Equity Research Zazz Energy, Q2 2023: Intense quarter and restart expected soon

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The second quarter of 2023 has brought significant activity for Zazz Energy (“the Company”). In early May, a preliminary agreement to restart the Amfilochia plant was communicated. The restart of the plant has faced delays. The Company is currently grappling with financial challenges, necessitating securing additional capital. We lower our assessed fair value per share to SEK 0.30 (previously 0.48).

Continued production stop but restart (probably) in the near future

As of August 24, 2023, the production halt at the Amfilochia plant continues, a situation that has persisted since autumn 2022. This pause in production stems from the non-delivery of bio-oil by the partner NAIS. Zazz Energy has been compensated to offset the revenue loss, a trend observed through Q2 2023. Initially targeting a restart no later than June 30, 2023, the company’s plans have been postponed. The revised projection now anticipates the plant to recommence operations by September 15.

Upon reactivation, Zazz Energy is poised to regain an annual revenue stream of SEK 15-25 million through green electricity sales. Earlier this spring, the company garnered over SEK 19 million net via a rights issue. In addition, a convertible loan issue yielded another SEK 7 million during the summer. All convertible options have since been converted to shares. Despite this influx of capital from issuance, as of the close of Q2 2023, the Company’s cash and cash equivalents totalled approximately SEK 2.6 million. Hence, Zazz Energy finds itself in need of further capital infusion in the immediate future. This necessity arises to sustain ongoing operations and facilitate potential investments in new projects.

The two projects initiated in November-March 2022 for a total of 2MW (Patras 1 and 2) have, as of August 11, 2023, received written approval of the environmental permits required to apply for funding. It is unclear when Patras 1 and 2 can be expected to be commissioned, but we model revenues from one of these plants by Q2 2024.

Dilution risk reduces fair value per share

In our comment on June 30, 2023, we took into account that the restart of Amfilochia would be delayed further. The message from the company was that August 15 was the target date for the restart. Our fair value of SEK 0.48 per share was based on the assumption of no revenues in Q3. With a restart on September 15, we are thus correct in our assumption, and revenues will only start to roll in sometime in Q4. In our scenario, we have calculated revenues from November 2023. However, we believe that there is still a risk that the restart will be further delayed. On the positive side, the Greek government has raised the electricity price from €184 to €230 by March 30, 2023. That means slightly higher revenues for the company for some time, assuming the restart goes according to plan.

We estimate a fair value of SEK 0.30 (0.48) per share. Our valuation corresponds to EV/Sales in 2023 of 26.9x and 4.9x in 2024. The reference group median for EV/Sales in 2023 is 6.1x.

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