The Boo, The Bad, and the Bugly

I had a nice chat with Peter re a few things. So I will share my understandings. And some comments on where we are going.

The Boo, you know about. The BOO in the first half was higher than expected. This is why the share price rocketed. And margins were super good (72%). Peter mentioned the costs (opex) were very pleasing for such 'non opex heavy' projects like solar. So the solar is good for IGO good for Greta and good for Zenith. Boo is Good.

The Bad was the silly low margin on MOM/EPC. That was not really a one off. The MOM/EPC margins were very robust in the past, but going forward it will look more like the first half we just saw reported. (I actually am not sure I believe Peter here! I dont think any business will do work less than 10% margin. Maybe MOM/EPC is cyclical and we are at a low point. I dont know what to model going forward. Will MOM/EPC be $10 mill a year and $3 mill ebitda or will it be $6 mill a year with 500k ebitda. That is a big difference!)

The Bugly was this odd 571k write off of some BOO assets. Peter said it was just some assets that were deemed not usable anymore (I think on some upgrade, I would guess Barrow). But the assets (generator) had not been fully depreciated. So we have this write off. I asked if this was something I should expect every six months. He said 'no'. But there may be some 'tidy up' that needed to be done over the near future. (ha ha, does that mean in the next 6 months there will be another 500k or $1 mill or maybe NIL)

The good thing re the above statements is that I think the 'underlying' eps after tax for the first half is closer to 3 cents - not the 2.28. So that confirms my prior thoughts that in a 'no growth' scenario, Zenith is at least 6 cents eps pa after tax. With no news - good or bad, that is the eps to expect at the low end. And it is likely closer to 7 as 2nd half work completes and comes on line.

Now when I mentioned GCY, Peter mentioned DCN. So I had to go look 'what about DCN'. I did not realise they have been trading halted since 2 Feb. Why did no one here tell me!?! This exchange came from that I told Peter it is 12 months since they signed a NEW client. Peter countered the existing clients (the big old ones) are very strong and having some growth and uplifts and that is good. (ha, ha... of course that is good)

So now we (us Zenith holders) need to think about GCY ....and... DCN. Of course it will be 'ok'. But there is risk there.

I asked re Kundana (needs to be extended soon) and he only said Northern Star was a very good partner with Zenith. That is what Rebecca said. I note one mine at that project has stopped working because of a wee earthquake. The entire project with Rand and who is the other and NST is a bit odd. It is hard to 'guess' the outcome. I can guess about GCY (it will mine for years) as that info is very public. Again I 'assume' Kundana will continue, but the PPA is finishing soon.

I was trying to figure out in my head the 2nd half (and therefore yearly) numbers now. My projections are just wrong from the recent past as the BOO MOM mix and margins have changed. But I think they have changed for the overall good. If there is no bad news for 2nd half and all clients just keep going, we are looking at a yearly eps at 6, with 2nd half about 3.5. If that comes to pass (3.5 as a steady state), then you project 7 cents eps per year as early as NEXT YEAR. So your share price depends upon what Mr Market wants to assign as a PE. And if any new contracts are signed.

Oh, re new contracts / debt. Peter was very comfortable with the current head room and cash flow to modestly grow Zenith. But I asked re Cap Raise... if a big, big contract was signed. He said if they needed more capex for a big project, they would tackle that at the time - and had a number of avenues. I asked if there was ability to get more head room with CBA, and he said the relationship with CBA is very positive. And he mentioned (aside from a Cap Raise, that I had asked about) about off balance sheet stuff. If you google off balance sheet you read about things like leases and such. So, my take on this debt conversation is 'it all depends on contracts signed'.

I asked Peter if the entire PPA market was stalled. And he said the guys at Zenith that are doing proposals and chasing the pipeline are quite busy. So he did not agree there was stagnation in the PPA market right now. Now, I think the last 12 months the BOO signed has grown only 5% based on existing Tier 1 client upgrades. But I think the BOO contracted (and still being built) gives us 10% growth from 2020 to 2021. I was trying to figure out the Barrow MOM/BOO to BOO conversion. Some early presentations say Barrow was 16 MW BOO/MOM before this upgrade, others say it was 20 MW from the start. So I just do not know the BOO increase on Barrow. It could be even 10 or 12 MW. Say they 'were' BOO/MOM 8 MW each and now go to BOO 20 MW, that is a loss of 8 MW MOM and a gain of 12 MW BOO. That is a huge plus, but I just do not know.

So... we may get new contracts.... small or big or extensions.... or we may not.
And... we may get more debt or cap raise... small or big... or we may not.
GCY... may keep going... or they may not
DCN... may have a reduction of mine life.... or they may stop... or they may or may not
Barrow is an increase in BOO of 4 MW or 8 MW or 12 MW.... we just do not know
Asset write off.... we may have some more in the next half year... or we may not

With all I know, I 'think' the current base case for Zenith is 7 cents EPS (6 cents 2020 (2.5 + 3.5) and 7 cents 2021 (3.3 + 3.5)), tending up, but with some downside risk if a bad event happens. If you like EPS of 10, then 70 cents is your price. If you like EPS of 12, then 84 cents is your price (if all events turn out positive). I think Mr Market has it about right! But how does one balance the risks I listed with possible new projects. Perhaps we can 'assume' they balance, until we get further news?