Intelligent Energy Holdings

Transcription

1 Intelligent Energy Holdings Profitability transformed by landmark transaction Contract and trading update Alternative energy Intelligent Energy (IEH) has signed an agreement to acquire GTL s energy management business, which provides energy to over 27,400 telecom towers in India, for 85m. The transaction is expected to generate longterm recurring revenues worth 1.2bn over 10 years. Management expects EBITDA margin for this activity to rise from c 15% to 30-35%, (c 40m per year), within three to five years. We revise our estimates and indicative valuation to reflect the transaction, giving a base case fair value of 471m. 12 November 2015 Price 99.75p Market cap 188m /US$1.51 Net cash ( m) at end September Shares in issue 188.3m Free float 66% Year end Revenue ( m) EBITDA ( m) PBT* ( m) 09/ (52.4) (58.0) (30.4) 0.0 N/A 09/15e 77.6 (46.2) (49.7) (24.4) 0.0 N/A 09/16e (23.8) (72.5) (36.5) 0.0 N/A 09/17e (5.3) (0.8) 0.0 N/A Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. EPS (p) DPS (p) P/E (x) Code Primary exchange Secondary exchange Share price performance IEH LSE N/A Progress on executing strategy in all three divisions The GTL transaction is important because the DP&G division represents a mechanism to generate profits from the fuel technology without waiting for widespread adoption of fuel cell vehicles. The deal also provides a platform for the large-scale economic deployment of fuel cells as a distributed power solution. The Motive division has recently extended its development programme with one of its existing Asian automotive OEM customers and announced participation in an EU backed development programme for which BMW Group and Daimler are specifying the stack requirements. In August, the CE division demonstrated that its fuel cell technologies can be embedded in cell phone and tablet hardware without reducing either existing functionality or battery capacity. This is a critical step in evolving from the standalone Upp, launched in late 2014, to a fully embedded commercial offer. Non-dilutive funding options being explored Growth continues to be driven by the DP&G division and depends on IEH s ability to fund the acquisition of energy assets relating to telecoms towers. The consideration payable for the energy management business comprises 25m cash and 60m debt sourced from the Indian banking markets. A further doubling in divisional assets during FY16 is expected to be funded from asset finance. There remains a short-term funding gap, estimated at 65m. IEH intends to raise additional funds through two routes: a proposed issue of a convertible instrument to industrial partners involving a strike price at a premium to the current share price; and realising value from its DP&G Indian operations. Valuation: Upside from royalty deals % 1m 3m 12m Abs (0.3) 10.8 (49.8) Rel (local) (48.5) 52-week high/low 209p 68p Business description Intelligent Energy develops efficient hydrogen fuel cell power systems for the distributed power and generation markets (DP&G division), global automotive (Motive division) and consumer electronics (CE division) markets. Next event Prelims 30 November 2015 Analysts Anne Margaret Crow +44 (0) Roger Johnston +44 (0) industrials@edisongroup.com Edison profile page Our sum-of-the-parts analysis gives a risk adjusted base case indicative valuation of 471m. The potential value arising if DP&G achieves management s target of 135k towers under management by end FY17e is explored in the note. This analysis excludes any value associated with long-term royalties for the Motive division or licence fees and royalties for the Consumer Electronics divisions. Intelligent Energy Holdings is a research client of Edison Investment Research Limited

2 GTL contract In February 2015, IEH announced that it had reached agreement in principle with GTL, a provider of services and infrastructure to the Indian telecommunications sector, with regard to the long-term power management rights over a 26,000 telecom tower estate in India. The number of towers under management increased from around 10,000, the majority of which were already managed under an interim agreement with GTL, to around 27,000. On 1 October, IEH announced that the agreement with GTL to acquire the energy management business had at last been signed. The consideration payable is INR850 Crores ( 85m), of which up to 25m will be financed by IEH and up to INR600 Crores ( 60m) from debt funding secured against the revenue streams of the Energy Management Business. The consideration is payable on completion, which is likely to take place in CY Q116. Until completion, energy management of the towers will be conducted under the interim agreement at minimal EBITDA margins. This is a transformative deal for IEH. It is expected to have a material impact on profitability. The majority of the Group s revenues are currently derived from the DP&G division. As noted above, at present most of the towers under management are operated under an interim contract with GTL. Under the interim contract, the towers are operated at minimal EBITDA margin, but once this longterm contract is completed, EBITDA margin is expected to increase to 15% initially. Over three to five years, management expects to be able to increase EBITDA margin to around 30-35%. This will be achieved by improving the efficiency of sites, by replacing worn-out diesel generators with fuel cells where economic and by generating surplus electricity for sale to third parties for applications such as water purification (see our initiation note, pages 6 and 7 for details of how margin expansion will be achieved). IEH expects annual revenues from providing power and maintaining equipment to be around 120m per year. The transaction is also valuable strategically as it provides a platform to deploy fuel cells incorporating IEH technology. Management estimates that around 70% of sites currently under management experience power outages of more than eight hours a day and are therefore suitable candidates for substituting fuel cells for diesel generators as the latter wear out, resulting in widescale deployment over the next three to five years. Smaller volumes of fuel cells would be manufactured on the ready-to-scale line built by the JV between IEH and Suzuki. Larger volumes will probably be manufactured locally by third parties in India. We note that IEH is considering selling part of its Indian business (this is discussed in the section on cash flow). If this happens, the strategic ambition to create a platform to deploy fuel cells that is independent of widespread adoption in the automotive industry will still be fulfilled. Additionally, the transaction creates a blueprint for further deals of this type. GTL s tower estate represents an estimated 7% of towers in India, so there is plenty of scope to increase the number of towers under management. IEH continues to hold discussions with other parties interested in a similar arrangement. Once the GTL agreement is completed, it is likely that other agreements will follow. Our financial model assumes one other deal similar in size to GTL completing by the end of FY16. Management has identified an opportunity to improve the profitability of the energy management operation yet further by acquiring IP (know-how, operational processes and services) that improve performance and reduce downtime. This IP would also make it easier for IEH to expand its energy management operations elsewhere in South-East Asia and increase the attractiveness of IEH s energy management proposition. Management expects that the consideration payable, if the acquisition proceeds, will be 30-45m. This would be funded by non-recourse debt finance, financed by charges payable by the Indian energy management business for access to the IP and covered by the resultant margin improvement. Intelligent Energy Holdings 12 November

3 Financials DP&G division Our previous estimates had assumed that the GTL contract would complete by mid-fy15. The delay in completing the contract has a negative impact on FY15 forecasts, as the average revenue generated per site under the interim contract is less, and generates a minimal EBITDA margin. As management has been focused on finalising the GTL agreement, discussions with other parties have not been concluded, so the total number of towers under management added during the year has not been as great as we originally modelled. Therefore, this has a negative impact on FY15 divisional performance. We expect some of the discussions with other parties to complete during H216, so the number of towers added in our model during FY16 remains unchanged. However, for the first part of the year the GTL towers under management will generate lower revenues and EBITDA margins than previously assumed. Exhibit 1: Revisions to DP&G divisional model FY15e FY16e FY17e Old New Old New Old New Number of towers under management added during year (k) Number of towers under management at year end (k) Revenues ( m) EBITDA ( m) 7.7 (0.2) Source: Edison Investment Research Motive division The recent trading statement notes that, because of the phasing of some JDA activity from H215 to H116, the division is expected to show a year-on-year reduction in revenues during FY15. We adjust our FY15 estimates to reflect this. Our FY16 estimates remain unchanged, underpinned by the recent announcement of an extension to the development programme with the existing Asian OEMs, which is worth c 6.5m over two and a half years, and the EU-backed VolumetriQ programme. This is a three-year programme, supported by 5m of funding, with a target to develop fuel cell stack based on IEH s proprietary 90kW fuel cell technology that can be manufactured in high volumes for use in hydrogen fuel cell vehicles by IEH is leading the programme. The industrial partners include Johnson Matthey Fuel Cells, Solway Speciality Polymers and automotive component OEM ElringKlinger. BMW Group and Daimler will be participating by setting out the stack requirements. Exhibit 2: Revisions to Motive divisional model FY15e FY16e FY17e Old New Old New Old New One-off Motive licence revenues ( m) Total divisional revenues ( m) EBITDA ( m) 0.5 (0.7) Source: Edison Investment Research Our estimates model the award of a major licence deal in FY17. While it is not possible to predict with certainty when major licence deals will be awarded, external events make an award seem more likely. Recent months have seen a surge in activity related to fuel cell vehicles. For example, in September, the first public access hydrogen refuelling station was launched at the Advanced Manufacturing Park, just off Junction 33 of the M1 in South Yorkshire. This is a significant advance in creating a viable infrastructure to support adoption of fuel cell vehicles in the UK. It is particularly timely given that Toyota launched its new Mirai hydrogen fuel cell vehicle in the UK during October. Those automotive manufacturers that have not already developed their own fuel cell technology have limited options. The high-cost (estimated at several billion dollars) and lengthy time-scales to Intelligent Energy Holdings 12 November

4 develop the technology in-house make licensing the technology a good option. IEH is the only independent provider of technology suitable for a wide range of vehicles. BMW and Daimler s participation in the VolumetriQ programme, intended to develop a robust, high-volume variant of IEH s current automotive product, illustrates the high levels of interest in the technology. Consumer Electronics The Upp device, which is an external fuel cell charger for mobile phones, was launched in Apple stores in November Adoption has been limited, probably because of the high cost of refills ( 149 for fuel cell and initial cartridge, 5.95 for refill cartridges) and weight of the combined charger and fuel capsule. We adjust our divisional estimates so that ramp-up in volumes associated with the availability of the lighter disposable refills is delayed until FY17. We reduce the divisional operating costs, assuming that marketing expenditure will be minimal until the disposable cartridges are launched. The acquisition of fuel cell-related assets from Societe BIC in February 2015 is key to the development of the disposable fuel cartridges. Integrating these assets is progressing well. Exhibit 3: Consumer Electronics divisional model FY15e FY16e FY17e Old New Old New Old New Number of Upps sold during the year (k) Revenues ( m) EBITDA ( m) (14.0) (14.0) (16.0) (10.5) (10.3) (8.0) Source: Edison Investment Research From a strategic stance, the Upp should be regarded as a stepping stone to creating a fuel cell that is fully embedded in a mobile device. In August IEH demonstrated its fuel cell technologies embedded in cell phone and tablet hardware without reducing any of the functionality or battery life of the devices. It has also demonstrated consumer electronics derived technology to a potential industrial partner in an adjacent fast-growth market. We exclude any contribution from this project from our estimates. Group Earnings We expect the reduction in DP&G revenues and profitability resulting from the delays in completing the GTL contract to have a material impact on Group revenue forecasts during FY15 and FY16. The impact on profitability has been mitigated by management s actions in reducing the central cost base, modelled at 31.3m for FY15 compared with 38.4m in FY14. Our revised model assumes that IEH acquires energy management rights but not the tangible assets, reducing depreciation charges and thus loss before tax in FY15. The net cash position at the end of FY15, stated by management as 24.5m, is better than expected because of the delay in acquiring the GTL energy management business. The estimates for net debt at the end of FY16 and FY17 are higher than previously because we now model a higher average cost of acquisition for each site. Exhibit 4: Summary of changes to estimates FY15e FY16e FY17e Old New Old New Old New Revenues ( m) EBITDA ( m) (39.4) (46.2) (4.0) (23.8) PTP ( m) (73.8) (49.7) (73.1) (72.5) 3.5 (5.3) EPS (p) (37.2) (24.4) (36.8) (36.5) 3.9 (0.8) Net (cash)/debt at year end 34.8 (24.5) Source: Edison Investment Research Intelligent Energy Holdings 12 November

5 Cash flow and balance sheet Our estimates model 85m cash outflow associated with the acquisition of the GTL energy management business and a further 93m associated with the acquisition of energy management rights for a further 30,000 telecom towers. This is included within capex. 60m of GTL acquisition cost is expected to be funded by debt funding secured against the revenue streams of the Energy Management Business. This is included in long-term borrowings. We expect that all the funding needed to acquire the additional 30,000 telecom towers will be provided under a similar arrangement. This leaves an estimated 65m funding gap, which we model as provided by shortterm debt. Management is currently exploring two complementary options to bridge this funding gap. The first involves a proposed issue of a convertible instrument to industrial partners. The terms have not yet been agreed but are expected to include a strike price that is at a premium to the current share price. The second involves realisation of value from the Indian operations. We have not modelled the impact of either of these potential initiatives, but note that either would remove the potential for a discounted funding round and associated dilution, a prospect that has weighed down the share price. Valuation Exhibit 5: DP&G division Our analysis now focuses on the year ended September 2017, rather than September 2016, as delays in signing the GTL contract mean that the later period is more representative of the potential revenues that may be generated from the DP&G division. Noting the recent announcements relating to the Motive division, which strengthen the likelihood of a licence deal, we now value this division separately from the Consumer Electronics division. Our previous note used the same methodology for both the Consumer Electronics and Motive divisions. Peer EV/Sales comparison Valuation scenarios Market cap ( m) EV/Sales TTM Sep17 (x) Base case M nt target Aggreko 2, Number of sites under management end FY17e APR Energy FY17 revenues ( m) Ashtead Group 5, Average EV/Sales for sample of peers Bharti Infratel 7, Implied EV ( m) , ,180.3 Cape Net cash end FY15e ( m) Cash required for tower portfolio expansion* ( m) (247.5) (247.5) (247.5) (247.5) Speedy Hire Risk-free indicative value ( m) Toromont Industries 1, Indicative value with 10% adjustment for risk ( m) United Rentals 4, Indicative value with 20% adjustment for risk ( m) Mean 2.0 Indicative value with 30% adjustment for risk ( m) Indicative value with 40% adjustment for risk ( m) Source: Edison investment Research. Note: Prices at 6 November *Shown as 'capex' and 'acquisitions/disposals' in the financial summary table. Our analysis of a sample of listed peers engaged in the provision of power generation and other equipment to utilities and the construction sector indicates that a calendarised EV/Sales ratio of 2.0x for the twelve months ending September 2017 is appropriate. We apply this multiple to a range of revenues extending from our base case for FY17e ( 320.1m divisional revenues) to FY17e revenues realisable if a more rapid growth trajectory enables management to achieve its ambitious target of 135k telecoms towers under management by the end of FY17 ( 592.0m divisional revenues). Although we would normally state EV by reference to historic net debt or cash (and this is the basis of EV/sales ratio for the peer group), in the case of IEH we have used net cash as forecast for September 2015, and have adjusted this figure for prospective expansion investment, as this amount is particularly material. Intelligent Energy Holdings 12 November

6 Noting the uncertainty regarding the revenue structure of any future deals with telecom tower operators, we apply a 30% discount for current perceived levels of risk. This gives an indicative value of between 291m (base case as modelled in our estimates) and 670m. This upper end of the range rises to 957m if no risk adjustment is applied. We note that the base case indicative value for this division on its own is 59% higher than the current market capitalisation. We adopt a similar process to determine the incremental value associated with the Consumer Electronics division. This time we apply the calendarised EV/Sales multiple for the twelve months ended September 2017 (2.4x) derived from a sample of listed companies involved in fuel cell development to our divisional FY17e revenue estimate. (Noting that one of AFC Energy s fuel cell systems has recently delivered power to the German grid, we recognise that the company has progressed sufficiently towards commercialisation to be included in the list of peers.) Applying a 30% discount for current perceived levels of executional risk, gives divisional indicative value of 31m, which is our base case. The risk-free indicative value is 44m. This analysis excludes any potential licence or royalty revenues generated by the division as it is likely that these will occur outside the period covered by our estimates. Note: In this analysis, all the debt is attributed to the DP&G division. Exhibit 6: Consumer Electronics division Peer EV/Sales comparison Valuation Market cap EV/Sales TTM Sep17 (x) AFC Energy 104m 8.9 Upp units FY17e (k) 220 Ballard Power Systems 164m 2.0 CE revenues FY17e ( m) 18.7 Ceres Power 56m 19.1 EV/Sales multiple 2.4 FuelCell Energy 183m 0.7 Net cash (debt) end FY15e ( m) 0.0 Heliocentris 44m 0.5 Risk-free indicative value ( m) 44.1 Hydrogenics Corp 74m 1.9 Indicative value with 10% adjustment for risk ( m) 39.7 Plug Power 326m 2.0 Indicative value with 20% adjustment for risk ( m) 35.3 SFC Energy 31m 0.6 Indicative value with 30% adjustment for risk ( m 30.9 Mean 2.4 Indicative value with 40% adjustment for risk ( m 26.5 Source: Edison Investment Research. Note: Prices at 6 November Grey shading indicates exclusion from mean. The business model for the Motive division differs from the other two divisions, in that we expect substantial income from licence fees during the period covered by our estimates. These attract substantially higher margins than revenues from supplying managed power services or product sales. Exhibit 7: Motive division Peer EV/Sales comparison Valuation Market cap ( m) EV/EBITDA TTM Sep17 (x) AFC Energy Average licence revenues FY15e-FY17e ( m) 15.0 Ballard Power Systems Motive JDA revenues FY17e ( m) 10.6 FuelCell Energy Total normalised revenues FY17e ( m) 25.6 Heliocentris Normalised FY17e EBITDA ( m) 14.8 Hydrogenics Corp 74 - EV/EBITDA multiple 13.5 Plug Power Net cash (debt) end FY15e ( m) 0.0 SFC Energy Risk-free indicative value ( m) Mean 13.5 Indicative value with 15% adjustment for risk ( m) Indicative value with 25% adjustment for risk ( m)) Indicative value with 35% adjustment for risk ( m)) Source: Edison Investment Research. Note: Prices at 6 November Grey shading indicates exclusion from mean. We therefore apply a calendarised EV/EBITDA multiple for the twelve months ending September 2017 (13.5x) to FY17e divisional EBITDA. A single licence fee similar to that previously received from Suzuki would be 45m. Our estimates attribute the entire 45m to FY17. For valuation purposes, we assume that the Motive division will receive a sizeable licence fee (c 45m) every. Intelligent Energy Holdings 12 November

7 three years, and therefore ascribe one-third of the licence fee ( 15m) to our FY17e in the valuation calculation shown in Exhibit 7. Applying a 25% discount for current perceived levels of executional risk gives a divisional indicative value of 149m, which is our base-case. (We apply a lower discount for risk to the Motive division because recent announcements demonstrate strengthening customer engagement, increasing the likelihood of one or more licence deals in future.) The divisional risk-free indicative value is 199m. This analysis excludes any potential royalty revenues generated by the division as it is likely that these will occur outside the period covered by our estimates. As discussed previously, all the debt is attributed to the DP&G division. Summing the indicative valuations for the three divisions gives a base-case of 471m and an upper bound of 1,200m. This is derived from the risk-free indicative values, assuming that the DP&G division reaches management s ambitious target of 135k sites under management by the end of FY17. This analysis excludes any value associated with long-term royalties for the Motive division or licence fees and royalties for the Consumer Electronics divisions. Intelligent Energy Holdings 12 November

8 Exhibit 8: Financial summary m e 2016e 2017e Year-end 30 September IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue Cost of Sales (13.5) (9.9) (53.6) (116.2) (188.2) Gross Profit EBITDA (23.4) (52.4) (46.2) (23.8) 64.8 Operating Profit (before amort and except) (26.7) (42.6) (49.8) (55.9) 18.8 Amortisation of acquired intangibles Exceptionals 0.0 (7.1) Share based payments (0.0) (6.0) (2.6) (2.6) (2.6) Operating Profit (26.7) (55.6) (52.3) (58.4) 16.2 Net Interest (0.5) (4.0) 0.1 (16.6) (24.1) Share of losses from JVs and exceptionals (2.5) Profit Before Tax (norm) (29.7) (58.0) (49.7) (72.5) (5.3) Profit Before Tax (FRS 3) (29.8) (59.6) (52.3) (75.1) (7.9) Tax Profit After Tax (norm) (20.9) (46.6) (45.9) (68.7) (1.5) Profit after tax (FRS 3) (21.0) (48.2) (48.5) (71.3) (4.1) Average Number of Shares Outstanding (m) EPS - normalised (p) (15.6) (30.4) (24.4) (36.5) (0.8) EPS - normalised fully diluted (p) (15.6) (30.4) (24.4) (36.5) (0.8) EPS - (IFRS) (p) (15.6) (31.4) (25.8) (37.9) (2.2) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) N/A N/A N/A N/A 16.4 Operating Margin (before GW and except) (%) N/A N/A N/A N/A 4.8 BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Deferred tax assets Current Assets Stocks Debtors Cash and short-term deposits Current tax assets Current Liabilities (8.6) (17.6) (21.8) (95.4) (105.4) Creditors (8.6) (17.6) (21.8) (30.4) (40.4) Short term borrowings (65.0) (65.0) Long Term Liabilities (21.1) 0.0 (0.0) (153.8) (203.1) Long term borrowings - asset finance (18.5) 0.0 (0.0) (153.8) (203.1) Other long term liabilities (2.6) Net Assets CASH FLOW Operating Cash Flow (23.4) (50.6) (48.8) (18.2) 59.6 Net Interest (0.0) (16.6) (24.1) Tax Capex (5.0) (6.8) (9.5) (101.5) (61.0) Acquisitions/disposals (9.9) (85.0) 0.0 Equity financing Dividends Forex 0.0 (0.0) Net Cash Flow (23.6) 56.1 (64.4) (217.5) (21.7) Opening net debt/(cash) 29.9 (13.1) (88.9) (24.5) HP finance leases initiated Other Closing net debt/(cash) (13.1) (88.9) (24.5) Source: Edison Investment Research, company accounts Intelligent Energy Holdings 12 November

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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0) Intelligent Schumannstrasse 34b Energy Holdings 280 High 12 Holborn November Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St Frankfurt Germany London +44 (0) London, WC1V 7EE United Kingdom New York , New York US Sydney +61 (0) Phillip St, Sydney NSW 2000, Australia Wellington +64 (0) Wellington 6011 New Zealand