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Macquarie ups SIMEC Atlantis Energy target to 55p from 41p in wake of power producer's transformation

Macquarie analyst Dominic Nash forecasts SAE's Uskmouth plant generating underlying earnings (EBITDA) of £51mln in its first full year of operations in 2021

Uskmouth power plant
The analyst values Uskmouth at 42p per share, or £152mln based on a 13% discount rate, which makes up the bulk of Macquarie’s target price for SAE

Macquarie has raised its target price for SIMEC Atlantis Energy Ltd (LON:SAE) to 55p from 41p and reiterated an ‘outperform’ rating on the stock in the wake of the transformation of the firm into a new diversified independent power producer.

The Australian broker noted that in May 2018 the board of Atlantis Resources approved the acquisition of SIMEC Uskmouth Power, a 220 megawatt (MW) power plant in Wales, from SIMEC Energy.

READ: Cantor Fitzgerald thinks SIMEC Atlantis Energy shares have potential to go above 300p, a near ten-fold increase

As part of this transaction, SIMEC Energy, a division of GFG Alliance, became the largest shareholder of the company, and its name was changed to SIMEC Atlantis Energy (SAE).

GFG Alliance, a London-headquartered international conglomerate which combines energy generation, metal manufacturing, and financial services, has total revenues of US$13bn per annum and net assets of around $3.1bn

In a note to clients, analyst Dominic Nash pointed out that the transaction has transformed the company from a specialist tidal developer into a power producer with a broad spectrum of assets.

He added: “It is now “under the wing” of a conglomerate with a captive need for renewable energy. This relationship, we believe, enables a credible pathway for SAE to grow its asset base.”

Uskmouth conversion the first test

Nash said SIMEC Atlantis Energy’s first test will be to successfully convert Uskmouth on time and budget, and we believe as this project matures the valuation will trend towards its increased target.

He noted that SAE’s plan is to convert the Uskmouth to a plant that operates using end-of-waste energy pellets - derived from a mixture of biogenic material and plastics that cannot be recycled - instead of coal.

The analyst pointed out that the main source of revenue for the fuel supply company will be a gate fee and it will be able to sell the energy pellets to SAE for £0.20 per GJ of net calorific value, which is approximately 4% of traditional biomass alternatives.

The analyst forecasts the Uskmouth plant generating underlying earnings (EBITDA) of £51mln in its first full year of operations in 2021.

He said he values Uskmouth at 42p per share or £152mln based on a 13% discount rate, which makes up the bulk of Macquarie’s target price for SAE, with the group no longer just a pure tidal power play.

READ: SIMEC Atlantis Energy says two Meygen project turbines removed for inspection and maintenance

Nash also noted that SAE’s biggest shareholder, the GFG Alliance, has provided the firm with investment rights on a first offer basis for a pipeline of renewable power assets, which will be injected over time into the group.

The analysts said: “We believe this transforms SAE’s growth prospects, as it now has a credible pipeline of renewable energy assets, which includes 680MW of gross capacity in various power plants in the UK and Australia.”

In late afternoon trading on Friday, SIMEC Atlantis Energy shares were steady at 31.75p.

Quick facts: SIMEC Atlantis Energy

Price: 6.9 GBX

Market: AIM
Market Cap: £29.61 m

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on 11/5/18

3 min read