Magnora ASA

OSE:MGN

Earnings Call Transcript

[Erik Sneve, executive]

Good morning. Welcome to another great quarter. We'd like to thank our partners, customers and employees for another great quarter with sales to blue chip customers in both Sweden and South Africa. As the company evolves, we have the luxury of combining growth and harvesting at the same time. Q3 was about origination, sales and return of capital to our shareholders.

We like our asset-light strategy with high gross margins, and we have 0 debt, and we have exposure to rising energy prices and falling CapEx on solar modules and batteries and that's offsetting some risk our customers have in relation to higher interest rate costs.

On a general note, I would like to underline that our customers in the quarter have little or 0 debt, so we don't see any big problems. Magnora's cash position is a great asset, both on the offensive and defensive side. We've seen growing interest from the region and international mutual funds who like our asset-light business model, growth and capital policy.

We continue to sell pre-ready to build on strong demand for green energy on the back of customers, businesses and governments migrating towards a carbon-neutral society. Year-to-date, we've sold 385 megawatt and that's quite far above our guiding.

We continue to meet and discuss with landowners and our current teams are in 350 dialogues across multiple countries and regions. Diversification will be key for us reducing risk and growing our top and bottom line.

We continue to grow our land portfolio, a key driver for long-term value creation. Without land, there is no business. Roughly 20% organic growth this quarter alone. And we're excited some of this cash can be returned to our shareholders through share buybacks and dividends, around NOK 40 million this quarter.

We continue to see that our culture in Magnora, Helios, and South Africa and the U.K. foster growth, and we are particularly happy with growing our franchise in Finland with over 500 megawatts since start earlier this year with a great local team.

This quarter, we saw our first sale in South Africa to Globeleq, a company owned by the Norwegian and U.K. governments. We estimate around NOK 50 million to NOK 60 million in the initial deal in South Africa, if the customer wins the auction and all milestone payments are paid according to the plan.

We see further upsell opportunities within solar at the same site, so further payments. This morning, we announced the second deal with Globeleq in a similar structure, upfront payments with milestone payments as the project progresses. We consider this as a proof of concept our business in South Africa.

Our business model works. Projects in South Africa can be sold at an early stage. Partnering with strong customers provide a comparable fast roll to market as in Europe. In strategic markets, South Africa, too, offers the opportunity to sell projects at a decent price.

Make also note of the progress being made in Norway. Hafslund Magnora Sol roughly doubled its project portfolio, and we're closing 1 gigawatt soon, faster than anticipated. We have also received good feedback on our buyback program and dividend policy, which everyone think is sound. We will continue to distribute cash and consider new buyback programs and return cash when more cash hits our bank account. This will be reviewed quarterly.

On the back of potential growth in our legacy business, interest from multiple parties for our business and businesses as well as growth in several business segments, we have considered a review of our corporate structure in order to enhance shareholder value.

Our Board has engaged Pareto, a legal [indiscernible], to consider all aspects of this in reference to an optimal corporate structure, internal reorg, spin-off and demerger and more. We continue to see strong organic growth and a good deal flow short to midterm.

Our goal is to grow earnings year-over-year in a profitable way by funding dividends from portfolio companies to Magnora, returning it to shareholders and from time to time, sell companies. We also see that Evolar is taken very well care of with new owners, and we're hopeful that we will see further payments from that venture in the future.

Magnora is a pure-play renewables developer with a focus on early-stage development. We're growing an attractive portfolio of projects, including on and offshore wind, solar and energy storage. The development is supported by a strong team of professionals and a robust war chest of cash.

Magnora's team has been a driving force for energy development for decades in Statkraft, Lundin, DNV, Aker Systems companies. Our solar development projects represents more than 2/3 of our portfolio today. This is currently the fastest-growing renewable segment in the world. And we're present in South Africa, Sweden, Finland, U.K. and in Norway.

We're pursuing the solar PV opportunity with an ambition in Norway of reaching 1,000 megawatts, and we've done that much, much faster than anticipated, and we also see very strong growth now in Finland, U.K. and South Africa.

Energy storage is going to become an important part of the renewable shift to provide stability as more variable energy sources are being connected to the grid. We're currently developing over 100-megawatt hour of storage project in U.K. with a strong partner there. And we see this as a very attractive opportunity going forward in multiple markets.

Our onshore wind exposure is currently in South Africa only. This region represents an attractive opportunity as South Africa plans to develop minimum 20 to 30 gigawatt of renewables projects over the next decade to decrease the current power shortage they're experiencing in the country.

The government is continuing to invite private investments with a 100-megawatt limit for corporate and industry projects now being removed completely. The permitting process is under evaluation to become more efficient as well. Maybe in the future, they'll have a spot market, which really will drive this market going forward.

There is high interest from investors experienced with different strategies for Magnora in South Africa, and we are in discussions with multiple of these parties.

Going forward, we expect positive developments within onshore wind, solar as well as storage solutions, in particular battery for our business. Recently, the offshore wind segment has slowed and stalled due to a combined factors of high CapEx, high interest rates and higher steel prices.

Factors that may not be fully reflected in CFD auctions, and we anticipate the CFDs to improve going forward and CapEx to drop. Behind the portfolio growth, there is a sustained and systematic origination effort across all onshore markets. The required skills are quite diverse.

Good business instincts, good analytics, good processes and risk aversions and not least, amazing team players in our group companies or in Magnora. A lot of leads behind every signed projects, a lot of leads. The projects have to be economically feasible, there has to be a potential for a grid connection and we have to consider all aspects of environment, key factors in all markets we participated, also South Africa.

In early stages, the quality of leads is more important than the volume of leads. Most projects are sold before ready to build and payments include associated milestones. Magnora's customer base has little counterparty risk after a project is sold. Our current customer base generally carry something equivalent to A, AA or AAA credit rating.

Key success criteria in our business is balancing origination across multiple markets, development and a continuous focus on low cost and sales. Here, you see a list of our customers, many repeat customers. Our customers are leaders in their respective markets with low risk and high future potential for Magnora and Magnora portfolio companies.

Each company enjoys a strong position in the respective markets. Their strong brands help Magnora's origination efforts and derisks and allows for early sales combined with milestone payments. We see that success fosters additional success. So landowners want to be associated with a company like Magnora, our group companies, because they know we're able to execute.

We continuously monitor new projects. We're in discussions with multiple advisers and teams across multiple areas in the world. In particular, Europe, we have an ambition to invest early stage corporate with strong partners, experienced teams, derisk the maturity projects all the way through farm downs and sale.

At ready-to-build, we seek to optimize the ownership of the assets to suitable owners for long-term ownership and operations. We have some guiding criteria for the investments being that we want to invest NOK 2 million to NOK 20 million initially, and then we can add more capital when we see that they're able to succeed and grow according to the business plan and the action plan.

We need to see a potential of at least 5x return on our capital before we're entering into new projects, who we always want to believe can grow into platform companies. To give you an example, together with the founders of Helios, we invested NOK 30 million around 2020.

Now we've sold almost 1,000 megawatt in Sweden to multiple energy companies across Europe. These projects alone will create 1 terawatt hour of clean solar energy in the Swedish market. So it's been an incredible success so far. Here is a slide where you see where we'll change hands with companies like Hafslund, Statkraft and others.

We're in the early stage where the risk is high, where already absolute capital at risk is very low as opposed to owning a wind farm or a solar park. We have a very strong team to support that development with long track records from the energy and renewables industries.

For instance, Bjørn Drangsholt, he was the Country Manager for Statkraft many, many years in the U.K. when he developed all the onshore wind farms in Wales, Scotland, and the offshore wind parks in England. He's been an incredible resource to our organization. He's also been the Deputy CEO in Hafslund Magnora Sol growing it to where it is today. He has great expertise with landowners.

Emilie, she came from DNV. She worked 7 years with technical due diligence on solar, onshore wind farms and offshore wind farms. The combination of having young, savvy researchers together with savvy retired people like Bjørn creates incredible energy in the company. And we have multiple people in a company that's quite similar to their experiences.

Every quarter, there are new events. Behind these events are slow but sustained shifts in the markets. We believe these shifts are quite favorable for an early stage developer like Magnora. A sustained fall in the -- fall of price -- fall of solar panels improve our pricing power, like we've seen in the last year and what we've seen since 2010, over 90% drop in CapEx.

We also see a sustained fall in the price of battery modules, which also improve our pricing power of our projects. The continued struggle to find new sources of energy improve our pricing power, since we have a lot of land. There is a huge growth in electricity demand that improves our pricing power because companies and businesses are moving towards green energy.

There's a difficulty finding grid and land for new entrants. We have a team that have done that for many, many years. This also improve our pricing power and our ability to have good discussions with energy companies who wants to buy our projects. Picture is somewhat different in offshore wind for the time being, hit by a series of setback lately.

We think we've seen the worst, and we think that CFD prices will adjust favorably going forward and that CapEx will drop. We have no hurry to bid for any CFD in 2023, and we look forward to the upcoming CFD realty.

We also have a legacy business, and we might see growth in our legacy business going forward. We have 2 license agreements, delivered almost NOK 100 million in 2022. We expect to see big payments coming up soon to midterm, maybe the end of the year, early next year, and those are payments for the Shell Penguins FPSO. So another $8.6 million from Shell. As you know, we received $0.50 per barrel from the Western Isles FPSO.

So back to our guiding. Earlier this year, we raised our guiding to 200 to 325 megawatt. And as you can see in the mid-column, we've sold 385 megawatt net to Magnora so far in 2023. Since we are at the end of the year, we won't do anything with our guiding before later this year, looking into 2024.

But as I mentioned before, we have good news flow through second half of 2023, and we expect to see good news for the rest of the year. And the focus on guiding will be '24 and '25. It's too late in the year to speculate too much on how big the numbers could be, but we have good news in sight.

In the future, Magnora may differ from today. On August 28, Magnora signaled a review of the company structure due to high growth in the onshore business, potential growth in the legacy business and our offshore business.

In parallel, we encountered significant interest for individual assets, the company, group companies and portfolios. If we believe a deal is in the best interest of our shareholders, we will pursue accordingly. Magnora, therefore, hired Pareto Securities to assist, together with [indiscernible], on the optimal structure for the company and to explore the incoming opportunities we currently are in discussion with.

Magnora will always act in the best interest of our shareholders. Then over to condensed profit and loss. As you see, [indiscernible] worsened from Q2 when we sold Evolar to First Solar. When you look at the operating expense, quite similar. It's moving a little bit upwards due to legal expenses regarding the corporate interest and the analysis of group structure.

So that's primarily the increase in the operating expense. We see that we have still a deferred tax asset of NOK 3.5 billion and paid-in capital of NOK 8.4 billion. So the return on capital is tax-free for some type of shareholders and you should discuss that with your tax adviser.

Cash flow from operating activities, negative NOK 10.3 million, reduced cash by NOK 37.6 million from net financing activities and net investments of NOK 6.3 million. And adjusted with operating activities, we land at NOK 367 million. The drain on cash was the buyback and the return of capital to the shareholders. We still have a very, very strong balance sheet and no debt.

And then over to outlook. We've had a very good start to the year, continue to perform well into Q3. I expect good news going out of the year in Q4 as well. We've sold way above our midpoint and above our highest level we anticipated 325 megawatt, closing towards 400 megawatt. Our portfolio is growing maybe a little faster than I anticipated earlier this year.

So we should be approaching 9,000 megawatts, I think, within the timeframe. We expect future funds also from the Evolar transaction. And we continue to see growth opportunities from our legacy contracts. We will get back to that as well. And we see recurring sales from our businesses in South Africa, Sweden and soon, maybe also Finland, Norway and the U.K. So I think we're a very diversified renewable company with growth opportunities over the next decade. We're very, very pleased to execute on our strategy on a daily basis, and this wouldn't have been possible with the great team members we have in Magnora.

So a little bit about skin in the game. Most employees have shares in the company or have options. So that's something we encourage, and we think that's key and also helps us keep cost focus and strategy focus and operational focus daily.

There's also an appendix here where you can find some useful information. We'll be later today with SEB and Danske Bank and you might reach out your sales contact there to hear more about Q&As from those meetings.

We're always available on the e-mail or if you're in the Skøyen area in Oslo, we'd be happy to set up time to have a coffee. We are extremely pleased by the year, and we're very pleased by the interest from -- for all of our businesses. We look forward to approaching the end of the year, and we think the future is quite bright for Magnora employees, group companies and shareholders. We wish everyone a great day. Thank you.