Share Code: REN – Market Cap.: R3.8bn – PE: -89.0x – DY 0.0%
News: Large Reserve Upgrade & Upsizing of Phase Two
- Sproule has published an updated reserve statement on Renergen, revealing large upgrades to the Group’s gas reserves.
- For example, +428% and +610% was added to the amount of methane & helium in 1P. Similar upsides came through in 2P & 3P.
- While Phase One remains mostly the same, this has resulted in us making the following key changes to our Phase Two assumptions:
- Lifting our LNG production from 300tons/day to 720tons/day with a target of c.2.5% yield of helium, &
- Boosting our capex to R12.2bn with 30% of being raised as equity (the balance being debt & prepaid tokens).
Our Thoughts & Spot Prices: Updated & Refined
- We have used this opportunity to update spot prices, exchanges rates and interest rates across the model.
- Likewise, we have tried to understand management’s expectations for LNG and helium basket pricing and, although we feel that some of their views are conservative, we have tried to align our model with these views.
Valuation and Implied Return: Dividend Discount Model Added
- Our Sum-of-the-Parts for Renergen sees the share’s fair value as c.5,747cps and, on basic assumptions, implies an FY 30E Price Earnings of c.6.1x with a Dividend Yield of c.15.6%.
- Upon maturity, management intends paying most profits out as dividends. Therefore, we have taken our valuation a step further and attempted a crude Dividend Discount Model (DDM).
- Our DDM assumptions arrive at a fair value of 6,412cps for REN minority shareholders (after DWT). This is more or less in line with our SOTP model & adds conviction that REN shares are likely to be worth mid-R50/share to mid-R60/share, or certainly above their current 3,065cps share price, despite Phase Two dilution.
Share Code: REN – Market Cap: R2.2bn – PE: -50.5x – DY: 0.0
News: Helium and LNG offtakes lining up nicely
- Phase 1: Renergen has signed a 5-year LNG offtake with a major glass manufacturer, Consul Glass. The supply of LNG is to begin in January 2022 and ramp-up to 14tons/day. The LNG will be priced off the floating South African LPG price.
- Phase 2: A raft of supply agreements for a total of c.65% of the expected helium production of Phase 2 has been signed with a range of major players (Linde Inc., Messer LLC, Helium24 LLC) for between 10 to 15 years. The helium will be priced in US Dollars with annual escalations linked to the US CPI.
Spot Prices: Moving in Renergen’s favour
- Most spot prices and currencies have gone in Renergen’s favour, thus leading to a strong uplift in the Group’s implied Sum-of-the-Parts (SOTP):
- South African Diesel Whole Price (A1) has risen +7%, leading to a higher value for the Group’s LNG reserve that is priced at a 25% discount to this price,
- Rand has weakened nearly 9% versus the US Dollar, both helping lift up the above-noted diesel price and boosting the USD-denominated helium price, &
- The South African 10-year bond rate has dropped from 9.26% to 8.96%, lowering our WACC & boosting our NPV.
Valuation and Implied Return: Contrary to share price weakness…
- Reflecting the above-changed input variables (amongst several other minor ones), we see REN’s fair value as 5603cps (previously: 4535cps) and its 12m TP as 6567cps (previously: 5330cps).
- We find it strange that the share price has moved contrary to the positive movements in the variables driving up the implied fair value of Renergen.
Refer to our Initiation of Coverage for more background.
Share Code: REN – Market Cap: R2.7 – PE: -65.2x – DY: 0.0%
FY 21 Results: Smaller than Expected Preproduction Loss
- Renergen’s operating loss was smaller than expected despite a small revenue miss as lost production (due to the lockdown) was offset costs.
- The Group spent R125.7m on assets under construction, capitalized R21.5m intangible assets and made a second draw down on its US International Development Finance Corporation (DCF) loan to the tune of $12.5m. The Group’s short-term unencumbered cash reserves sit at R130m.
Progress Updates: Almost Entire Positive
- The Group has concluded a partnership with Total SA as LNG distribution is set up down the key N1 route.
- Drilling of P007 & MDR1 both reflect strong resource, flow & helium concentration data, highlighting potentially better-quality resources and/or lower capex intensity of Phase Two.
- The Group has concluded its first helium sales agreement with a global tier-one automotive supplier for Phase Two.
- Finally, The Group’s innovative cold chain storage solution (Cryo-Vacc™) made its first sale, moving post-revenue.
Forecast, Valuation and Implied Return: Appears Undervalued
- Since our Initiation, our major assumptions remain the same, albeit we have updated our model for the latest spot prices that, in general, have moved in Renergen’s favour.
- Our DCF-driven sum-of-the-parts (SOTP) valuation for Renergen implies Phase One & Two—offset by central costs, debt and (potential) dilution—are worth 4149cps (previously 3539cps). After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth 4978cps (previously 4247cps).
- Rolled-forward by CoE, our 12m TP is 5850cps (previously 4977cps) or over double what the current share price is.
Refer to our Initiation of Coverage for more background on this stock.
Share Code: REN – Market Cap: R2.3bn – PE: -34.9x – DY: 0.0%
Business Overview: Near-term Helium & LNG Producer
- Renergen owns an onshore petroleum production right to the “Virginia Gas Project” that is rich in methane (LNG) and helium and the Group is developing in a two-phased approach.
- Renergen is in a formidable position to move up the value-curve as Phase One nears first-production.
- Importantly, the Virginia’s Phase Two could be multiples the size of Phase One and unlock staggering value in the Group.
LNG & Helium Markets: Attractive Prospects
- South Africa is an energy-scarce economic region with both a good potential LNG demand and a potential supply deficit of the gas in its near-future as some existing assets come offline.
- The global helium market is opaquer, but the recent drop-off in USA supply and uncertainty around Russia’s planned supply growth combine to imply tight(er) helium supplies post-pandemic. Finally, the major consumers of helium (aerospace, semiconductors & MRIs) are all above-average growth vectors and cannot substitute helium for anything else.
Forecast, Valuation and Implied Return: Upside Apparent
- Our DCF-driven sum-of-the-parts (SOTP) valuation for Renergen implies Phase One & Two—offset by central costs, debt and (potential) dilution—are worth 3539cps. After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth c.4247cps.
- Rolled-forward by CoE, our 12m TP is 4977cps.
Key Up- & Downside Risks: Lots of Moving Parts
- Running a sensitivity analysis on our model highlights that Renergen’s valuation is more sensitive to helium than LNG, but both prices are ultimately sensitive to the USD/ZAR rate.
- Inflation, production, and resource risks also exist here.