Carlsen, Scatec CEO

A turning tide

Clean energy has been performing well in the past year. However, the recent fortunes of clean energy ETFs in Opto’s Theme Performance Screener suggest that investors’ appetite for renewables has changed.

As of 30 March, Scatec constituted 3.5% of the Invesco Solar ETF [TAN], making it the fund’s largest utility holding. The fund has fallen 18% so far since the start of the year (through 29 March). The majority of losses accumulated in the month between 9 February and 8 March, over which time the fund lost 31.8% of its value. Meanwhile, the iShares Global Clean Energy ETF [ICLN] — of which Scatec formed 3.7% as of 30 March — has fallen 20.6% in the year to date (through 29 March), again with a dramatic slump in the month to 8 March.

The reasons clean energy stocks are down so far this year are complex and headwinds have included rising interest rates, higher oil and gas prices and an increasingly competitive renewable energy market.

However, the long-term tailwinds are still in renewable energy’s favour, and companies like Scatec, whose investment covers a range of clean energy sources as well as storage, will be well-placed to profit, Daniel Foelber wrote in The Motley Fool.

Despite its troubles in 2021 so far, the Invesco Solar ETF was trading 224.4% above its price a year ago on 26 March. The iShares Global Clean Energy ETF has fared worse but has still increased its value by 129% over the last 12 months.

The recent slump in Scatec’s share price was inevitable after it increased 586% over five years, SimplyWall Street noted. Investing in the clean energy space will need to prove profitable in order to convince shareholders that stocks and ETFs are not overhyped and, as a consequence, overpriced.

However, investors should be encouraged by Scatec’s 93.9% annual growth in revenue over the last five years, as well as its renewed dividend commitments.