It is good to see some direction now in EPN, but the near term issue of the loan facility remains an issue the Board has not updated shareholders, which remains to my knowledge a current liability due and payable by 31 October.
It may require $23.5 million wholesale sales commitment from Valens each year starting pretty immediately to get to an acceptable position to renew the existing loan.
This is the logic. At present my understanding is Valens has a lock on the facility at its discretion up to 11 years, meaning that a commercial lease return model (EPN as landlord) is likely to be appropriate for lenders to consider site valuation (assuming EPN is prevented from selling the asset and realising any other market valuation). For comparison purposes, we can look at 5% net for commercial leasing. However given that Southport is a fully functional production facility and EPN is carrying depreciation for all the equipment as well as facility depreciation, 10% is probably a more appropriate net commercial return.
Suppose Valens put $10 million worth of sales through Southport each year (a potentially achievable figure given Canadian total sales of CAD 86 million / AUD 92 million according their 2020 report), then we can take 2.5% of this as return ($250,000). $250,000 net revenue (as all direct costs are covered by Valens) would equate to a facility value of $2.5 million. This is far short of the current loan on the facility, but may be a fallback position for EPN as the purchase price of Southport.
So really we may need Valens to effectively guarantee $14 million of sales (wholesale pricing) per year from this year to enable a valuation of approximately 100% of the loan facility. If we say that only 60% property value is appropriate for the loan, this brings the wholesale sales requirement up to $23.5 million. This is around 25% of current total sales for Valens, so it is not something that can just be assumed.
Maybe the Board can update shareholders on the valuation discussion with lenders.
Also can't tell what proportion of the $18.5 million non-current assets sits with Southport. If we say $17 million, then a 10% return equates to $1.7 million per annum, or $68 million sales p.a. from Valens through the factory. The auditors might have a problem keeping the current valuation if the company is now considered landlord, not operator. I guess we might find out in the not-yet-released half yearly?
Southport factory re-valuation for $3.523 million loan facility before 31 October
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