Dislaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!
Background:
Some of my readers might remember, that I bought into a “Freedom energy” basket in March 2022 in order to “hedge” against potentially catastrophic effects from the Russia/Ukraine war. After a first nice run, I sold 3 out of the initial 4 (7C Solar, PNE, Energiekontor and ABO Wind) and only kept ABO Wind because I considered it the most undervalued stock.
Looking at the chart we can see that for some of the stocks of that basket, not so much happened, only PNE is still significant above the level of March 2022 (ABO Wind is the solid Yellow chart):
ABO Wind is my remaining Renewable Energy investment with a weight of 3%. The basis of the thesis was, that the stock is relatively cheap and that due to a significant ownership stake of its founders, long term interests of Management and shareholders should be well aligned.
In addition, I do think that the value creation potential for developers in the current environment is significantly higher than for pure “operators” such as 7C or Encavis.
Germany: Something is happening here
Some might remember the Speeches of German politician, calling renewable Energy “freedom Energy” from last year. A lot of stuff was announced, especially lofty targets for more Renewable energy, but initially little or nothing happened. However now, after almost 1,5 years, things in Germany are moving. One thing in particular stands out: It really looks like that Onshore Wind permits, that used to be very cumbersome to obtain, seem now to move much faster than a year ago. I have heard this from several sources, that the speed of permitting etc. finally has been greatly improved and that developers now can develop and build especially Windparks much faster.
Who is to profit most from this ? Of course Developers with a big presence (and pipeline) in Germany. From my basket, the ones with the biggest German development exposures is clearly Energiekontor (~50% share Germany~ 4GW). ABO Wind has around 2GW German pipeline (10%). PNE has a similar sized German development pipeline but also some more exotic countries like Vietnam and South Africa. So Energiekontor is clearly the most German focused developer.
Faster speed also creates problems: Capital
Developing (and owning) Windfarms is a very capital intensive business. If, for an existing pipeline, the speed of development gets higher, this means higher returns on Capital but also a requirement for (a lot) more capital.
Interestingly, Energiekontor, which is one of the pioneers of “developing and owning” business model has a very different apporach to ABO Wind.
The ABO WInd approach: Mo’ Capital
On June 1st, ABO Wind dropped a bombshell by announcing that they plan to change their corporate structure from a “normal” German stock cooperation (AG) to a KgAA. The KgAA also has listed shares, but due to a different Goevrnance, the public sharehiolders have only a very limited say in how the company is run.
On June 13th, ABO Wind released a Webcast where one of the founders together with the IR guy tried to explain why they are doing it. The main reason is that they want to raise more capital in order to grow faster, but the founders, who currently own 52% do not want to be diluted below 50%. The KgAA structure would enable them to go below 50% in ownership but keep control.
In a subsequent call with the IR guy, he mentioned that they need the capital both, for faster project approvals but also in order to be able to hold projects longer until they are “turnkey” ready. So far, ABO often sold projects earlier, for instance at the “ready to build” stage. The reason for this is that they want to keep more of the developer margin.
I think especially especially for the KgAA attempt, ABO Wind was pummeled heavily, I am not sure if they will get the required votes for this.
The Energiekontor approach:
Energiekontor interestingly has the exact opposite approach. They actually plan to sell projects earlier than in the past in order to use capital more efficiently:
Looking into this chart from the Energiekontor investor presentation clearly shows that 90%-95% of the value creation happens up until a plant is “ready to build”:
So from a capital allocation perspective, Energiekontor’s strategy looks a lot more shareholder friendly than ABO Wind. Interestingly, Energiekontor has published a quite aggressive forecast for 2028:
So Energiekontor plans to double EBIT by 2028 based on 2023, which itself is 15-20% higher than 2022.
Before I write myself tired, I reference the excellent new (German language) Energiekontor write-up from Jon Neuscherler on Abilitato.
To summarize the attraction of Energiekontor in a few points:
- most exposure to strongly growing German on-shore Wind reneweables market
- founder owned/run
- shareholder friendly strategy focused on capital efficiency
- relatively conservative Balance sheet (Net debt ~2,5x EBITDA)
- Significant upside if forecast is hit
- represents a certain hedge against Energy price shocks
- The increase in speed in German On Shore wind permit doesn’t seem to have been realized by the market so far
Overall, at the current valuation, one is underwriting a return of 15-17% p.a. which I think is highly attractive considered the relatively limited downside risk.
Of course there are risks, such as rising costs for wind parks, further rising interest rates, execution risks and political risks. But overall, I consider this as a very attractive risk/return profile and allocated 3% of my portfolio into Energiekontor at ~74,50 EUR per share. (For the record: In 2022, I bought them at 63 EUR and sold at 91 EUR).
What about ABO Wind, PNE, 7C and Encavis ?
Via the Active Ownership Fund, I already have exposure to PNE. ABO Wind is a company that I still like from a fundamental perspective and is attractively valued, despite the less shareholder friendly startegy.
I do think that the stock is currently a kind of “special situation”. If the KgAA issue resolves itself one way otr the other, the share price could benefit. So I will keep the ABO Wind position for the time being.
Dislaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!
