Research update Zazz Energy, Q3 2022: Increased uncertainty but the share at low levels

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Research update Zazz Energy, Q3 2022

Equity research, Zazz Energy

Zazz Energy has had a tough quarter. But if the company can show progress in scaling up installed capacity, the potential upside is big – even bigger than before, given the steep fall in the share. After adjusting our assumptions, a fair value per share is calculated at SEK 3.4 (SEK 7.5).

Negative momentum due to uncertainty

During the first nine months of the year, the company generated total revenues of SEK 9.2 million, including Zazz Energy S.A. Our forecast was SEK 10.1 million. Profit before tax for the same period was minus SEK 6.4 million. Adjusted for the reversal of prepaid bio-oil, the result was minus SEK 9.5 million, compared to our forecast of minus SEK 8.4 million.

The stock has fallen sharply, which we believe is explained by increased uncertainty about the company’s ability to scale up connected capacity in line with previous plans. Today, the company has 1MW of connected capacity. However, due to delivery issues, the bio-oil plant is now temporarily shut down (previously communicated). NAIS, the supplier, expects to start resupplying bio-oil in February 2023. However, for better or worse, this event has had knock-on effects that have delayed the process of scaling up connected capacity. To move forward, supply guarantees (of bio-oil) are now needed to ensure the operation of the new facilities. The company is evaluating several options, including producing bio-oil on its own. Such a solution will obviously increase the investment needs (together with a weak SEK) and changes the original business. On the upside, however, there is increased control and improved margin potential. Well worth noting is that the company expects at least two new plants to be connected before the end of 2023, which would bring positive profitability, all else equal.

Adjusted assumptions and potential in high-risk stock under pressure

In view of the increased uncertainty and protracted processes, we have lowered the probabilities in our risk-adjusted model for revenue and cost assumptions. We have also made adjustments to the connected capacity. Before risk adjustments, we expect the company to have 3MW connected by the end of 2023. That compares to 9MW previously. However, from the end of 2029, the assumptions around connected capacity are unchanged as it is assumed to increase from 32MW to 40MW by the end of 2031 before risk-adjustments.

By combining a multiple valuation with a DCF valuation, a fair value of SEK 3.4 (7.5) per share is calculated. The downward adjustment is due to changed assumptions and reduced financing possibilities via share issues given the decline in the share price. Despite a substantial revision, our fair value is well above the last price. We believe there is good potential upside despite increased uncertainty. Our valuation corresponds to EV/Sales 2023 of 8.3x and 3.0x in 2024. The reference group median for EV/Sales 2023 is 6.0x. A trigger that must be in the near term is that the company actually initiates construction of new capacity. The large difference between the Bear and Bull scenarios reflects this uncertainty.

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