Winds of change at Windlab (ASX:WND)
15/11/2018
Trav Mays
Follow @MaysTrav
Description
Windlab (ASX:WND), formed in
2003, is an international renewable energy development company, with projects
in Australia, Kenya, South Africa, Tanzania and USA. The company is involved in
wind generation projects from development through to operating.
Windlab is currently
transitioning into a more revenue sustainable model, whereby they retain a % of
the project after the development stage allowing them to collect a reoccurring
dividend. Traditionally they have sold the project at or near financial close
generating a 5 – 10x return; the expected return from continuing on with a % of
the project is an IRR between 8 – 15%.
Dr Nathan Steggal and Dr Keith
Ayotte, currently employed as General Operations Manager and Chief Scientist
respectively, whilst working for CSIRO developed Windscape, Windlab’s premier
wind mapping technology.
Company
Windlab has to date, successfully
completed 9 projects with a combined total of 1093MW of renewable power
capacity, with their transition to a more stable revenue model mostly going to
plan. The graph below shows their increase in recurring revenue, assuming that
the Kennedy Energy Park and financial close of Lakeland will be completed
within 2018, this however is no longer the case. InfraRed, who had previously
signed a non binding term sheet to provide 100% of the equity for the
construction of Lakeland has since pulled out, “citing its inability to price
risk associated with the project’s grid connection, including risk of network
losses and risk of curtailment.” These are very real risks, especially in the
remote areas where the network connections are “weak” and therefore are unable
to withstand the large fluctuations of power from renewables. To limit the
effects on the connection, the Australian Energy Market Operator (AEMO) can
require additional equipment be installed to strengthen the grid, however even
with this, AEMO has the ability to curtail the amount of energy entering the
network from a project. Windlab states that “With high quality wind resources
and full development approvals, Windlab remains confident in the Lakeland
project and will continue to work towards financial close of Lakeland as
quickly as possible. However, given this unexpected development, it is likely
that financial close of the project will be delayed into early 2019.”
Source: Windlab
Results Presentation
Windlab co owns (50% Windlab, 50%
Eurus Energy) Kennedy Energy Park, which is Australia’s first Wind, Solar and
storage renewable energy facility to be constructed on Australia’s National
Energy Network. The $160M project began construction in December 2017 and is
forecast to have construction and commissioning completed in the early part of
the last quarter 2018.
Windlab is using the Kennedy
Energy Park to demonstrate that wind power is not in direct competition with
solar, but complements it. This is clearly seen on the graph below, which shows
that wind generation reduces when solar is most productive and increases when
it is less productive, at the Kennedy Energy Park, except for in the early
morning. The combination of the two allows for a more even distribution,
reducing curtailment and network effects.
Source: Windlab
Results Presentation
Along with this, Windlab was recently
been awarded approval for the first wind farm within Tanzania, for up to 300MW
of capacity. They have also successfully secured an Energy and Environment
Partnership grant from the Ministry of Affairs of Finland to help fund this
project. The first phase of the project will be able to power nearly 1 million
average Tanzanian homes.
Management
Windlab has a diverse and
experienced management team. Roger Price, board member since 2007 and CEO since
2011, has over 30 years experience working within technological companies, most
notably the CEO of Reino International. Reino is an Australian start up
providing technically advanced parking solutions. Roger led an aggressive
growth strategy, growing Reino from 30 staff to over 300 within 2 years whilst
overseeing 4 acquisitions. Along with his current position he is also a General
Partner of Innovation Capital an early stage venture capital fund, investing in
Australian technology companies (Innovation capital is the current largest
shareholder of Windlab, with 18.71% of shares). Roger owns 1.95% or $1.5mill (@$1.1/share)
of Windlab.
Complimenting Roger’s leadership
skills is Joseph O’Brien, an Independent non - executive board member, who
brings nearly 20 years of consulting and project development experience within
the electricity supply industry. He has worked with in both the electrical
infrastructure and trading markets, bringing a more holistic understand of the market
to Windlab. Roger owns .54% or $0.19mill (@$1.1/share) of Windlab.
Pippa Downs as a Non Executive
Director since July 2017, brings over 25 years of international banking and
finance experience. Charles Macek has over 15 years of board experience and
John Cooper who has over 10 years of experience on boards in both executive and
non-executive roles in the engineering, mining, property and construction
industries. They own .2%, .3% & .25% respectively.
The Board combines together
extremely experienced people with diverse backgrounds and a set of skills that
compliments one another perfectly. Along with their experience, they are
reputable people, a number of which are members of different charity boards.
Competitive advantage
Windlab’s competitive advantage
is its Windscape technology, which is able to map and pinpoint high wind
resource sites. The advantages of which can be seen in the next 2 graphs. They
have the 2 highest sites measured by capacity in Australia with the predicted
vs actual graph, showing the accuracy of the software.
Source: Windlab
Results Presentation
Macro Overview
The renewable energy sector has
had very favorable tailwinds over the last 10 years. Australia continues on
the longest Bull Run in history, complementing this is ageing coal fired power
stations, the Paris agreement and a global move towards renewable energies. The
result of which was the Renewable Energy Target, an Australian Government
mandated target of 33000 GWh or at least 20% of electricity being produced by
renewables by 2020.
Due to a large increase in investment
in 2017, Australia is on track to meet the Renewable energy target, with
Bloomberg New Energy Finance predicting a slowdown in investment with a
collapse post 2020.
Following on from the Renewable
Energy Target, a National Energy Guarantee has been proposed, however this so
far has had little support and there doesn’t appear to be growing bipartisan
support for this or any other scheme. It has been forecast that without a government
mandated renewable energy target that the investment in renewable energies will
dry up, however the International Renewable Energy Agency has predicted a 21%
reduction in the cost of onshore wind by 2019, bring the levelised cost of
energy (LCOE) down to $30/MWh, the cost of coal from a producing plant is
currently $40/MWh, making it not only cheaper than new coal but existing coal.
While there is a very low chance
that a renewable energy policy will be decided on the national level in the
short term, states have declared their own renewable energy targets. Queensland
has a goal of 50% of power to be generated from renewable energies, which will
require between 4000 – 5500MW’s of new renewable projects being completed
before 2030, along with this, they have a goal of having net zero emissions by
2050.
This is of exceptional importance to Windlab, as the next graph
shows, an increase in Queensland’s mix of renewable power to include just over
50% wind power, will eliminate the need for any further storage and still keep
curtailment below 10%.
Source: Windlab
Results Presentation
Along with Queensland, a number
of other states have self imposed renewable energy targets. NT also has a 50%
renewable energy target by 2030, Vic 25% by 2020 and 40% by 2025, SA 50% by
2025, Tas 100% by 2022 and ACT 100% by 2020. Along with these targets QLD, VIC,
NSW, TAS, ACT and SA have a goal of having net zero emissions by 2050. These
goals will need a combination of renewable energies to be achieved. Below is
Bloomberg’s forecast renewable energy mix, if correct, onshore wind will make
up a large percentage of Australian Electricity.
Source: Windlab Results Presentation
Competition
Infigen Energy is Windlab’s main
Australian competition, however given the business model of Windlab, I believe
that they are more comparable with a development and construction company. With
this in mind, below is the ranking of Windlab and Infigen FY2017 figures. As
you can see, Windlab has better figures for EBITDA/EV, P/S, EV/S, P/TB, P/E, EV
Multiple and Z score (7 of the 9).
Using a conservative multiple of
50% of IFN’s 2017 EV multiple on WND’s last year figures gives a share price of
$2.99.
Catalyst
The pulling out of InfraRed on
the Lakeland project has resulted in Windlab having a negative return for
FY2018. This has resulted in a large decrease in the share price from a high of
$1.68 to $1.1 in four months.
However given the talent and
experience of the management team, this coupled with their experience with weak
connections in outback Queensland, has resulted in an excellent buying
opportunity. They are well positioned to take advantage of the Queensland government’s
renewable energy target and have diversified their country risk by having an
international focus.
They have a strong balance sheet
with $8.3mill in cash and only $2.9mill in borrowings. In the worst case
scenario, assuming they keep their expenses and reoccurring revenue the same
and have no additional projects, it would take 2.65 years for them to run out of
cash.
Reason to not invest
The connection and curtailment
risks associated with the outback Queensland projects these combined with the
potential slowdown in renewable investment within Australia are very concerning
and real risks. Windlab, may be unsuccessful in finding another firm to supply
equity for the construction of Lakeland, resulting in a large loss of resources
and future revenue. While they have reduced their country risks, they have
subsequently increased their foreign exchange risk as well as increased their
political risk by targeting countries with less stable governments than
Australia.
Recommendation
Windlab is an example of an
excellent value company. A strong balance sheet, excellent staff and with a proven
technological advantage, Windscape. The recent removal of finances from
InfraRed and an uncommon business model has resulted, in my opinion, in a very
undervalued business.
Whilst on a Federal level there
may be no renewable energy target in the near future, to meet the state
renewable energy targets, a large amount of investment is going to be needed.
With the advantages of combining solar with wind (where wind is available) a
large percentage of investment will need to be put into wind infrastructure.
Windlab’s ability to pick high wind resources sites coupled with their
demonstrated ability to see projects through from the initial stage to
operation, puts Windlab in an excellent position to take advantage of the
situation. I believe that Windlab will be an excellent long term investment.
Thanks for reading
Just Culture Investor
Trav Mays
The author is a current owner of a portion of Windlab, given this, they may be subject to one or a number of biases, more specifically anchoring and/or confirmation bias. This article is neither general nor personal advice and in no way constitutes specific or individual advice. The website and author do not guarantee, and accept no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of any material contained on this website or on any linked site. This website is not a substitute for independent professional advice and users should obtain any appropriate professional advice relevant to their particular circumstances. The material on this website may include the views or recommendations of third parties, which do not necessarily reflect the views of the website or author, or indicate its commitment to a particular course of action
Follow @MaysTrav
Description
Windlab (ASX:WND), formed in
2003, is an international renewable energy development company, with projects
in Australia, Kenya, South Africa, Tanzania and USA. The company is involved in
wind generation projects from development through to operating.
Windlab is currently
transitioning into a more revenue sustainable model, whereby they retain a % of
the project after the development stage allowing them to collect a reoccurring
dividend. Traditionally they have sold the project at or near financial close
generating a 5 – 10x return; the expected return from continuing on with a % of
the project is an IRR between 8 – 15%.
Dr Nathan Steggal and Dr Keith
Ayotte, currently employed as General Operations Manager and Chief Scientist
respectively, whilst working for CSIRO developed Windscape, Windlab’s premier
wind mapping technology.
Company
Windlab has to date, successfully
completed 9 projects with a combined total of 1093MW of renewable power
capacity, with their transition to a more stable revenue model mostly going to
plan. The graph below shows their increase in recurring revenue, assuming that
the Kennedy Energy Park and financial close of Lakeland will be completed
within 2018, this however is no longer the case. InfraRed, who had previously
signed a non binding term sheet to provide 100% of the equity for the
construction of Lakeland has since pulled out, “citing its inability to price
risk associated with the project’s grid connection, including risk of network
losses and risk of curtailment.” These are very real risks, especially in the
remote areas where the network connections are “weak” and therefore are unable
to withstand the large fluctuations of power from renewables. To limit the
effects on the connection, the Australian Energy Market Operator (AEMO) can
require additional equipment be installed to strengthen the grid, however even
with this, AEMO has the ability to curtail the amount of energy entering the
network from a project. Windlab states that “With high quality wind resources
and full development approvals, Windlab remains confident in the Lakeland
project and will continue to work towards financial close of Lakeland as
quickly as possible. However, given this unexpected development, it is likely
that financial close of the project will be delayed into early 2019.”
Source: Windlab
Results Presentation
Windlab co owns (50% Windlab, 50%
Eurus Energy) Kennedy Energy Park, which is Australia’s first Wind, Solar and
storage renewable energy facility to be constructed on Australia’s National
Energy Network. The $160M project began construction in December 2017 and is
forecast to have construction and commissioning completed in the early part of
the last quarter 2018.
Windlab is using the Kennedy
Energy Park to demonstrate that wind power is not in direct competition with
solar, but complements it. This is clearly seen on the graph below, which shows
that wind generation reduces when solar is most productive and increases when
it is less productive, at the Kennedy Energy Park, except for in the early
morning. The combination of the two allows for a more even distribution,
reducing curtailment and network effects.
Source: Windlab
Results Presentation
Along with this, Windlab was recently
been awarded approval for the first wind farm within Tanzania, for up to 300MW
of capacity. They have also successfully secured an Energy and Environment
Partnership grant from the Ministry of Affairs of Finland to help fund this
project. The first phase of the project will be able to power nearly 1 million
average Tanzanian homes.
Management
Windlab has a diverse and
experienced management team. Roger Price, board member since 2007 and CEO since
2011, has over 30 years experience working within technological companies, most
notably the CEO of Reino International. Reino is an Australian start up
providing technically advanced parking solutions. Roger led an aggressive
growth strategy, growing Reino from 30 staff to over 300 within 2 years whilst
overseeing 4 acquisitions. Along with his current position he is also a General
Partner of Innovation Capital an early stage venture capital fund, investing in
Australian technology companies (Innovation capital is the current largest
shareholder of Windlab, with 18.71% of shares). Roger owns 1.95% or $1.5mill (@$1.1/share)
of Windlab.
Complimenting Roger’s leadership
skills is Joseph O’Brien, an Independent non - executive board member, who
brings nearly 20 years of consulting and project development experience within
the electricity supply industry. He has worked with in both the electrical
infrastructure and trading markets, bringing a more holistic understand of the market
to Windlab. Roger owns .54% or $0.19mill (@$1.1/share) of Windlab.
Pippa Downs as a Non Executive
Director since July 2017, brings over 25 years of international banking and
finance experience. Charles Macek has over 15 years of board experience and
John Cooper who has over 10 years of experience on boards in both executive and
non-executive roles in the engineering, mining, property and construction
industries. They own .2%, .3% & .25% respectively.
The Board combines together
extremely experienced people with diverse backgrounds and a set of skills that
compliments one another perfectly. Along with their experience, they are
reputable people, a number of which are members of different charity boards.
Competitive advantage
Windlab’s competitive advantage
is its Windscape technology, which is able to map and pinpoint high wind
resource sites. The advantages of which can be seen in the next 2 graphs. They
have the 2 highest sites measured by capacity in Australia with the predicted
vs actual graph, showing the accuracy of the software.
Source: Windlab
Results Presentation
Macro Overview
The renewable energy sector has
had very favorable tailwinds over the last 10 years. Australia continues on
the longest Bull Run in history, complementing this is ageing coal fired power
stations, the Paris agreement and a global move towards renewable energies. The
result of which was the Renewable Energy Target, an Australian Government
mandated target of 33000 GWh or at least 20% of electricity being produced by
renewables by 2020.
Due to a large increase in investment
in 2017, Australia is on track to meet the Renewable energy target, with
Bloomberg New Energy Finance predicting a slowdown in investment with a
collapse post 2020.
Following on from the Renewable
Energy Target, a National Energy Guarantee has been proposed, however this so
far has had little support and there doesn’t appear to be growing bipartisan
support for this or any other scheme. It has been forecast that without a government
mandated renewable energy target that the investment in renewable energies will
dry up, however the International Renewable Energy Agency has predicted a 21%
reduction in the cost of onshore wind by 2019, bring the levelised cost of
energy (LCOE) down to $30/MWh, the cost of coal from a producing plant is
currently $40/MWh, making it not only cheaper than new coal but existing coal.
While there is a very low chance
that a renewable energy policy will be decided on the national level in the
short term, states have declared their own renewable energy targets. Queensland
has a goal of 50% of power to be generated from renewable energies, which will
require between 4000 – 5500MW’s of new renewable projects being completed
before 2030, along with this, they have a goal of having net zero emissions by
2050.
This is of exceptional importance to Windlab, as the next graph
shows, an increase in Queensland’s mix of renewable power to include just over
50% wind power, will eliminate the need for any further storage and still keep
curtailment below 10%.
Source: Windlab
Results Presentation
Along with Queensland, a number
of other states have self imposed renewable energy targets. NT also has a 50%
renewable energy target by 2030, Vic 25% by 2020 and 40% by 2025, SA 50% by
2025, Tas 100% by 2022 and ACT 100% by 2020. Along with these targets QLD, VIC,
NSW, TAS, ACT and SA have a goal of having net zero emissions by 2050. These
goals will need a combination of renewable energies to be achieved. Below is
Bloomberg’s forecast renewable energy mix, if correct, onshore wind will make
up a large percentage of Australian Electricity.
 |
| Source: Windlab Results Presentation |
Competition
Infigen Energy is Windlab’s main
Australian competition, however given the business model of Windlab, I believe
that they are more comparable with a development and construction company. With
this in mind, below is the ranking of Windlab and Infigen FY2017 figures. As
you can see, Windlab has better figures for EBITDA/EV, P/S, EV/S, P/TB, P/E, EV
Multiple and Z score (7 of the 9).
Using a conservative multiple of
50% of IFN’s 2017 EV multiple on WND’s last year figures gives a share price of
$2.99.
Catalyst
The pulling out of InfraRed on
the Lakeland project has resulted in Windlab having a negative return for
FY2018. This has resulted in a large decrease in the share price from a high of
$1.68 to $1.1 in four months.
However given the talent and
experience of the management team, this coupled with their experience with weak
connections in outback Queensland, has resulted in an excellent buying
opportunity. They are well positioned to take advantage of the Queensland government’s
renewable energy target and have diversified their country risk by having an
international focus.
They have a strong balance sheet
with $8.3mill in cash and only $2.9mill in borrowings. In the worst case
scenario, assuming they keep their expenses and reoccurring revenue the same
and have no additional projects, it would take 2.65 years for them to run out of
cash.
Reason to not invest
The connection and curtailment
risks associated with the outback Queensland projects these combined with the
potential slowdown in renewable investment within Australia are very concerning
and real risks. Windlab, may be unsuccessful in finding another firm to supply
equity for the construction of Lakeland, resulting in a large loss of resources
and future revenue. While they have reduced their country risks, they have
subsequently increased their foreign exchange risk as well as increased their
political risk by targeting countries with less stable governments than
Australia.
Recommendation
Windlab is an example of an
excellent value company. A strong balance sheet, excellent staff and with a proven
technological advantage, Windscape. The recent removal of finances from
InfraRed and an uncommon business model has resulted, in my opinion, in a very
undervalued business.
Whilst on a Federal level there
may be no renewable energy target in the near future, to meet the state
renewable energy targets, a large amount of investment is going to be needed.
With the advantages of combining solar with wind (where wind is available) a
large percentage of investment will need to be put into wind infrastructure.
Windlab’s ability to pick high wind resources sites coupled with their
demonstrated ability to see projects through from the initial stage to
operation, puts Windlab in an excellent position to take advantage of the
situation. I believe that Windlab will be an excellent long term investment.
Thanks for reading
Just Culture Investor
Trav Mays
The author is a current owner of a portion of Windlab, given this, they may be subject to one or a number of biases, more specifically anchoring and/or confirmation bias. This article is neither general nor personal advice and in no way constitutes specific or individual advice. The website and author do not guarantee, and accept no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency or completeness of any material contained on this website or on any linked site. This website is not a substitute for independent professional advice and users should obtain any appropriate professional advice relevant to their particular circumstances. The material on this website may include the views or recommendations of third parties, which do not necessarily reflect the views of the website or author, or indicate its commitment to a particular course of action
