Best stock to invest in – Yin and Yang of Yield for Abengoa

Best stock to invest in

by Debra Fiakas CFA
The atmosphere started getting uncomfortably hot for power developer
Abengoa SA (ABGB: 
Nasdaq)  in early August last year  –  and it was not
just the seasonal high temperatures in the company’s home town of
Seville, Spain.  Management had finally admitted that
operations could not generate as much cash as previously expected,
causing worries about Abengoa’s ability to meet debt
obligations.  At the heart of the company’s cash flow woes is
the reversal of Spain’s policies on solar power that has reduced
subsidies and feed-in tariffs for solar power producers.

In August 2015, Abengoa also announced plans to raise capital by
selling 650 million euros (US$715 million) in common stock and 500
million euros in assets (US$550 million).  The plan was to pay
down debt thereby reducing future interest and principal
obligations.  At the time the company had about 9.0 billion
euros in debt (US$9.9 billion).

The company’s share price had already been weakened by rumors, but
the news sent the stock plummeting to historic lows.  After
stabilizing for a several months near the $5.00 level, ABGB was gain
sent into a free fall last month with more negative news on
Abengoa’s cash and debt woes.  The company has asked for
protection from creditors, a precursor to declaration of
bankruptcy.  The stock price at the time of this article was
just a few pennies over a dollar.

The question for investors is whether Abengoa’s share price is
oversold, opening a window of opportunity for equity investor with
an eye for deep value.

 It is the calendar more than anything that has spooked
shareholders and bond holders.  Abengoa has 500 million euros
in bonds (US$530 million) coming due in March 2016.  The plan
to sell equity appeared to be a viable solution until one of the
largest equity investors pulled out in late November 2015, citing
Abengoa’s failure to meet prerequisites for the financing. 
Other than a 106 million euro line of credit to pay employees (US116
million), the company’s creditors have appeared reluctant to
refinance the debt.  There appears to be little time for
Abengoa to reach an orderly resolution to its balance sheet

A financial solution might require a restructuring of the company
and its many operating subsidiaries and investments.  Abengoa
has already been selling assets, including shares of Abengoa Yield, plc (ABY: 
Nasdaq).  Abengoa now owns less than half of the ‘yield-co,’
which is a portfolio of power generation and electricity
transmission assets in the Americas and Europe that were originally
developed by Agengoa SA.

Unlike its sponsor, Abengoa Yield is profitable, reporting US$674
million in revenue and US$7.4 million in net income in the twelve
months ending September 2015.  Operating cash flow generated
during that period was $282.9 million, making it possible for
Abengoa Yield to support US$7.3 billion in debt and still provide
shareholders with US$1.72 in annual dividends per share.  The
recently negotiated line of credit is secured with the Abengoa’s
yield-co shares.

There appears to be a great deal of uncertainty for Abengoa. 
Even decision makers at the yield-co are hedging against a demise of
their sponsor by proposing a change in the name from Abengoa Yield
to Atlantica Yield.  Thus as tempting as the ABGB price might
seem, perhaps it would be more prudent to take a position in Abengoa
“Atlantica” Yield and collect a dividend.  The current yield is
10.0% and ABY shares are trading at 11.2 times forward earnings.

Debra Fiakas is the Managing Director of Crystal Equity
, an alternative
research resource on small capitalization companies in selected

Neither the author of the Small Cap
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

– Best stock to invest in

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