By Richard Gill, CFA
EQTEC (EQT), the waste gasification to energy technology provider, has revealed the signing of a Co-Development and Option Agreement with Rotunda Group and special purpose vehicle Shankley Biogas for the Southport Hybrid Energy Park project.
Rotunda is the owner of a plot of land at Watts Industrial Estate, Southport, Merseyside, which currently has planning permission for; a waste recycling facility for municipal, commercial and industrial waste for 80,000 tonnes of annual residual waste; an anaerobic digestion facility; and 9MW of electrical generation with 2MW of battery storage, exporting 11MWe to the grid annually. The project has also qualified for the UK Government’s Renewable Heat Incentive Scheme.
Under the deal the two parties will jointly develop the project, with EQTEC responsible for contributing 100% of the development costs pre-financial close (currently estimated at c.£500,000). At financial close, the company will receive a return on the funds invested in the form of a development fee, no less than two times the funds invested. Rotunda has the option to participate in the project’s development capital and receive a proportional fee.
Also under the agreement, Rotunda has granted EQTEC exclusivity to enter into a potential transaction whereby EQTEC can obtain full ownership of the project SPV via an acquisition. In consideration for the granting of exclusivity (12 months plus potential extensions), EQTEC will pay £100,000, a figure which will be deducted from the proposed acquisition price of £382,000 should it go ahead. In addition, the SPV will lease the land from Rotunda for a period of 23 years with a potential five year extension, whereby the lease fee (approximately £400,000 per annum) will be set up as a profit share agreement.
EQTEC intends to seek additional planning permission for the project so that its advanced gasification technology can be applied to make it capable of converting over 55,000 tonnes annually of RDF waste which would be created by the proposed project plant and otherwise be destined for landfill or incineration, generating an additional 6-8MW of ‘green’ electricity. EQTEC estimates that the additional capacity for the thermal conversion of waste, using its technology has the potential to generate additional revenues for the Project SPV of c.£70 million in electricity sales and potentially up to £15 million in heat sales over a 20 year period, and save over £80 million in waste disposal costs. EQTEC and Rotunda have been in initial discussions with the local authority, which, in EQTEC’s view, has been supportive and is keen to have such infrastructure as an alternative to incineration technologies.
Yet another statement from EQTEC which goes to show that waste to energy projects are keen to use its technology solutions to run and improve the expected performance of their plants. It follows on from a similar agreement back in July for the Deeside RDF project whereby the company entered into an agreement to potentially acquire the project SPV and also apply its technology to significantly improve project economics and environmental impacts. Again, we do not include the latest project into our forecast figures as our model assumes that revenues are earned for services only and not via the acquisition of specific projects. However, project acquisition is an avenue the company is increasingly exploring and should this deal go through it will significantly positively impact the company’s financials.
Surprisingly, shares in EQTEC have slipped slightly on this statement, despite the company further demonstrating it has commercial projects in advanced stages of development. At the current price of 0.58p (down from a recent high of 0.825p seen in June) the company is capitalised at just over £40 million. On 16th July we updated coverage on EQTEC, forming a new financial model based on the increasing pipeline of commercial opportunities that the company has built up over the course of the year.
At the top line, we expect revenues to grow markedly over the next 3 financial years as EQTEC delivers on its project pipeline. Net profits are forecast at €5.3 million in 2021, rising to €8.6 million in 2022. We consider a multiple of 15 times earnings to be a justifiable figure to use for our valuation, which applied to our 2022 forecasts and discounted back to end June 2020 at a rate of 12% derives a price per share of 1.39p – 140% higher than the current price. While project delays are perhaps the key risk to our figures being met, further opportunities like ones at Deeside and Southport demonstrate that there is also the potential for our forecast figures to be increased.
We retain our stance of Conviction Buy.
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