Eskom is on the fritz, and there will be no quick fix to load-shedding. Is there any way investors can hedge, or rather insulate, their investment portfolio against the power production crisis?
Perhaps in times of headier sentiment, the JSE might have seen a flurry of new listings aimed at capitalising on the electricity generation shortfall. But right now there are only three pure renewable energy plays on the JSE — Mahube Infrastructure Capital and Renergen, as well as Montauk Renewables, which operates gas and electricity plants on landfill sites and farms entirely in the US. Micro-cap Kibo Energy is focusing on green energy projects, but it’s been long on promises and short on delivery.
There are, however, a number of companies with parts of their business model dedicated to renewable or alternative energy.
Power-hungry investors can mull over the following options:
REUNERT
Investors in Reunert are buying into a well-established copper cable, circuit breaker and battery business, as well as a growing renewable energy hub via solar businesses Terra Firma and Lumika Renewables, BlueNova (large lithium-ion battery packs) and Apollo Energy.
Reunert also owns a highly profitable technology segment as well as niche businesses that cover communications and radar systems. Over the past financial year to end-September Reunert made an increased investment into its solar business, though its core electrical engineering division — underpinned by the cabling and circuit breaker businesses — increased revenue 13% to R6.3bn and operating profit by 17% to R436m on the back of “good large contract orders”.
Reunert’s applied electronics segment, which houses the burgeoning solar business, saw revenue up 27% to R2.4bn and operating profit up 64% to R164m. Renewable energy contributed a chunky 39% of the unit’s revenue and plans are understandably afoot for investment into African solar assets and an expanded renewable energy offering.
Reunert is arguably the go-to option for punters wanting to capitalise on the load-shedding crisis. The business is well managed with dependable cash flows and prudent capital allocation. Though the share has sparked up 30% in the past three months, Reunert is on a reasonable forward multiple of about 10 and offers a nifty dividend yield of almost 5%.
RENERGEN
Renergen, one of the most popular shares with retail investors, recently raised a not-insubstantial R110m in an oversubscribed accelerated bookbuild exercise. The fresh capital, which comes after a similar fundraising exercise last November, will be used to fund its phase 2 expansion plans for liquid helium production at its Virginia Gas Project. But the jury is out on exactly how profitable Renergen’s endeavours at Virginia will be.
The company has a handful of commercial contracts, but it is too early to gauge possible long-term profit numbers. A good portion of Virginia’s production is likely to end up powering diesel trucks — marketed as a green alternative. But Clucas Gray portfolio manager Brendon Hubbard says Renergen is also in the early stages of planning a 350MW plant which will supply peaking power to back up solar capacity. He argues that the combination of solar during the day and gas at night can deliver electricity at a competitive price of R1.30 per kilowatt-hour.
Hubbard adds that Renergen will have significant liquefied natural gas (LNG) capacity for other industrial customers, and has been able to achieve a competitive price for the LNG at US13.50c per British thermal unit (Btu) against European import prices in the $30s (albeit highly elevated due to the Ukraine war), Japan at US19c/Btu and the US at US3.30c/Btu.
HUDACO
Like Reunert, Hudaco offers shareholders an alternative energy play tucked away in a diversified and redoubtable industrial business with a long track record of profitability and careful capital allocation. Unlike Reunert, the renewable or alternative energy angle at Hudaco is not that prominent yet.
Still, in its just-released results to end-November, Hudaco reported that “thus far, our excitement about the alternative energy sector has been justified, and we remain positive about the impact our year-old Hudaco Energy business should bring to our diesel engine, battery and electrical businesses already supplying to the sustainable energy market”.
The group also recently snapped up the Cadac gas business for R100m. Since the deal, Cadac has performed well above expectations. Not everything surged in the past financial year — Hudaco’s traction battery business performed poorly. The management team has been changed and a much-improved result in the 2023 financial year is being pencilled in. Hudaco also believes Cadac’s contribution should grow in the years ahead, and sees enormous growth potential for the alternative energy sector, albeit off a low base.
enX Group
enX is best known for its Eqstra fleet management business, which had its roots in the old Imperial Holdings conglomerate. But the group also owns a substantial energy business in New Way Power (NWP), which designs, manufactures, installs and maintains diesel generators, and distributes a range of industrial and marine engines.
The company also offers temporary power solutions offering cleaner power through solar hybrid and grid alternatives. In its last set of results to end-August, it said that while NWP was constrained by a difficult construction sector, load-shedding and an entry into the solar market have continued to create opportunities. enX has also had a strong recovery in the short-term lease of generators for the events industry. In the past financial year NWP saw revenue jump 24% to R397m and profit before tax swinging back to R10m after a loss of R37m in the previous financial year.
NWP represents less than 10% of enX’s turnover and less than 5% of profit before tax, which means enX can’t really be flagged as an Eskom hedge. One might presume NWP is too small to be unbundled and separately listed, though sentiment can change quickly in the prevailing power predicament.
MAHUBE *
Mahube Infrastructure Capital (the old Gaia Infrastructure listing) is a significant minority shareholder in five renewable energy assets across Southern Africa — two wind farms and three solar PV farms. Collectively, they have the potential to generate enough energy to power more than 350,000 South African homes.
At present the investment portfolio has a collective power generation capacity of about 400MW, with all the projects generating electricity that is sold to Eskom under a 20-year power purchase agreement.
Mahube’s portfolio aims to provide investment returns that are characterised by predictable and regular cash flows generated by its solar and wind farm assets. It’s not a business that is ever going to shoot the lights out, but generous dividends will soothe load-shedding frustrations. The FM calculated that since 2019, Mahube has collectively paid out 218c a share in dividends — which is measured against a share price that has ranged between 400c and 700c over the past few years. For the record, Mahube’s tangible NAV is over R11 a share.
ELLIES
Ellies Holdings is shifting away from its old sweet spot in satellite television products and accessories, moving into more vibrant areas including lighting solutions, solar power and uninterrupted power supply. Unfortunately, Ellies’s track record in the past 10 years is rather chequered, which has left the share languishing at 15c with a paltry market capitalisation of R120m.
While Ellies is seeing demand for power backup solutions, demand for satellite products is dropping because of the growth in streaming services. The most recent set of results does raise questions about the viability of swinging Ellies’s business model into power generation products.
In the half-year to end-October revenue increased 6.5% to R509m, but the earnings before interest, tax, depreciation and amortisation loss swelled to R30m (previously R19.5m). Braver punters may hold hopes for a better 2024 financial year. Ellies forked out R203m to buy Bundu Power, a distributor and renter of generators as well as a distributor and installer of solar and alternative energy solutions for residential, commercial, industrial, hospitality, agricultural and recreational users.
With the price tag dwarfing Ellies’s market value, the deal will hopefully be transformative — though Bundu was described as “the first building block” of the group’s new strategy.
Significantly, the Bundu deal is tagged to earn out payments for the 2023, 2024 and 2025 financial years. Bundu made R11m in after-tax profit for the year ended February 28 2022 and is eyeing R20.4m for the 2023 financial year.
INVESTMENT COMPANIES
A number of investment companies also hold exposure to renewable energy or alternative power plays. While these are still small, some of the investment companies have great track records in building on start-up or fledgling ventures, so these small endeavours should perhaps not be completely overlooked.
Remgro is invested in the Energy Exchange of Southern Africa, which delivers energy from a generator to a user located in another area using existing transmission or distribution networks.
Hosken Consolidated Investments holds a minority stake in the Karoshoek solar project and a small legacy stake in Montauk Renewables, while its industrial subsidiary Deneb recently launched Explorius 2022, which has environmental solutions to convert mining and industrial waste into fuel energy.
Sabvest Capital is now a significant investor in electrical goods and lighting specialist ARB Holdings, which was delisted from the JSE recently and may look a very different group in five years.
* The writer holds shares in Mahube
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