Analyst | Date | Price Target | John Bishop | 4thNovember 2019 | Under Review (prev. $0.70/sh) |
Pumped Hydro Project Substantially Delayed
Key Points ·GNX provided an update regarding its Kidston Stage 2 Pumped Hydro energy storage development; ·Energy Australia (“EA”) has advised that during the course of its final approval process (ahead of planned FID later this month), that its parent entity cannot agree to the proposed offtake period of 30yrs (per the original Term Sheet ann. Dec 2018); ·Consequently, financial close will not be reached in CY’19; ·The impact of this announcement is significant in that it will result in both the J-Power Subscription Agreement (ann. Jun 2019) and NAIF concessional project loan approval (ann. July 2019) lapsing by Dec 31, 2019 (unless extended); IMPACT ·The market has rightly discounted the Pumped Storage project for nil value at this time; ·However, we view that the initial reaction, even after today’s recovery, the sell-off is overdone given the underlying value of the business on our assessments; ·We outline our sum-of-the-parts Valuation below noting the following assumptions: oPumped Hydro - $0m (whilst we await revision to offtake terms and financial structure); oKidston Solar Stage 2 - $0m (noting that without the Pumped Hydro development the Transmission Line will not be upgraded); oReducing peak debt and working capital - $200m (previously $400m after removing GNXs NAIF funding portion for Kidston Stage 2 per above); oRemoving J-Power Subscription Agreement – implied maximum dilution and associate equity funding;We view this announcement as significant enabler to take Kidston Stage 2 to Final Investment Decision later this H;
IMPACT TO VALUATION & RECOMMENDATION ·Whilst there will be clear impact to our revised Valuation (prev. $0.65/sh) and Price Target (prev. $0.70/sh) we view that GNX has been oversold on this announcement; ·Furthermore, we note continued support by State and Federal Govt (policy and rhetoric) specific to the Kidston Pumped Hydro project as well as renewables and associated network stability management: oKidston Pumped Hydro received “Critical Infrastructure” designation; oFunding commitment to the Transmission Line upgrade if the Pumped Hydro project is developed; oNAIF funding of up to $612m on the previous form; ·Additionally, J-Power have clearly showed interest in the project and therefore we feel it safe to assume that they will continue to remain supportive and engaged to resurrect the development; ·Whilst EA were – up to last week – looking publicly towards Kidston Pumped Hydro as a significant plank in its growth ambitions in Australia to replace its coal fired power assets; ·So though the Pumped Hydro development faces a delay and revised NAIF financing terms, we are of the view that the groundswell of political and stakeholder goodwill, should see a positive outcome in time (albeit in a different form to our last published financials and SOTP Valuation); ·We will not be changing our BUY recommendation as a consequence. Investment Case Whilst the EA announcement and the resulting lengthy delay to reaching financial close for Kidston Stage 2 Pumped Hydro storage development is disappointing, the GNX stock is oversold. We see greater upside than downside risk based on our SOTP Valuation for the operating Kidston Stage 1 Solar Project and the Jemalong 50MW Solar Project, due to reach financial close shortly. Further to which, we are of the view that the groundswell of political and stakeholder goodwill, will see the project go ahead in time. Uncertainty on timing and form will prompt revision to our Valuation and Price Target, but we believe that with time, GNX will increasingly understand the framework and therefore timing to restructure the Project and its funding. The market will therefore impute value ahead of the current share price on our analysis. We retain our Buy recommendation as a consequence.
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