Research update Zazz Energy, Q2 2022: Exciting outlook for producer of green energy

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Research update Zazz Energy, Q2 2022

Equity research, Zazz Energy

In the first six months of 2022, Zazz Energy reported revenues of SEK 6.4 million at a gross margin of 52 per cent, above our assumption for a normalised gross margin of 40 per cent. The company intends to initiate the process of building new capacity in the current quarter, which, when in reality, is a value trigger. Also, we increase our revenue and margin assumptions. However, the fair value per share is unchanged at SEK 7.5, with a higher risk-free rate.

The first six months of the year prove the model

The Q2 2022 report exceeded our expectations in terms of gross margin. Financing costs stand out but are, for the most part, one-off transactions related to bridge loans. Financing is expensive in these markets, especially for early-stage companies like Zazz Energy. Also, it should be noted that we believe it was a correct decision for the company to pay up for short-term funding not to miss out on opportunities and lose time.

During H1 2022, Zazz Energy, through Zazz Energy S.A., has generated net sales of SEK 6.4 million at a gross margin of a high 52 per cent. The gross margin was well above our assumption for a normalised gross margin of 40 per cent on electricity produced at a bio-oil plant. Given the figures presented for the first six months, we believe the company’s business model can be considered proven. A proven business with good profitability bodes well for the future and can strengthen the company’s position in financing further expansion and value creation.

Higher margin assumptions with higher revenue

Interestingly, the company now expects the future bio-oil plants’ annual revenue to exceed SEK 20 million, including the sale of heat. That means the expected annual heat revenue is at least SEK 5 million. Thus we have increased our assumption from previously SEK 3.5 million in our initial coverage report. As an effect, the total gross margin is increased. That as heat production does not require the additional purchase of raw materials. Also, the company informs of rising investment needs and costs in the wake of the current inflationary situation. We have adjusted the investment needs and cost assumptions for operations upwards. However, given the high gross margin in the first six months of the year, we leave the assumption for the normalised gross margin on electricity at 40 per cent unchanged. On the net, this implies a margin increase.

Low valuation relative to recurring revenues

Combining a multiple valuation with a DCF valuation, we calculate a fair value of SEK 7.5 (7.5) per share. The valuation is not up despite the upward revision in revenues and margins due to a higher risk-free rate that lowers the DCF valuation. Nevertheless, our fair value is well above the last paid price. Thus, we believe that the market underestimates the probability that the company will be able to finance and connect new capacity for which licenses have been exercised. Our valuation corresponds to EV/Sales 2023 of 5.8x and 2.1x in 2024. The reference group is trading at a median EV/Sales 2023 of 5.9x. A value trigger that must be in the near future is that the company actually does initiate the process of building new capacity.

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