Mrkt BUZZ Zazz Energy: Downtime without impact on cash flow

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Mrkt BUZZ Zazz Enery, 14 Oct 2022

Equity Research Zazz Energy

Rough start for Zazz Energy in an extreme market

Yesterday, Zazz Energy (the company) announced the suspension of electricity production at its 1MW bio-oil plant in Greece. That was due to the non-delivery of the bio-oil feedstock. While this demonstrates the vulnerability of few (one) operational plants, the loss of revenue (reduced contracted predetermined purchase price for bio-oil) is being “rescued” by the company’s partner NAIS who is covering up. Zazz Energy will also have no operating costs related to the plant for the period of downtime.

The reason for the downtime is that NAIS finds it more attractive to reimburse Zazz Energy for lost revenues than to supply bio-oil (in line with the terms of the contract). That is, in turn, a consequence of extreme spot prices for bio-oil and the contract where Zazz Energy’s cost for purchasing bio-oil is predetermined. The fact that NAIS purchases bio-oil over the spot market is an effect of NAIS not being able to produce bio-oil in its facilities as intended. However, as stated in the press release, NAIS is expected to be able to supply bio-oil to Zazz Energy around February 2023.

The company’s cash flow will not be affected

Zazz Energy will invoice NAIS during the downtime an amount equal to the value of the electricity produced, reduced by the purchase price of the bio-oil as stipulated in the contract. Thus, the company will have the same cash inflow equivalent to gross profit (Carlsquare estimate is approximately SEK 1.5 million per quarter). At the same time, the company will not have any service and maintenance costs for the plant during the production stop. We estimate this cost at around SEK 300 000 per quarter.

Business strategy and assumption remain in place

The company intends to continue to own energy plants for the production of green electricity. However, the company will review the possibility of reducing its exposure to risks. It can be interpreted as if the company is looking at opportunities to own the whole/larger part of the value chain.

Work on installing new capacity is ongoing, and processes are progressing. Our assumption that the company, by the end of 2023, will have a total of 8MW of connected capacity remains (before risk adjustments). However, the risk in our assumptions increases with each passing day. News of orders for new capacity is a value driver.

Exaggerated price reaction

Given that cash flow will be close to unchanged and that the plan for further expansion remains in place, we believe that the initial price movement is overdone.

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