Investing in sources of light and power
There’s scarcely a seat to be found on the renewable energy bandwagon in SA now, especially since Eskom has cut the schedule by indicating its unwillingness to sign new renewable energy offtake agreements.
But this is likely to turn out to be a small blip in the long-term growth scenarios that a number of think tanks envisage for renewable energy based on the African continent’s need to address a severe backlog in energy provision, increasingly competitive costs of renewables and pressure from environmental lobbyists to add more carbon-neutral energy sources.
There is a difference between renewable and alternative energy sources: renewable sources are wind, sun and hydropower, while alternative energy can be derived from wasting processes such as in the uranium or industrial sectors as long as these sources are carbon neutral. At present the JSE has only two listed companies that qualify as "green": Hulisani and Montauk Holdings.
In SA alternative energy could also refer to any business that competes with Eskom, since Eskom’s track record of unreliable delivery and well-above-inflation tariff increases has opened new opportunities in gas, generators and batteries.
The future of those businesses is not only reactionary to Eskom, though. They can also meet SA’s growing market for gas, temporary generator power or off-grid solutions in remote areas.
Diesel generators are hardly carbon neutral, but some broader energy businesses may offer attractive returns in the long run.
The BP Energy Outlook’s base case to 2035 forecasts that though world GDP will more than double in the next 18 years, the level of energy needed for that will grow only by about a third because of energy efficiency gains. The report foresees that fossil fuels will remain dominant, providing about 60% of the additional energy and accounting for almost 80% of total energy supplies in 2035. Gas will be the fastest-growing fossil fuel but renewables should grow fourfold.
The US Energy Information Administration (EIA) says in its International Energy Outlook 2016 that its base case scenario is for world energy consumption to rise 48% between 2012 and 2040, mostly in the non-OECD countries and particularly in India and China. It foresees renewable energy consumption rising 2.6%/year in that period, with nuclear energy the second-fastest growing technology at 2.3% growth and coal the slowest, at 0.6%. The EIA expects fossil fuels, mainly natural gas, to represent 78% of global energy use by 2040. It says Africa’s energy consumption will more than double in the review period, as GDP growth will average 4.8%/year, but this will vary greatly within the continent.
Only one JSE-listed share offers exposure to renewable energy outside SA: Montauk Holdings. It was listed after its unbundling from Hosken Consolidated Investments (HCI) two years ago because HCI’s major shareholder, the SA Clothing and Textile Workers’ Union, wanted HCI to focus on SA businesses.
Montauk is a US-based company that extracts methane from landfill sites and sells it as pipeline-quality natural gas — alternative fuel for vehicles and power generation. It operates 14 landfill gas sites in the US and makes money from the sale of renewable energy credits. It has signed an agreement to build and operate a natural gas facility, which is in the design phase but should be operating by 2019.
Montauk is a difficult business to understand because its bottom line is distorted by depreciation and amortisation. Based on its bottom-line profits, its price:earnings ratio is an unlikely 82, compared with the 20 of a blue chip like Richemont. A more indicative measure of its growth is earnings before interest, tax, depreciation and amortisation, which rose 600% in the six months to September, to $17m.
Cash is reinvested, not distributed to shareholders.
Though Montauk does nothing to promote its shares to SA shareholders, it has had a phenomenal share price run, from 300c at listing to R19.50 now. The main attraction seems to be that it was an HCI business, and there is a lot of positive sentiment about the group’s investment decisions. About 50% of the shares are described as publicly held, and directors hold 8.4%, so it is a tradable share, unlike some of the other energy counters. But the share price performance is hard to justify and may not be sustainable.
Renergen is less liquid but there are plans to address that.
It acquired its first energy business, 90% of the shares in Molopo (now Tetra 4), in November. Tetra 4 owns a natural gas resource near Virginia in the Free State that came into production in May. Tetra 4’s initial focus is on producing compressed natural gas to fuel 10 buses in the Megabus fleet. Megabus is part of Unitrans. Renergen has also entered into a joint venture with Linde Group, which will build a plant at the site to extract the helium.
Renergen has more plans. It is discussing power production with industrial clients, and another division, Mega Power Renewables, is making progress on a study into a hydro-electric project in Côte d’Ivoire. The strategy is to build up a diversified portfolio of investments in alternative and renewable energy. Renergen will invest in traditional energy sources — fossil fuels — if they have enhanced emission reduction, and also in associated energy services like pipelines and transmission.
Renergen shares surged from R13 to R16.50 on news of the Tetra 4 acquisition, but have since fallen back to R13. That represents a market capitalisation of about R1bn compared with the R6.6bn independent valuation of the gas deposit, which should make it attractive to investors who believe the market will eventually recognise its potential.
The biggest shareholder is Tamryn Investment Holdings, with 56.12%. Four major shareholders have 82.09% of the shares but about 338 retail shareholders have small stakes.
Hulisani, which listed in April with R500m of share capital and plans to invest in green energy, recently announced its first deal, the purchase of a 6.6% stake in the 80MW Kouga wind farm for R145.2m. Kouga was awarded a licence in round one of SA’s renewable energy independent power programme, which means that there is a predictable return from a long-term power purchase agreement with Eskom.
Hulisani plans further acquisitions; it has sought and received shareholder permission to issue shares at R10-R11 through a private placement to raise up to R4bn. The shares are now at R13. Hulisani’s biggest shareholders after listing were the Eskom Pension and Provident Fund, with 33%, and the Government Employees’ Pension Fund, with 15%.
The other investable options are diversified companies that have some alternative energy in their mix, though it is not dominant.
Consolidated Infrastructure Group (CIG), through its subsidiary Conco, supplies high-voltage infrastructure to the energy sector. Conco operates throughout Africa and the Middle East. Its key focus areas are substations, overhead power lines, protection solutions and infrastructure for wind farms. At the end of February its order book was about R5bn, which represents threefold growth over three years, with most of the growth outside SA. Power contributes about half of CIG’s profit after tax.
CIG warned at year end that the growth in its renewable energy services was flat because of delays in the rollout of the programme and a slowdown in municipal spend. But this may be temporary. CIG’s diversity offers some protection to investors, and that has been further enhanced by the recent agreement to purchase Conlog, a payment and smart meter specialist. CIG’s share price performance has been lacklustre this year — it is now at about R24 from over R35 a year ago — but it should benefit from the forecast longer-term growth in African economies.
Industrial equipment group enX has, through its recent purchase of businesses from Eqstra, become more diversified, diluting its business of installing and maintaining diesel generators and providing temporary power. The power business had a poor second half of the financial year because purchases of generators have dropped since Eskom stopped load shedding, and enX says this division is seeking new sources of power-related revenues.
Energy is a hugely complex sector and every company has different technologies, markets, vulnerabilities and prospects.
On the whole these companies can be expected to grow over the next few years but there will be some casualties on the way, which investors can try to avoid by doing proper research before they buy.