This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below. You should consider your financial situation and goals before making investment decisions.
Overall, I do not write about resource stocks because I feel I do not have an edge. However, some of the smaller energy-generation businesses, that are prudent about growing MW capacity and hedging electricity prices can get interesting. Particularly if they are yet to be well covered with sell-side research.
Introduction to Biogas & Biomethane
Biogas, which is the space that $LGI plays in, refers to gas which is 50-60% biomethane.
Biomethane is a fully refined product that has removed CO2 and other impurities and there is a trade-off between the additional refining costs to make pure biomethane vs. biogas - but this is a technical topic I won’t explore in this article
Biogas can be made from any organic material, so the three big sectors are
agricultural wastes (manures and slurries, crop residues)
food waste (from food manufacturing, supermarkets and households)
wastewater
Except for maybe Western Europe, biogas has been small where production was fragmented over thousands of sites/farms. In short - it was 'non-institutional'. However, energy supply issues in 2021/22 have led to a lot more investment in this space institutions have acquired biogas providers ·
BP --> Archaea
Shell --> Nature Energy
Macquarie --> BayWa biogas
Nextera --> Energy Power Partners
Whilst there are many factors, the main reason that it has not had institutional investment is a) government assistance is needed in getting the waste b) lower ticket price means it takes more projects to scale than wind/solar and c) it has a bigger opex profile than wind/solar which are mainly upfront costs
What about LGI Limited?
LGI operates in biogas from landfill space which they use to generate renewable energy along the eastern seaboard and have been doing this since 2009
LGI competes with larger privately owned specialist gas-fired generators such as:
EDL Energy (owned by DUET ) operates 17 landfill sites and installed capacity of over 70MW
LMS Energy (private) has 60 biogas sites and has 90MW of installed capacity
They manage the whole process (design, construction and operation) for these energy projects which now total 8 power stations and 15 landfill sites
Most of their plants either make $ from:
80%- Generating power (i.e. MWh or Large Generation Certificates)
15% - Earning Carbon credits (i.e. ACCUs)
5% - Managing landfill and infrastructure (simple $ for the project)
Is this another Genex?
Even though this is another Morgans-backed generation business, it is worth noting that it is quite different from Genex insofar as:
LGI has a longer history of deploying less debt and generating higher profits
LGI has much higher insider ownership (including the founder, Adam Bloomer and Vik Bansal; ex- Cleanaway Chief)
Their production sales price has a greater degree of hedging incorporated which means production volume and medium-term pricing is a bigger drivers than short-term pricing
LGI is a pureplay biogas company where the majors are not producing a lot of biogas
So no - I would consider it far less financially risky than $GNX but more operationally niche.
Where do you start in valuing this business?
Futures prices are falling: Electricity futures prices have come off quite materially. This has not flown directly through to LGI cash flow yet due to their price hedging and growing production capacity. Although there hedging is great - it has a cap on it because Biogas does not generally have long-term PPAs, they structurally cannot hedge longer-term pricing
Ramp-up/down means they're better than baseload: Like most biogas - LGI do have the benefit of being able to turn on/off supply during the day to avoid selling at low periods (which other energy sources struggle to do without battery storage)
ACCU pricing is quite stable, below Euro carbon price: As shown below ACCU is range bound which could be a function of a) more investment in renewable b) seasonal factors reduced consumption and c) sentiment on future renewables is somewhat muted
It is important to remember that European carbon credit prices trade at a lot higher levels than ACCUs. If anything, ACCU should be trading around the pricing cap ($75/tonne)
Volume growth = low-to-mid-teens: Looking at the track record you can see that their growth in energy generation has been lumpy. Given the recent capital raising I think MWh will likely grow at 10-15%
Government risk is obvious & unavoidable: There are two major governmental risk
Likely/less severe - Government intervention to limit the costs of fuel
Unlikely/severe - reducing the requirement for waste businesses to sell their product to a biogas operator
Chunky trading multiple: With such a growing and seasonal business, getting run-rate earnings multiple for this business is difficult. However, it might be reasonable to assume that it currently trades on a c. 28x NPAT (i.e. $7m NPAT, MC of $202m) at a point where energy prices are crazily high
Cash runway & Gearing headroom: The way I see this is really simple
They have $30m of debt to easily re-draw
EBIT Margins = 30% and Capex/Rev = 30%, so they can self-fund to an extent but the bank facility is very useful for growth
Given the strong current price, they have more optionality than some small-cap companies
Conclusion - Optically $LGI is not cheap but it has some clear operational benefits
Given the strong electricity price, I think the 28x multiple is quite full and probably a by-product of the illiquidity of the stock. Whilst I would usually buy a company at a full price if the factors are right, the price is particularly important because a) $LGI will spend all OpCF on Capex over the next 2yrs and b) it cannot hedge energy prices beyond a 12-18 month period. This being said, the business has some attractive traits
14-yr operating history suggests they know how to manage capex/gearing in weak energy markets
It owns a pipeline of biogas, an asset class that is only recently getting institutional
Optionality with its debt headroom and cash
Possibility for ACCU price growth
In short - I think it is easy to dismiss small generators like $LGI but they have grown impressively. A reasonable price for this business is probably closer to its IPO price ($1.75) and even though it structurally is an energy price-taker like $DEL/$GNX, I consider their gearing and electricity price risk management to be superior to small listed peers.
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