Share code: REN – Market Cap.: R5.1bn – PE: -114x – DY: 0.0%
News: South African Government invests directly
- South Africa’s Schedule 2 state-owned diversified energy company, Central Energy Fund (CEF), has signed a non-binding term sheet to invest R1bn into Renergen’s wholly-owned subsidiary that houses the Virginia Gas Project, Tetra4, in exchange for new shares equalling 10% of Tetra4 being issued.
- The agreement leaves 141 days for the CEF to complete a due diligence, get necessary approvals, & sign a binding legal agreement with Renergen. This period can be extended & Renergen has the option to renegotiate the price.
Our Thoughts: Adds momentum, derisks further & implies fair value
- This deal adds further momentum to the direct investment into the Group by Ivanhoe Mines, further capitalizes Phase II and, more subtly, aligns this project’s success directly with domestic Government that somewhat politically & regulatory derisks it.
- Management has confirmed that the CEF deal is backed by Ivanhoe Mines. Thus, it may add to the probability that Ivanhoe Mines will follow their remaining rights at Group-level.
Valuation and Implied Return: CEF price tag implies 6946cps
- Given the proximately to our last note, we have not updated our fair value for Renergen and maintain it at 5821cps (previously: 5821cps) with a 12m TP of 6867cps (previously: 6867cps).
- The R1bn price attached to 10% of Tetra4 implies a valuation of R9bn for the remaining 90% held by Renergen, or c.6946cps per issued REN share (=R9bn / c.129.5m issued shares).
- While this implied valuation is only indicative (the CEF likely has different criteria for making/valuing investments than stock market minorities, the investment further derisks the project, & shareholding in a subsidiary does not take into account other Group assets nor HoldCo costs), it certainly highlights how undervalued Renergen’s shares potentially are.
Share Code: REN – Market Cap: R3.4bn – PE: -76.3x – DY: 0.0%
H1:22 Results: Sufficiently Capitalised for Phase One
- Group revenue rose during the period, but rising overheads as the Group ramps up towards Phase One first production in late H2 saw its loss slightly larger than we expected.
- OPIC debt, a small share placement, offtake agreements for c.28% of Phase One’s LNG & c.65% of Phase Two’s helium production, & a digital tokenisation mechanism for “prepaid helium” all ensure that the Group is sufficiently capitalized to see Phase One over the line.
- CryoVacc has moved into field trials that could see it becoming commercially viable as a standalone business soon.
- Finally, the favourable exploration outcomes from Evander have triggered an updated reserve report that management anticipates publishing in Q4:22.
Progress Updates: Numerous Qualitative Updates
- For a range of updates during the period, refer to our previously published update notes:
Forecast, Valuation & Implied Return: Undemanding SOTPs
- Taking our Phase One & Phase Two DCF’s, Group overheads, factoring in debt, the recent share issue & (potential) future dilution, we arrive at a SOTPs for Renergen that indicates that the stock is worth 5,383cps (previously 5,093cps).
- Assuming Cryo-Vacc & Evander collectively add +10% value, this boosts our fair value to 5,922cps (previously 5,603cps).
- Finally, rolling this forward at our (nominal) Cost of Equity implies a 12m TP of 6,976cps (previously 6,567cps).
- We highlight the likelihood of Phase Two being larger than we anticipate as a risk to our valuation, but we will only update our view after several variables have been resolved.
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.