canacord update with BUY 6.40 target, the guts of it. LEILAC...

canacord update with BUY 6.40 target, the guts of it.

LEILAC valuation validation achieved (CGe $485m) Investment Recommendation The Carbon Direct investment announced marks a pivot point in CXL’s lifecycle with the first external valuation of its LEILAC/carbon capture technology (>A$3.00ps) as well as providing material strategic rationale through both i) significant carbon capture expertise and global networks that CXL will be able to leverage, and ii) providing ~A $24.5m of capital to accelerate commercialisation to meet the growing demand for its technology capability. We believe prescribing a near-term valuation for CXL remains difficult task given the largely pre-commercialisation nature of its technology across multiple verticals (i.e. no revenue/profitability), and the wide-ranging number of outcomes for potential licencing agreements that are yet to be agreed upon. However, the longer-term opportunity and structural thematic unfolding is apparent, with decarbonisation regulation increasing globally at a rapid pace and likely to be a foundational part of business operations over the next three decades to meet net-zero targets by 2050 (and to avoid highly punitive carbon tariffs; ETS price a record >€60pT). The Carbon Direct investment provides a baseline valuation for the LEILAC technology opportunity, in our view, and is supportive of our estimated royalty agreement economics/valuation with each percentage of market share CXL is able to achieve in its CO2 vertical worth ~$0.80-1.00ps. Moreover, we expect completion of commercialisation milestones (LEILAC-2 entering development, and potential for LEILAC-3 commencement) that de-risk the technology scaling process will provide further valuation upside beyond ~$3.00ps. We expect business momentum to continue over the medium term given the structural trends underpinning demand for CXL’s products, while the expanding number of end markets provides material optionality and is diversifying risk away from a single outcome. We apply a 25x target EV/revenue multiple to our FY24E revenue forecast, and our target price lifts to $6.40ps (prev. $3.50ps) First external valuation of CXL’s carbon capture technology for lime and cement industry at $485m (i.e. >$3.00ps) CXL has announced Carbon Direct Capital management has invested €15m (A$24.5m) for a 6.98% equity stake in Calix’s subsidiary, the LEILAC Group, which is focused on commercialisation/development of its CO2 capture technology. We estimate this implies the LEILAC Group subsidiary is valued at €215m (AUD/EUR 0.62 = A$345m or $2.15ps) with CXL retaining 93% ownership post transaction. However, as a part of the transaction, CXL has also entered into a licence agreement under which it will retain 30% of royalties earned (i.e. excludes any engineering by the LEILAC Group) from deployment of the technology regardless of its equity stake in the LEILAC Group. We believe equates to a valuation of A$485m for the LEILAC technology or >$3.00ps. Of note is that the LEILAC Group is the exclusive licensee of Calix’s LEILAC technology and will operate with its own management team and a board that will be made up largely of Calix directors and one director appointed by Carbon Direct. We believe the investment provides two key points of external validation, being, i) technology validation from a global leading carbon investment/advisory group that also has investment in other leading carbon capture and utilisation technologies in the cement industry (e.g. Svante and Carbon Cure), and ii) valuation baseline for the LEILAC technology, which has been a key driver of the strong share price appreciation over the past 12 months, in our view. For important information, please see the Important Disclosures beginning on page 4 of this document. Strong strategic partner to support technology advancement (€15m = A $24.5m investment) Carbon Direct is a US-based investment/advisory group that specialises in direct investment into leading carbon removal and utilisation technologies as well as utilising its large team of specialised CO2 scientists and project managers to advance the commercialisation of the technologies. We expect CXL will be able to leverage Carbon Direct’s large team and extensive network to increase technology awareness and to provide connections to ultimately offer an end-to-end CCUS solution. The €15m (A$24.5m) will be used to “accelerate and continue to de-risk deployment of the LEILAC technology, both technically and commercially” e.g. engineering, business development, project and research resources. In our view, the capital injection for the LEILAC Group, in conjunction with the grant funding for LEILAC-2 (EU grant funded) will allow CXL to rapidly progress the ten CO2 capture projects it is developing (six cement, four lime) and progress its substantial pipeline of 21 projects now in early-stage discussions. Additionally, we believe, the investment reinforces CXL’s strategy to be an expert in calcination and desire to work with industry experts to advance adoption of its technology into industry, while also improving balance sheet flexibility to concurrently progress its other pre-commercialisation verticals (sustainable processing, advanced batteries, and biotech). What’s implied in the price? We view the valuation of CXL through: i) what investors are paying for the existing, more mature water treatment segment; and ii) the implied option value on the remaining business. In our view, the water treatment business can justify a A$0.75/share valuation, implying investors are attributing A$4.60/share (A$730m valuation) to the option on the other verticals. With the Carbon Direct investment providing what we calculate to be a $3.00ps valuation (A$485m) for the LEILAC technology, we estimate investors are applying a $1.60ps valuation to the sustainable processing, advanced batteries and biotech applications. However, as previously highlighted (further detail outlined – Link) we estimate the potential commercialisation of Heidelberg and Cemex alone could be worth $3-6ps, illustrating the potential upside beyond the current $3ps valuation for LEILAC, but believe this is reasonable given the staging and timing to future cash flow (CGe beyond 2025)