Eco Investor August 2018

Pre-Profit Securities

New Strategy for Carnegie, Subsidiary for Tag Pacific

In an unexpected change of strategy, Carnegie Clean Energy is to merge its 2016 acquisition, Energy Made Clean, with ASX listed Tag Pacific. Carnegie will return to its former focus on commercializing its world leading wave energy technology. Tag Pacific and Energy Made Clean are both renewable and remote energy project developers and together will become a larger remote area energy specialist under the new name of MPower.

Although the dramatic changes need shareholder approval, their announcement saw Carnegie's and Tag's share prices jump in opposite directions. Carnegie's share price fell from 2.7 cents to a low of 1.6 cents and it is currently around 1.8 cents. Tag's share price leapt from 6.3 cents to a high of 10.5 cents and it is currently around 8.4 cents.

The reason for the opposite movements is likely revenue. Energy Made Clean (EMC) earns all of Carnegie's commercial revenue through its solar, battery and microgrid projects. Carnegie's 2017-18 revenue from customers was $8 million. EMC has a development joint venture with Lendlease, and the company's prospects for revenue growth look promising. When Carnegie acquired EMC in late 2016 it turned Carnegie from a pre-revenue into a pre-profit company and its share price climbed from 4 cents to 9 cents. Investors liked the story and its outlook was good. Carnegie was suddenly a clean energy project developer with a unique suite of technologies that included wave energy as well as solar and storage.

The revenue and the promise now move to Tag Pacific. Tag's share price has been declining or flat for the past five years as it has failed to deliver profits and growth. Tag is an investment company and its main business is MPower, an energy project developer that has been growing the revenue from its renewable and hybrid energy projects. Not only will EMC boost its project capabilities and revenue, but Tag said that the combined businesses are expected to have enough scale to enable them to become profitable. The share price moves show investors like the story.

Under the demerger and acquisition, Carnegie will receive 58,507,377 shares in Tag, about 32 per cent of the new MPower, and it will distribute these in-specie to its shareholders. The companies didn't give details about the in specie distribution. But Carnegie has 2,881,452,450 shares on issue and divided by 58,507,377 that could be a 1 for 49 distribution.

So how will the two companies look if and after shareholders approve the changes?

The new MPower will have over 130 staff and operate Australia wide and in New Zealand and the South Pacific. It is being presented as "a leading renewables, battery storage and microgrid developer, designer and constructor". Its combined pro forma revenue in 2017-18 would have been over $50 million, and this is expected to increase in 2018-19 and later. The new MPower will start with a combined committed orders of around $20 million.

Tag's chief executive and planned MPower's head, Nathan Wise, said "The microgrid market is growing rapidly and consolidation in the sector is inevitable. The enlarged MPower business will be well placed to take a leadership position and dominate this market. We have plans to grow the combined group rapidly across our EPC [engineering, procurement and construction] and Build Own Operate (BOO) and Products divisions."

He said MPower also plans to establish a dedicated vehicle to house its build, own and operate solar, battery energy storage and microgrid assets as they are developed. After the transaction, MPower will do a $4 million capital raising to fund the growth of the enlarged group and the development and financing of the build, own, operate projects.

The microgrid market in Australia has been forecast to be over $1.6 billion over the decade from 2016 to 2026. Tag said the combined value of prospective deals for the MPower and Energy Made Clean businesses is over $500 million. These are opportunities for revenue contracts that have been identified and are at various stages of tender but have not been secured.

After the deal, MPower will have $25 million in historical tax losses and $7 million in franking credits. It will have over 12,000 shareholders, which could be handy for liquidity and capital raisings.

Carnegie chief executive and managing director, Dr Michael Ottaviano said the transaction is "a compelling opportunity to unlock the significant potential from the microgrid market in Australia, New Zealand and the Pacific, bringing together two of the leading entities in Australia to create a national champion." The growth of the microgrid market and the conversion of Australia's remote and off grid energy from diesel to renewables are now underway so there is plenty of potential. But it is a shame that Carnegie could not become that champion.

Large Image

The fringe of grid and off grid sectors in Australia.

The demerger means Carnegie will retain its eligibility for the R&D tax cash back incentive, so perhaps this was a factor in its decision to demerge EMC. Capital was another. Dr Ottaviano said the Carnegie board believed the transaction was "a more compelling alternative for shareholders than an organic growth strategy with EMC which would require additional working capital over a longer time frame."

The transaction is expected to be finalized by late August.

After the demerger, Carnegie will continue with the commercialization of its CETO wave energy technology. It will continue with its main Albany Wave Energy Project. It will retain ownership of the Garden Island Microgrid and its 50 per cent ownership of the 10 megawatt Northam Solar Farm that is scheduled for commissioning in the December quarter. Engineering and site preparation are complete and the first solar modules have been installed. Carnegie said these assets will support the commercialization of its wave technology.

Design and development work is still underway for the Albany Wave Energy project. CETO unit manufacture is scheduled for 2019, and installation for the summer 2019/20. So the demerger of EMC will put back and slow Carnegie's revenue growth. However, Carnegie is right to ensure the Albany Wave Energy project remains its top priority. Others can do solar project developments but so far Carnegie is the best in the world for wave energy development.

In this spirit, soon after the demerger announcement Carnegie announced a collaboration agreement with Enel Green Power (EGP), one of the largest energy and renewable energy companies in the world. EGP will invest $1.6 million in the research, development and deployment of the CETO technology, including at the Albany Wave Energy Project, and on pursuing international wave energy opportunities.

Dr Ottaviano said Enel Green Power will help Carnegie to tailor the CETO technology to the needs of future utility customers. However, he did not say what ENEL will receive for its investment in CETO.

He did say the new CETO 6 unit will have a capacity of 1.5 MW and deliver more than twice the energy of the previous CETO 6 unit. The initial unit will be installed during the 2019-20 summer - about 18 months away - and operate for 12 months. If successful, Carnegie wants to build a 20 MW wave farm with potential for up to 100 MW. So for shareholders, it's back to being patient. (ASX: CCE, TAG)







Search Eco Investor