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Citi started coverage of Enviva Partners LP (NYSE: EVA) with a Neutral rating and $26 price target, implying a potential upside of 5.8 percent from the current levels.
Enviva is an MLP that sells wood pellets primarily to European utilities for base load generation under long-term contracts.
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"We are initiating on EVA with a Neutral because we believe it has a strong visible near-term growth story supported by quality contracts and visible drop downs but is exposed to long-term trends that favor other renewables compared to biomass," analyst Ryan Levine wrote in a note.
Apart from stable cash flows, Levine noted that there is growing demand for renewable generation in Europe, Japan and South Korea due to regulation and compliance standards.
As a result, the analyst expects demand for wood pellets to grow 17 percent per annum through 2020 and the southeastern US is structurally well positioned to serve this demand.
On the drop-down inventory front, Levine sees the recently signed 1 million ton contract with MGT could translate to about $50 million of incremental EBITDA of potential drops over the next several years.
The analyst expects 2016 core EPS of $2.12 on sales revenue of $502.3 million. He added that EVA appears to trade at a meaningful discount with about 8.7 percent distribution yield and material distribution growth expectations.
"Despite the near-term growth, other renewable generation costs continue to move lower while wood pellet biomass generation is expected to remain relatively stable. This dynamic introduces recontracting risk for EVA in the 2020s," Levine highlighted.
Shares of Enviva Partners closed Thursday's regular trading session at $24.41.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.