Plugging into the JSE’s nascent alternative power

Does South Africa’s power crisis still offer opportunities for switched-on investors on the JSE?

Lower levels of load-shedding for now probably preclude investors fixating too darkly on the effects of disruptive power cuts. There are optimistic contentions that the worst of the power cuts is over and that disruptions will become more “manageable”.

Then again, as economic activity picks up and the country moves into the winter months — not to mention the passing of promises made in the run-up to an important general election — a stuttering energy supply could easily become a major concern once more. And there’s the increasingly exorbitant cost of Eskom-supplied electricity.

As with companies providing security services, logistics and private education, those able to supply alternative power should, on paper, still be tapping a pretty sweet spot for the foreseeable future.

The Southern African renewable energy market is estimated to grow by R90bn from 2021 to 2026 at a compound annual growth rate of 30%.

Yet the JSE-listed companies involved in alternative power supply are hardly trading at demanding premiums.

Of course, the biggest hitch for investors looking to capitalise on “private” energy solutions is that — aside from small solar and wind farm investment company Mahube Infrastructure — there’s no “pure” alternative energy play.

Helium business Renergen is still some way off convincing investors it has a commercially viable project in Virginia, and Montauk Renewables — which produces gas and electricity, mainly from landfills — operates only in the US. Hosken Consolidated Investments is involved in oil and gas exploration, but for now is mainly focused on managing potential windfalls from its Namibian developments.

The solar thrust is probably worth monitoring in the new financial year, and hopefully there is further evidence of traction in this niche in the interim results to end-February

The larger alternative energy plays are limited to dedicated power divisions within well-established industrial counters (Reunert and enX Group) with two smaller plays in the form of bombed-out small-cap counters Ellies and Kibo Energy.

To date the JSE hasn’t seen a flurry of new listing applications from alternative power suppliers either. Possibly a company such as Australian Securities Exchange-listed Kinetiko Energy — which made headlines recently when it announced a significant gas find near Secunda — could look for a secondary listing on the JSE. One might also regard Ellies’s purchase of a power supply company as a reverse listing of sorts.

For now, though, serious investors on the JSE can look at just two real opportunities in Reunert and enX — both trading at historic earnings multiples of about 10 and both offering appealing divided yields — to hedge against further supply fizzles at Eskom.

enX

This industrial conglomerate will take a new shape after its Eqstra fleet management business is offloaded, bringing its New Way power supply business into sharper focus.

New Way, which would hardly have been noticed by investors in previous years, was the star performer for enX in the financial year to end-August. In fact, New Way is the biggest segment by profit before tax at enX, which also dabbles in lubricants and chemicals.

With persistent load-shedding in the first half of 2023, New Way managed to hike revenue 72% to R683m and increase profits tenfold to R101m. CEO Andrew Hannington says business has been boosted by improved pricing for long-term data centre projects as well as short-term rentals for the events industry.

The main profit engine at New Way is the sale of generators — but the business has also recently moved into solar energy. A sales breakdown for the 2023 financial year shows equipment sales accounted for 58% of revenue; parts and services accounted for another 28%. Renewable (solar) sales were just 6% and equipment rentals 8%.

The solar thrust is probably worth monitoring in the new financial year, and hopefully there is further evidence of traction in this niche in the interim results to end-February.

In its annual report, enX says: “Our planned direct sourcing of product from manufacturers bodes well to make a large impact on both sales and margins.”

In fact, enX is explicit about New Way’s importance to the group’s future: “Our outlook for 2024 from a profitability perspective is somewhat dependent on New Way Power’s ability to maintain its outstanding performance. This will be dependent on the extent and duration of load-shedding.”

Reunert

While enX’s power business has come strongly to the fore thanks to an operational restructuring, Reunert’s alternative power supply business is still just a small(ish) part of a technology-flavoured industrial offering that is made up of a traditional power business (cabling and circuit breakers), a recently enlarged technology hub, and defence systems.

Reunert’s renewables segment increased revenue 24% to R1.1bn in the year to end-September — a period characterised by longer bouts of load-shedding. Reunert CEO Alan Dickson reported increased demand for residential and small commercial batteries.

He added, though, that market demand for solar power moved towards engineering, procurement and construction from the first half of the year.

That said, Reunert’s renewables segment is already seeing margin pressure with the “commoditisation” of residential and small commercial storage products, as well as competition from new entrants to the solar market — including international players.

Dickson said: “There is so much interest and focus on renewable energy that the general environment has become a lot more competitive. Some big players have stepped into this market. There is Discovery Green … which does what we do. Renewable energy will continue to be a contestable space.”

There is so much interest and focus on renewable energy that the general environment has become a lot more competitive ... it will continue to be a contestable space

—  Reunert CEO Alan Dickson

Reunert has already warned that the residential and small commercial battery market is unlikely to repeat the 2023 revenue growth rate, though Dickson did declare the group’s solar order book “fully loaded” for the first half of 2024.

That’s not to say solar won’t burn bright for Reunert in the financial year ahead, and it has exercised an option to create a solar joint venture with AP Moller Capital.

The solar segment’s build, own and operate portfolio now comprises 87 plants operating or as work in progress. Reunert has invested R352m in the venture, with normalised earnings before interest, tax, depreciation and amortisation (ebitda) up 39% in the last financial year. Ebitda for Reunert’s entire renewables sector, including storage and wheeling, came in at a not insubstantial R79m.

Could Reunert — if a few more years of growth can be pencilled in — look at splitting off its renewables cluster into a separate listing?

That could make for a nifty value unlock and create a slick vehicle able to hitch onto new efficiency drives in local energy generation.