Genex Power (ASX: GNX) Market cap: $100m
This is a clean energy generation and storage play at a key inflection point which in my view will add significant value. Stage 1 is 50MW solar project which is complete and Stage 2 is a much larger pumped hydro and solar storage facility. Notably, both solar and pumped hydro are proven and widely used technologies. It is located in far north Qld on a disused gold mine which provides key infrastructure for the project as the open pits provide reservoirs for the hydro component.
Clean energy generation has received bipartisan government support with emissions reductions a key Federal Govt.
mandate. Stage 1 of this project has received ARENA funding in addition to 20 year revenue guarantee from the Qld Govt which effectively provides a floor price per Mwh.
Stage 1 has been delivered on time and on budget, it cost $130m in capex (80% debt funded) and generates approx. $15m pa in EBITDA. Successful delivery of Stage 1 proves that management can deliver a complex project like this and hence gives credibility for the much larger Stage 2. I value stage 1 at approximately $0.18 per fully diluted share conservatively based on the floor price guaranteed per Mwh. Hence there is upside risk to this. The asset has a 30 year life and requires minimal OPEX of $1.6m pa.
Energy off-take agreements are in the final stages of negotiations and funding will follow that milestone closely.
The funding requirement for Stage 2 (270Mw expanded solar and 250MW pump hydro) is significant at $820m and I assume an 80:20 split between debt and equity. Following my conversation with management, that equity component of $165m will likely be sold down in exchange for 50% equity of Stage 2 of the project. That leaves $655m of debt funding. Quite an undertaking for $100m market cap company, however given the level of state & federal Govt. support in addition to locked in off-take agreements it become feasible at even attracts concessional interest rates < 5%. Revenue estimates based on 780,000 Mwh produced from Stage 2 running 8 hours per day, equates to approx. $100m pa. I estimate that the NPV@8% post- tax is approx. $0.78 for GNX’s remaining 50% of the project.
Low Funding risk – The project has been designated critical infrastructure by the Qld Govt. and the flexible, dispatchable nature of pumped hydro electricity generation is increasingly important infrastructure. Notably the debt will be raised against a long life asset, 40 years, underpinned by largely contracted cash flows. Hence, my view that concessional debt funding from several Govt. agencies (NAIF & ARENA), is not only possible but probable.
The value uplift from 50% ownership of Stage 2 without further equity dilution is significant, relative to the current market cap. Once financial close is announced and funding off-take partners are all confirmed in CY18, this in my view will be the catalyst for a significant re-rating of the stock. Delivery of the project is scheduled for 2020 for the expanded solar and 2021 for the hydro.
Management, own 19% of the GNX stock which assures an alignment of interests.
GNX Price at posting:
31.0¢ Sentiment: Buy Disclosure: Held
