Genex $GNX $GNX.AX is a renewable energy developer with a focus on firming through pumped hydro and batteries. After 6yrs in the sin bin for epic delays, what's changed?
@ElephantCapita2 will also share his technical analysis to answer 'why now?'
Let’s take a deep dive.👇
1. Investment thesis: Turnaround / Asset play.
A high CAPEX company, in a growing sector, potential takeover target, progressed through multiple de-risking events, but due to failures since IPO in 2015 its priced markedly below fair value.
Potential to become a stalwart?🤷
2. Growing demand for renewables.
There’s a long tailwind of renewable energy growth, both as total consumption increases and renewables replace fossils. Wind, solar and other (inc. bioenergy) are growing, and Genex is positioning itself in that super fast growing space.
3. Growing pipeline of renewables.
@RystadEnergy shows significant pipeline of renewables capacity. Higher energy prices, carbon permit prices, and asset prices are contributing to this. The policy vacuum is also favouring smaller caps over large regulated utilities.
4. @Genex_Power prides themselves as being "The only #ASX #renewables pure play", though I think this may need to be updated since the IPO of @DeloreanCorp.
Still, there will be more than one winner, and both are similar bets with different technology.
5. Genex is an infrastructure play.
It’s not a tech play, it’s an execution play (WACC vs IRR). Just like $DEL, the tech is proven and economically viable (this isn’t the next latest crazy in lithium cum graphite batteries, or betting on hydrogen to replace natural gas)
6. Genex assets has two assets in production, and an extensive pipeline across NSW and QLD including wind, solar, batteries and pumped hydro.
🚨Backward looking financials and screeners provides no guidance as to where the company is heading 🚨
7. Kidston solar. This 50MW plant has been operational since 2017, and provides is the first stage of their mega project. There is an offtake agreement in place for 20yrs, providing a low risk asset that generates ~$8m EBITDA p/a.
8. Jemalong Solar. This 50MW has only just started operations in FY22, and has no offtake agreement in place yet (100% dependent on spot market). Genex is looking to sure up an offtake agreement to reduce risk.
9. Value is in the pipeline.
The 50MW Bauldercombe Tesla $TSLA battery is expected to generate >$8m EBITDA p/a and come online in FY23. Half the earnings will be energy arbitrage (buy cheap, store, sell peak), half is FCAS (utility-like revenue for stabilizing the grid).
10. Kidston pumped Hydro has been a 10yr dream. It’s repurposing a gold mine to generate 250MW of storage and generation capacity.
The tech is proven but still novel. Here’s Simon Kidston (CEO) talking it through with @sharecafetweets
11. Delays and costs blowouts.
Since the prospectus in 2015 the project has been delayed ~5yrs, and capital costs have increased from $282m to $800m. To be fair, that’s enough for most market pundits to tune out… but bare with me.
12. 5yrs of de-risking events for free.
One can essentially buy Genex at the same price as IPO in 2015, while they have been through a gamut of de-risking events culminating in financial close and construction starting in early 2021.
@7MaxxChatsko Thanks for the framework.
13. Funding is secured.
Northern Australia Infrastructure Fund has given a $610m concessional loan. Their investment doesn’t necessarily mean it’s a good project (Project Sea Dragon $SFG ?), as it’s largely political (Cowboys training ground? 🙄)
naif.gov.au/what-we-do/cas…
14. Quality project.
ARENA’s @ARENA_aus $47m grant means the project has gone through the necessary technical reviews. Personally, I rate quite highly their technology readiness assessments, and I have confidence in backing their process for this type of late-stage funding.
15. Queensland Government’s $147m contribution to the poles and wires ensures the project will be able to be connected to the grid.
Also, it means future pipeline projects like solar and wind developments are much more likely due to better economics.
16. Construction Risk off.
The fixed price EPC contracts with John Holland @JohnHollandAus and McConnell Dowell @McconnellDowell pushes a lot of the execution risk away from Genex. No guarantees, but at least they’ll be compensated for someone elses failures.
17. Offtake risk off.
The ESSA with Energy Australia @EnergyAustralia means EA pays all operational costs, and $50m ‘rent’ to Genex. Any upside / downside in prices in on EA.
Shoutout to Linda at @Genex_Power who responded to my queries on the contracts! Great IR!👍
18. Kidston overall is a de-risked infrastructure play, with much of the upside ‘sold’ to get it off the ground.
Now there are future developments including wind (150MW) and solar (170MW – pending) that will value add.
19. Asset valuations.
Using recent sales of +$3.5m/MW and EV/EBITDA of 16-29 (higher for firming), my models are estimating $0.75c in FY26 in a bearish scenario, $1.17 in a likely scenario, and over $1.69 in a bullish scenario.
20. Discounted cash flow.
Using future earnings and baking in only 2% CPI growth and no new pipeline developments with 10% rate of return, current valuations are showing $0.33c – while I don’t pretend to know short term movements, this provides some margin of safety.
21. Technical analysis.
Follow @ElephantCapita2 – he does more than analyse squiggles and candles, he explains the set up really well.
You can see with Genex the TA and fundamentals are converging, with a bullish penant on decent volume.
22. Risk.
Cost or time blowouts of K2 pumped hydro, and specifically going back to the capital markets for more funding as debt is maxed.
Future capital allocation to poor quality projects also a potential risk, one that is *currently* well managed.
23. Overall, I think story-based investors have got this one wrong for 5+ years. They flocked to a risky development under the guise of 'renewables are the future'.
But now, I think there is an asymmetric asset play in a trendy sector, with decent returns to the patient.
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A deep dive per week is my commitment to FinTwit.
Questions and feedback always welcome.
DM's open. DYOR. Disclaimer, I’m long $GNX and $DEL.
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