Methane from US landfill sites is positioning HCI cast-off as a promising investment in renewable energy

Shares in renewable energy group Montauk Holdings* have been all over the place in the past three months.

This would suggest the market is still struggling to tag a value to Montauk’s profits, generated from production facilities extracting gas and energy from waste landfill sites in the US.

At the end of October last year Montauk shares were trading at below R32 on the JSE — then rocketed to around R60 at the end of November and start of December. In mid-December the shares settled back to R42, followed by another surge to R60 on January 9.

The recent moves in the crude oil price would have stirred sentiment. But increasing perceptions of a renewable energy boom in the US (despite initial fears that President Donald Trump’s administration would be unsympathetic to clean-energy production) may have spurred punters to take positions in Montauk.

The shares are tightly held, and anyone determined to buy a sizeable parcel might have needed to bid up the price markedly.

At the time of writing, the Montauk price was holding at around R46.50.

Long-term shareholders in Montauk, especially those who acquired shares between 200c and 400c at the end of 2014 and beginning of 2015, won’t give a hoot about the recent share-price volatility.

For the record, Pittsburgh-based Montauk was listed on the JSE in late 2014 when the company was unbundled from investment company Hosken Consolidated Investments (HCI). The market initially showed scant interest in the renewable energy pitch.

Montauk was, technically speaking, acquired by default by HCI when the investment company took over the old Johnnic to secure a meaningful holding in gaming group Tsogo Sun. During its tenure in the HCI portfolio that market accorded little, if any, value to Montauk.

Just after listing, Montauk carried a market value of 300m-R400m. Today that market capitalisation is above R6bn (and was more than R8bn at the R60 share price peak). It’s been a wonderful unlock for HCI shareholders, and perhaps a model for unlocking value for shareholders in other unlisted interests like the coal business, property and the oil and gas operations. On the other hand, if HCI had retained its stake in a listed Montauk, the holding would have been the group’s second-largest portfolio holding behind the enlarged Tsogo Sun.

The initial underwhelming response to Montauk’s listing underlines the notion that JSE investors tend to undervalue cutting-edge assets in sectors like biotech, renewable energy, fintech and artificial intelligence.

In retrospect, punters might have picked up on Montauk’s potential when perusing the pre-listing documentation. HCI — not known for too many bold statements — said Montauk had the “operational and financial capacity to pursue its envisioned growth strategy independently” and that the listing provided an opportunity to raise capital for future expansion.

When HCI unlocked its holding in Montauk, a number of HCI directors — including CEO Johnny Copelyn, and key executives Andre van der Veen and Kevin Govender — proceeded to fill their boots with Montauk scrip.

The big question now is whether Montauk, which unfortunately is underresearched by the mainstream investment houses in SA, still has gas in its tank.

It seems, canvassing the views of the handful of investors who follow Montauk, that the recent share-price spikes might also have been driven by the persistent contention that the company will, at some stage, need to secure a listing on the Nasdaq or New York Stock Exchange. This contention gains currency if investors believe renewable energy in the US (and globally) could be the next “investment sweet spot”.

It is important to note that Montauk — which earns a fair share of its keep from green energy credits earned via renewable identification numbers (RINs) — has found considerable operational traction over the past three years. The company’s net asset carrying value was stated as US92c/share (R11/share) at the end of the interim period to September 31 last year. At listing the net tangible value of Montauk was estimated at under US42c/share.

In the most recent interim period, revenue from Montauk’s renewable natural gas facilities increased by $8.3m or 24% on the back of a 3% increase in renewable natural gas volumes. The company also “monetised” 8.2m RINs – though this was a decrease of 7.5m RINs from the corresponding interim period in 2016, when 15.7m RINs were sold.

Montauk said the decrease in RINs sold was attributable to an increase in gas volumes monetised under fixed-price contracts.

At the end of the interim period the company still had 1.4m RINs generated and unsold, with the average pricing realised on RIN sales during the interim period 47% higher than 2016.

Revenue from Montauk’s electric generation facilities increased by $2.8m or 39%, with production touching 0.2mMWh and prices firming close to 16%.

Montauk’s operational net cash flow was reassuring at $20m (US180c/share), providing a solid underpin for reported earnings of $9.6m or US7c/share. Though the cash pile has grown to $30m, Montauk resisted declaring an interim dividend. This may signal further developmental activities, or even acquisitions.

In the interim period, Montauk secured an agreement with a landfill site operator in Ohio to build and operate the gas collection system and a renewable gas facility for 20 years.

This new facility will process up to 3,500SCFM (standard cubic feet per minute) of methane, and commercial operation should start in the first half of the 2019 financial year.

The Financial Mail reckons Montauk (not factoring in the new developments) can probably rack up Ebitda of $54m-$60m for the full financial year to end-March 2018. With new production facilities kicking in, it may not be a stretch to pencil in Ebitda of up to $80m (R960m) for the full 2019 financial year.

On an Ebitda basis, Montauk still looks an intriguing long-term prospect, remembering that valuations in the US for comparable companies would almost certainly reflect double-digit Ebitda multiples. This does raise the issue of why Montauk has not hurried to secure a listing in the US, where sympathetic and knowledgeable investors might provide a basis for a more generous market rating.

Though Montauk has not officially addressed the issue of a US listing, one senses that if the pace of development picks up and there are increased opportunities for acquisition, then a listing on Nasdaq would come in very handy as regards using scrip as deal-making currency.

• The writer holds shares in Montauk


Source: Financial Mail – Marc Hasenfuss