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Research update Zazz Energy, Q4 2022: Possible upside in the stock, but significant risk

1 Apr 2023

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Research update Zazz Energy, Q4 2022

Possible upside in the stock, but significant risk

The full year 2022 was challenging for Zazz Energy, with production stops and Irregularities surrounding management, accounting, and financing. We deem the risk-level surrounding the company have increased significantly during H2 2022, but the potential upside is still large given signs that the company can realize targets on its strategy. After adjusting our assumptions, we estimate a fair value per share of SEK 0.5 (SEK 3.4).

Continued halts in production, delays, and management changes

The year 2022 was a tumultuous time for Zazz Energy, as the company faced a range of challenges that had a significant impact on its operations. One of the major issues was the production stop at its Greek plant due to the failure of its partner, NAIS, to deliver the required bio-oil. Despite this setback, Zazz Energy has managed to secure full compensation for its lost sales, and negotiations are currently underway to reach an agreement on when production can resume. Another challenge that Zazz Energy faced in 2022 was a suspected accounting breach related to the acquisition that took place in December 2021. The company has since conducted an internal investigation and claims to have the situation under control, but this resulted in a write-down during Q4. The company has also undergone multiple management changes, including several CFO changes and two CEO changes. The appointment of Jan Törner as the new CEO represents a positive step forward, and the process of recruiting a new CFO has commenced. With this, we hope that the management can be stabilized, which is crucial for the daily and long-term work and confidence in the company.

The company announced its intention to carry out a fully guaranteed rights issue of approximately SEK 26.4 million to repay short-term loan financing, strengthen working capital, and partially finance facilities and infrastructure. The company continues to evaluate possible in-house bio-oil production together with NAIS, where the first financing choice is EU-guaranteed loans. The two projects initiated in November 2022 for a total of 2MW are now expected to be commissioned at the end of 2023/2024, which is later than initially announced.

Adjusted assumptions & potential in high-risk stock under pressure

In light of the increased uncertainty, sharply increased financing risk, protracted processes, and general turbulence in the company, we have lowered the probabilities regarding the assumed scale-up of connected capacity. We have also adjusted the assumptions about the scaling up of connected capacity.

By combining a multiple valuation with a DCF valuation, we calculate a fair value of SEK 0.5 (3.4) per share. Our valuation corresponds to EV/Sales in 2023 of 12.9x and 5.7x in 2024. The reference group median for EV/Sales in 2023 is 6.4x. It is important to note that the company depends on the approval of the proposed rights issue to continue its operations. An investment in Zazz Energy at this stage is thus associated with very high risk. However, we believe there is a high probability that the Issue will be voted through, which we also assume in our scenario. Triggers that must be in the near future are that the company secures financing and production is resumed at the existing plant.


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Research update Zazz Energy, Q4 2022: Possible upside in the stock, but significant risk