By Richard Gill, CFA
EQTEC (EQT), the waste gasification to energy technology provider, has signed an Exclusivity Agreement with developer Logik Developments over the Deeside Refuse Derived Fuel (RDF) Project in Wales. Logik is the owner of 6.27 hectares of land at the Deeside Industrial Estate, Flintshire, which currently has planning permission for a waste management facility comprising the recycling of waste, the production of RDF and an anaerobic digestion facility.
Under the exclusivity agreement, Logik has granted EQTEC exclusivity to enter into a potential transaction whereby EQTEC can obtain full ownership of the project from Logik via the acquisition of the project’s special purpose vehicle. Exclusivity runs until March 2021 and can be extended by mutual agreement. The proposed purchase price will be £4.6 million plus an amount based on a formula linked to the final planning achieved and a detailed financial model of the project – subject to a maximum further amount of £5.4 million.
EQTEC will also act as lead developer for the project, having responsibility for introducing potential project investors and EPC and O&M partners. In consideration for the granting of exclusivity, EQTEC has paid Logik £100,000, which will be deducted from the final purchase price.
Existing planning permission on the project provides for the construction and operation of a waste management facility for municipal, commercial and industrial waste for 182,000 tonnes of annual residual waste, and an anaerobic digestion plant which is projected to produce 2MW of biogas. Under the current planning, 60-70% of the RDF produced at the proposed waste management facility would incur disposal and/or landfill costs. However, with the addition of the EQTEC’s technology, the plant would be capable of converting hundreds of thousands of tonnes per year of non-recyclable everyday household and commercial waste, otherwise destined for landfill or incineration, into green energy.
As such, EQTEC will now seek additional planning permission so that its advanced gasification technology can be applied to the project, thus reducing the environmental impact and improving its economics. Discussions with the local authority have taken place, with EQTEC saying that they have been supportive and keen to have an alternative to incineration technologies.
Subject to achieving the additional planning, EQTEC expects that the project would be capable of generating 20MW of green electricity, enough to power 37,500 homes, and 27MW of thermal heat production. The electricity and heat could be exported to the grid and/or sold locally. The company’s preference would be to create private wire and heat networks using the surplus electricity and heat, as it is aware of interest from a large industrial energy user in the area.
Subject to obtaining the additional planning permission, and concluding the acquisition, EQTEC estimates that the additional capacity for the thermal conversion of waste, using its advanced gasification technology, would generate additional revenues for the project SPV of c.£16 million in gate fees, c.£6 million in electricity sales and up to £1.5 million in heat sales.
This is further significant news from EQTEC and goes to demonstrate the continuing high demand for its technology solutions from a range of industry partners. Project owners/developers are attracted to the firm’s advanced gasification technology due to its positive impact on both project economics and the environment, with local authorities keen to reduce their environmental impact via lowering municipal waste and finding alternatives to landfill and incineration. In this particular case, the project is also expected to significantly lower the environmental impact of large local industrial users, potentially enabling them to make significant cost savings on their energy.
In terms of financial impact, we do not include the Deeside project into our forecast figures at this time 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 has previously explored, and should this deal go through it will significantly positiviley impact the company’s financials. That said, there are obvious hurdles to overcome before then, not least obtaining the required planning permissions and project funding. While recently raising £10 million via a placing, EQTEC would likely need to find additional finance to fund the purchase of the SPV, which could run to a maximum of £10 million.
Shares in EQTEC reacted well to the news but have since settled back down at 0.46p, capitalising the company at just £31.6 million. We recently updated coverage on the company, forming a new financial model based on the increasing pipeline of commercial opportunities that the company has built up over recent months.
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 – 202% higher than the current price. While project delays are perhaps the key risk to our figures being met, further opportunities like this one at Deeside 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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