Ann: Energy Storage Presentation, page-4

We can only hope that a takeover is on the cards.

The challenge I see for Genex is that their cost of capital is too high, and yet they are unwilling to curb some of their more recent capital expenditure ambitions. I have mentioned this before - I think they should stop looking for new projects until either they sort out their financing, or start generating positive cash flow from Kidston pumped hydro. Right now they need all the capital they can get to fund this investment, and any more pressures on the balance sheet will only further the dilution.

Companies only have two ways of raising capital - debt or equity. Even though their cost of debt is relatively low, they can't get any more debt. So every additional $1 of capital required has to come through equity (read: capital raisings). Generally we would look for the weighted average cost of capital being less than the return on investment, but for Genex we need to consider the marginal cost of capital. From the most recent cap raise, it's around 25%. That is, to get $40m of financing, they had to create 266m shares, diluting shareholders by 25% - market cap resultantly dropped from $250m to $190m today, and EV will increase by $40m with the cap raise.

Compare that to the internal rate of returns on batteries. As per their presentation, they are only getting 9-17% IRR. This is substantially lower than their marginal cost of equity capital. Any presumably the next batteries after Bouldercombe will have even lower IRR, while the marginal cost of capital goes up.



And that's probably why Mike Cannon Brookes would rather fund the debt than the equity. And that's probably why a takeover by a company with a better balance sheet and lower cost of capital will create value for us shareholders and Genex. Maybe Brookfield will turn their attention from AGL to Genex next.