WIND – take over arbitrage opportunity – low risk 20% upside

This is now a completely screaming buy IMHO.
I have bought a large portfolio weight at 50p – 20% of portfolio value. Posting quickly as these opportunities tend not to be around long…

WIND – are also known as Renewable Energy Generation.
The management – who know the company have offered 60p – or £61m for the assets but not the company itself…. The NAV of the company – ex intangibles – ex capitalized development is about £57m. The work in progress is on the books for £19m. If you believe that – £76m, instant 30% upside for management. I bought it today at 50p per share.

I used to analyse utilities in the city days so am more comfortable than usual with this type of business…

Usual way to assess value of the wind assets is £/MW installed. This is obviously rough as somewhere windy would be worth more, not windy much less… They sold St. Breock and Ramsey II (18MW) for £13.8m – giving £760k per MW. Goonhilly (12MW) was sold for £25m, Denzek Downs sold for £1.4m /MW. They have 34.7 MW onshore wind (Dec 2014). They operate but dont own more I suggest a a value of £1m-£2m / MW – giving a valuation of £34-68m. I will say £50m.

They have a pipeline – of 53MW wind with a high probability of completion – less 18Mw sold under the old tariff regime so lets say these are £500k / MW – £17.5m.

Wind has a pipeline of assets going through planning. Hard to value but in the 2014 presentation the cost of putting 124Mw in planning is £14m.
I will stick my finger in the air and say this is worth £5m.

They have 18MW Bio Oil plant. This is similar to but more valuable than diesel generation. This is harder to value. 1MW of diesel generation costs about £100k in a container from China. But it then needs to be installed / run and bio is much more valuable than regular diesel. In the books for £4.7m – as I dont have insight I will go with this. Cost was £6.3m – so likely worth more. I will say £5m.

Asset management is also listed as an area of expertise. I believe they have 56MW under management. Valued at £1m a MW gives £50m. I would say a valuation of 1%-2% of AUM so 500k-£1m. Fees tend to be higher for non traditional assets so I will go to £1m for this.

Total for this is
Installed Wind – £50m
Pipeline in progress £17.5m
Less likely Pipeline £5m
Bio oil plant £5m

In addition from the June 2015 Interim,
Tax asset £2.3m
Cash £13.7
Receivables £4.3
Assets for Sale £11.6

Less
Liabilities – £35m

Giving approximate value of £74.4m – very close to the NAV including work in progress – or giving management an upside of 25%. Due to their obviously close relationship with Blackrock I expect it is low risk for them and they expect to sell the existing assets.

Ownership is very much large institutions. I suspect they may want more money than is being offered here and this is the main risk for the deal falling through… Looking at the downside the pre-offer price was 38p – so if we go back to that I loose 12p, if I am right I gain 10p but the probability is overwhelmingly in my favour, this makes it a trade with a high positive expectancy.

Next question which should be asked is do management have the money to invest ? The board says they are “highly credible”, I can’t imagine they would be able to keep their posts if their bid fell through – far too many potential conflicts of interest…

Management can probably justly afford this – CEO has worked for them since founding in 2005. He has been paid £1.7m after tax since 08. He was in the city before that. Googling indicates he is a Tory voter, so likely has a few quid – probably a couple of million of his own He owns £150k worth of shares a pitifully small amount. CFO paid approximately £1.1m post tax since 08.

I recon at a punt £10m of equity between them – they can get £34m out of the company due to what is cash or about to be sold – inc Denzel downs. The actual cost – or what they need to borrow at the 60m they have offered is only £20m. A lot of money but given the assets it secures … OK I am assuming with this that they havent invested much in capex this year – which may not be correct.

An RNS on 19th Feb 2015 stated they held £22m cash with £5.9 recievable.

Other way to look at this is what is likely free cashflow. In year to 2014 REG had EBITDA ex development from wind of 3.4m – given minimal capex on existing sites this can easily service the debt needed to buy the company. OK there are losses from biopower and central costs – I would assume lots of these are growth / site development related.

Well worth a decent investment – low risk but good chance of a healthy profit…

Advertisement