Enviva: Numbers Still Not Stacking Up For Dividends (NYSE:EVA)

Paying Bills

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Introduction

Following what looked to be an obviously very risky dividend earlier in 2021, Enviva (NYSE:EVA) completed a surprise corporate restructuring during late 2021, which apart from saving their dividends from a reduction, also saw various accounting complexities make their 2022 outlook difficult to ascertain, as my previous article discussed. Now that their results for the first quarter of 2022 are available, this article provides a follow-up analysis, which disappointingly sees that the numbers are still not stacking up for their dividends, which leaves their high 6.00% yield looking unsustainable.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings, as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

Enviva Ratings

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*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.

Detailed Analysis

Enviva Cash Flows

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When conducting the previous analysis, the discussion focused on the accounting complexities following the acquisition of their former holdings company, Enviva Holdings, which made their 2022 outlook difficult to ascertain with their financial statements being recast. Thankfully this should remain in the past because going forwards, their results will clearly follow the same approach, thereby making comparisons easier.

Upon reviewing their cash flow performance, it shows that their operating cash flow was negative $42.9m during the first quarter of 2022, which means that they saw a cash burn to merely operate their company, let alone make any investments. This represents a very large deterioration when compared to their previous results of only negative $1.6m during the first quarter of 2021 and whilst tempting to simply blame temporary working capital movements, this does not completely absolve this weak cash flow performance. They saw a working capital build during the first quarter of 2022, but this was only $26.9m and thus even if removed, their underlying operating cash flow was still negative $16m and thus no matter how the situation is viewed, their operations consumed cash instead of generating cash. If the same approach is applied to their results from the first quarter of 2021, their underlying operating cash flow was only a minimal $5.8m but at least, if nothing else, it was still positive.

Even if their capital expenditure is ignored, this means that the entirety of their dividend payments was debt-funded and given they amounted to $52m for just the first quarter of 2022, this is a very significant burden to place upon their financial position. It should also be remembered that whilst I normally assess dividend coverage based upon free cash flow, given their low and recently negative operating cash flow, this would be pointless because no company can sustain dividend payments that exceed their operating cash flow, regardless of their capital expenditure. When considering the very sizeable gap between their negative underlying operating cash flow and dividend payments, they seem very unlikely to bridge the gap anytime within the foreseeable future, thereby leaving their dividends looking unsustainable and very risky.

When turning to their accrual-based results, they reported a distributable cash flow of $25.3m for the first quarter of 2022, as per slide eleven of their first quarter of 2022 results presentation. Even looking past my preference to utilize “cash” metrics that are actually cash-based like operating cash flow instead of “cash” metrics that are actually accrual-based like distributable cash flow, their result still pales in comparison to their dividend payments. In fact, their distributable cash flow of $25.3m does not quite even reach half of their $52m dividend payments, which once again, bodes very poorly for the sustainability of their dividends that still appear far too outsized even after considering their guidance for the remainder of 2022, as the table included below displays.

Enviva Guidance For 2022

Enviva First Quarter Of 2022 Results Presentation

It can be seen that management expects to generate distributable cash flow of between $165m and $205m during 2022, which is down versus their earlier guidance on the back of production, logistics and supply challenges, as per slide fourteen of their previously linked first quarter of 2022 results presentation. Regardless of being revised lower, the $185m midpoint of their full-year guidance still represents a sizeable increase versus their result of only $25.3m during the first quarter that would have only annualized to circa $100m.

Despite sounding promising, even achieving the $205m upper end of their distributable cash flow guidance for 2022 would still be insufficient to cover their dividend payments. After conducting an equity issuance during the first quarter of 2022, their latest outstanding share count increased to 66,561,472 and thus the cost to fund their quarterly dividends of $0.905 per share for the final three quarters of the year will come out to $180.7m. After being combined with the $52m cost already incurred during the first quarter, sees a full-year total of $232.7m for 2022. Apart from being well above their distributable cash flow guidance for 2022, let alone their actual operating cash flow, this could easily continue proving to be a moving target if they conduct more equity issuances, which have been common throughout recent years. Considering the cash burn to fund their capital expenditure and relatively oversized dividend payments, it seems likely that further equity issuances will be forthcoming during 2022 and 2023. Since it would further hinder their ability to cover their dividend payments as their outstanding share count continues climbing higher, regardless of whether an investor wishes to utilize cash-based or accrual-based metrics.

Enviva Capital Structure

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After seeing a cash burn just to simply operate their company, their $333.6m equity issuance saw their net debt decrease by a material 12.94% during the first quarter of 2022, thereby landing at $1.092b versus its previous level of $1.255b at the end of 2021. Whilst lower net debt is positive, it comes at the expense of more shares and thus dilution to their existing shareholders. The extent that dilution is bad remains debatable when it comes to funding capital expenditure since the resulting growth projects enhance their financial performance, although it nevertheless remains undebatable that issuing equity to cover a cash burn to merely operate and fund their dividend payments is especially undesirable and unsustainable in the medium to long-term.

It remains to be seen how the remainder of 2022 unfolds, but given their cash burn during the first quarter even after removing their working capital build, it seems reasonable to expect their net debt to begin marching higher, especially given their oversized dividend payments. This would obviously post further risks of a dividend reduction and whilst further equity issuances may help keep net debt under control, it comes at the expense of higher dividend payments that, as already discussed, further compounds their unsustainably.

Similar to the previous analysis, it would be rather pointless to assess their leverage in detail given their negative underlying operating cash flow and EBITDA, as calculated from their SEC-regulated financial statements. If viewing their gearing ratio, given their equity of $501.3m it currently stands at 68.55%, which similarly to previous analyses, once again remains above the threshold of 50.01% for the very high territory. It would also be redundant to reassess their liquidity in detail given their respective current and cash ratios of 0.79 and 0.02 have barely changed during the first quarter of 2022 versus their respective previous results of 0.77 and 0.07 at the end of 2021, thereby indicating adequate liquidity. The relevant graph has still been included below to provide context for any new readers, if interested in further details regarding this topic, please refer to my previously linked article.

Enviva Liquidity Ratios

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Conclusion

Thankfully now that their corporate restructuring sits in the past, the accounting complexities that complicated their outlook for 2022 are now resolved. Disappointingly, the numbers are still not stacking up for their dividends with even their distributable cash flow nowhere near adequate, let alone their free cash flow that is not even on the radar given their negative operating cash flow. Since they continue seeing a cash burn to merely operate their company with seemingly no hope in sight to cover their oversized and thus unsustainable dividend payments, I believe that maintaining my sell rating is appropriate.

Notes: Unless specified otherwise, all figures in this article were taken from Enviva’s SEC filings, all calculated figures were performed by the author.

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