Morningstar | Ormat's Margin Issues Cause for Concern; Maintaining Fair Value Estimate
We are reaffirming our $54 fair value estimate for Ormat Technologies after the company reported third-quarter adjusted EBITDA of $75.6 million, down from $76.4 million in the same year-ago period. Management reaffirmed its 2018 revenue guidance of $698 million to $722 million and adjusted EBITDA expectations of $370 million to $380 million. The adjusted EBITDA guidance assumes insurance recovery from lost Puna production. Absent recovery, adjusted EBITDA would decline $20 million.Gross margins continue to be our biggest concern, but we're hesitant to adjust our margin forecast as most of the margin issues appear to be short term. Margins in the quarter at the company's largest segment--electricity--were 31.7%, down from 41.9% in the same year-ago quarter. Margins were negatively affected by the Puna power plant shutdown, higher costs attributed to pump replacement, and lower generation due to grid operator curtailment.
Excluding Puna, management expects gross margin to be 43% for the full year. Management's history of margin improvement gives us some comfort in its ability to get margins back on track. Margin improvements materially impact our fair value estimate. If we don't assume our 100-basis-point annual decline in unit gross margins, our fair value estimate falls $9 per share.
The much smaller product segment also saw margins contract to 26.4%, down from 28.3% in the same year-ago period. A 200-basis-point change to our unit margin estimate changes our fair value estimate $1 per share. The product backlog currently stands at $226 million, down slightly from the prior quarter's $229 million. Shares are now trading slightly below our fair value estimate, but we think investors should have a higher margin of safety before taking a closer look at the name.
Ormat Technologies is a holding company. Through its subsidiaries, the company is engaged in the geothermal and recovered energy business. The company's segments include: Electricity, which develops, builds, owns and operates geothermal and recovered energy-based power plants in the U.S. and geothermal power plants in other countries and sells the electricity it generates; and Product, which designs, manufactures and sells equipment for geothermal and recovered energy-based electricity generation and remote power units and provides services relating to the engineering, procurement, construction, operation and maintenance of geothermal, Solar photovoltaic and recovered energy-based power plants.
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