Share Code: REN – Market Cap: R2.7bn – PE: -94.1x – DY: 0.0%
FY 23 Results: Producing Cash Flows from Phase One
- With Phase One’s LNG production started ramping up during FY 23, Renergen produced its first Liquid Natural Gas (LNG) revenues of R12.7m (FY 22: R2.6) with R11.1m coming from LNG and the balance from the now closed CNH pilot plant (FY 22: zero from LNG & R2.6m from CNG).
- Our FY 23 cost assumptions were too heavy, and we expected a full year loss of -22.3cps while the Group only actually lost -19.86cps (FY 22: -27.73cps).
Material Updates: A Coming Year of Big Events…
- Phase One will spend FY 24E ramping up production, & it pivotally shifts Renergen from developer to producer status.
- The Nasdaq listing process has started with management expecting its conclusion towards the end of this year. A circular to was released detailing the issuance of equity in two tranches; the first being 67.5m shares upon Nasdaq IPO raising c.$150m with the remaining tranche being raised towards the end of the Phase Two build. This is less implied dilution than we forecast & we have adjusted our view and SOTPs for this new data.
- Management also published a revealing “Phase Two Guidance Note” forecasting FY 27E estimated EBITDA of between R5.7bn and R6.2bn per annum. Given that Renergen’s entire market cap is currently only R2.7bn, R5.7bn EBITDA is significant!
Valuation: SOTPs & Peer Relatives Higher Than Share Price
- Updating and refining our forecasts, we see Renergen’s current fair value at c.6400cps (previously: 6233cps) and 12m TP as a little over 7500cps (previously: 7347cps).
- Updating the crude listed helium peer relatives (market cap/helium), Renergen remains discounted against this measure. This remains true even if we take Phase Two’s future equity raises into account and despite Renergen being more advanced than its peers in both proving and starting to produce from its resource.
Share Code: REN – Market Cap: R3.7bn – PE: -105x – DY: 0.0%
H1:23 Results: Delayed but moving swiftly forward
- Renergen’s revenue was flat at R1.2m and the Group reported a loss of -19.31cps (H1:21 -21.05cps) as it neared production status.
- Phase One is moments from producing gas and, although delayed against the original timeframe, this will be an exciting moment as the Group transitions from a developer to a producer.
- Phase Two funding is progressing well, having issued shares to Ivanhoe Mines (though the larger equity deal expired), the CEF has agreed to inject R1bn into the Project, & various blue chip debt funders have expressed interest in funding up to $1.2bn of debt for the project.
Our Thoughts: Enviable Position
- While Phase One delays are disappointing, the underlying fundamentals and attractive economics of the Virginia Gas Project remain and are further highlighted by the interest in funding Phase Two.
- The conclusion of the well-priced CEF R1bn equity investment is a strong positive and, we believe, the expiry of the Ivanhoe equity deal is a net positive by avoiding expensive dilution.
- Furthermore, the large pool of interested debt funders into Phase Two means that Renergen has both time to find the appropriate equity funding and the flexibility to pick terms.
- All in all, we believe that Renergen is in an enviable position for a developer as it transitions into a fully-fledged gas producer.
Valuation and Implied Return: Share Price Disconnected from Value
- We see Renergen’s fair value at c.6700cps (previously: 6337cps) and 12m TP c. 8000cps (previously: 7491cps).
- With a range of fair values from c.5000cps to c.6700cps (CEF deal implies c.6600cps for REN shares), what is clear is that REN’s share price deviates substantially from even the low-end of this range.
Share Code: REN – Market Cap: R4.6bn – PE: -124x – DY: 0.0%
Central Energy Fund: Due Diligence Successful, Fair Value Implied
- Following Ivanhoe Mines’ option expiring (see our previous note), questions surfaced about the reason for this expiry &, indeed, whether it involved the quality of the Virginia Gas Project (VGP).
- Concurrent to Ivanhoe’s deal, Renergen was fielding a due diligence (DD) by the Central Energy Fund (CEF) for a 10% stake in VGP for R1bn. This DD has successfully concluded and both parties are now seeking final approvals to complete the transaction.
- This is an important event for at least three reasons:
- The positive DD by CEF confirms the quality of the VGP,
- Assuming final approvals are received, this injects R1bn of equity funding into the Phase II funding, &
- This solidifies an arms-length R10bn valuation for VGP (i.e. if 10% is worth R1bn, 100% is worth R10bn).
Our Thoughts: Much Better Price + Less Dilution
- Above, point (3) implies that REN’s 90% stake is worth R9bn or c.6660cps (= R9bn/135.1m shares) versus our previous fair value of 6337cps & the share’s current market price of 3460cps.
- Ivanhoe’s option would have come in at a discount to the current market price (if exercised) &, thus, the CEF’s deal is a lot less dilutive for shareholders and ensures a much large proportion of the eventual VGP value likely accrues to existing shareholders.
Valuation and Implied Return: Unchanged
- We are currently reassessing our valuation and model for REN and will publish this in due course.
- Despite that & due to the CEF deal—assuming no deterioration in exchange rates, commodity prices or interest rates—we believe that the previously communicated valuation at least guides towards a floor value of the Group. Previously, we saw REN’s fair value as around 6337cps & 12m TP of about 7491cps.
Share Code: REN – Market Cap: R5.0bn – PE: -139x – DY: 0.0%
Phase 2 Debt Funding: Quantum Points to Larger Phase 2
- Renergen has signed a Retainer Letter with the US International Development Finance Corporation (DFC) for Phase 2 debt funding of up to $500m. The DFC provided debt of $40m in Phase 1.
- Added to this, Renergen has received multiple Letters of Intent to co-lend alongside the DFC of up to $700m in senior debt.
- The lenders are currently conducting a due diligence to finalize their offers &, assuming a positive outcome, it leaves Renergen in the envious position to pick and choose its debt funding.
- These lines of debt are up to $1.6bn in potential funding that—when combined with potential equity funding from Ivanhoe Mines & the CEF—points a clear path to a fully-funded Phase 2.
- Renergen is now targeting 65% gearing & the implications of the amounts are that Phase 2 will be materially larger than originally envisioned; we originally assumed a c.R12bn capex cost for Phase 2, but the above figures imply >R15bn – Gas projects tend to get returns to scale & a c.25% larger size may produce >25% more gas.
- If we assume a c.$1bn Phase 2, & Ivanhoe (capped to c.$250m) & CEF (c.R1bn) both follow through for their equity and Renergen management draw down on their debt with a 65% gearing (drawing c.$650m), this implies that there remains equity funding of c.$45m or c.R700m (c.1-for-10 rights issue at current prices).
Valuation and Implied Return: Updated for latest spot prices
- While Phase 2 size is rising, output upgrades & the Ivanhoe & CEF equity needs to be pinned down for us to correctly model. These are large variables and, currently, still have conditions outstanding.
- For now, we have kept the size of Phase 2 flat (which creates upside risk to our valuation and forecasts), assumed debt is drawn down at the end of FY 23E (but interest capitalized until FY 25E), Ivanhoe & CEF follow their full equity rights, 11.5m REN shares are placed during FY 23E (1-for-10 rights issue), & Phase 2 production starts during FY 25E (9 months) with steady-state in FY 26E (albeit, we have used flat spot prices as based on the current basket, ArgHe token price and exchange rates).
- This produces a fair value of 6337cps (previously: 6344cps) & 12m TP of 7491cps (previously: 7501cps).
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: R4.9bn – PE: -115x – DY: 0.0%
News: Helium & LNG more valuable, Ivanhoe Mines invests
- Helium market update: Supply challenges from BLM, Qatar & Amur all limit helium availability as SpaceX & the semiconductor industry ramps up demand, implying large helium spot upside.
- LNG market update: The oil price rally should drive domestic fuel prices (further) upwards. Reasons for the rally are both sticky and bode well for Renergen’s LNG revenues (tied to diesel &/or CPI).
- Ivanhoe Mines “strategic partnership”: In a momentous moment for Renergen, Ivanhoe Mines has invested into the Group (an initial 4.35%-stake) with a roadmap to potentially ramp this investment up to a maximum of either 55% or $250m of capital.
Our Thoughts: Renergen’s Potential Upside is Growing Quickly
- The tailwinds lifting Renergen’s underlying gas resource keep driving its fair value upwards. While the LNG revenue should track domestic fuel prices & CPI upwards, the helium revenue (even the revenue locked into the long-term supply contracts) holds immense upside potential too.
- The latter may see wild card renegotiation clauses being triggered and repricing in the increasingly tight global helium market.
- The investment by Ivanhoe Mines is a vote of confidence in the Group and, depending on how/if Ivanhoe Mines takes up their options to further invest, may underpin the (equity) funding for (a much larger!) Phase II that further derisks the Group.
Valuation and Implied Return: Plenty of Room…
- Despite keeping our helium basket price flat and a stronger Rand exchange rate, we upgrade our fair value to 5821cps (previously: 5747cps) & 12m TP to 6867cps (previously: 6766cps).
- Given the commodity pricing dynamics, there is considerable upside risk to this valuation from both LNG & repricing helium closer to spot, not to mention any Rand-weakness.
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: 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: R2.4bn – PE: -55.6x – DY: 0.0%
Discovery of Helium at Evander & Other Wells; Pipeline Update
- Renergen has found world-class helium concentrations at the MDR1 (3.15%) and P007 (4.38%) wells along with intersecting gas at R2D2. These wells all either point towards a better/larger resource and/or higher well density potential (i.e. lower capex/well) that incrementally adds upside to the Group’s existing Phase I and II of its Virginia Gas Project.
- Helium has now also been found at the Group’s Evander Exploration Right prospect at 1.1% concentrations. While this is lower than Virginia, 1.1% is still a world-class concentration and adds a further 52,000 hectares of exploration rights to the Group’s already exciting gas resource.
- Finally, the Virginia Gas Project’s pipeline has been completed and performance tested with very pleasing results (+7% higher than planned flow rate; 30% less power consumption) that should have positive operational and valuation impact.
Incremental Capital Raise Strongly Supported
- Renergen has placed c.5.6m shares (c.4.8% dilution to c.117.5m shares in issue) at c.1910cps (c.9.5% discount to the 30-day VWAP) with two key considerations to this placement:
- It was quickly and fully subscribed, adding 3 South African and 9 Australian institutional investors, and, somewhat, derisking the likely Phase II capital raise through the process, &
- Funds will debottleneck the Group’s exploration of the Virginia Project, Feasibility Studies for Phase II & offer some working capital runway for existing operations.
Forecast, Valuation and Implied Return: Updated for Spot Changes
- Leaving our model unchanged and only updating it to reflect current spot prices (ZAR, Diesel, & lower share price), we see REN’s fair value as 4535cps (previously: 4978cps) and its 12m TP as 5330cps (previously: 5850cps).
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.