By Richard Gill, CFA

EQTEC (EQT), the waste gasification to energy technology provider, has announced the signing of non-binding Heads of Terms for the acquisition of its RDF-to-energy project at Deeside, Flintshire, Wales.

Background

At Deeside, EQTEC is lead developer and technology provider for the project. The company is working in partnership with strategic land developer Logik Developments Limited and anaerobic digestion technology firm Anaergia Inc. through project SPV Logik WTE. EQTEC signed a Collaboration Framework Agreement with Logik in February 2021 to develop the site, which was previously a Gaz de France power station and comprises 6.27 hectares of land owned by Logik WTE. A share purchase agreement, first signed in December 2020 and subsequently amended, will see EQTEC’s wholly owned subsidiary, Deeside WTV, acquire 32% of the share capital of Logik WTE.

The planned multi-technology plant at Deeside is expected to include a material recovery facility to process municipal solid waste and an anaerobic digestion facility that would deploy technologies from Anaergia, with an advanced thermal conversion facility that would deploy EQTEC’s syngas technology. In October 2021 planning consent was granted for a proposed 9.9MWe plant to enable a complete and local waste-to-energy solution that would combine a 182,000-tonne waste reception plant with 2MW anaerobic digestion facility and EQTEC Advanced Gasification Technology.

Head of Terms

The deal has been signed with an un-named publicly quoted corporate investor which will acquire all of the equity in EQTEC’s 100% owned project development company Deeside WTV. The investor will also be granted an option to acquire 100% of the equity in land owner Logik WTE. The total consideration for the proposed transaction is £15 million. To facilitate the deal, Deeside WTV and Logik have agreed to extend the long stop date of the share purchase agreement to 28^th February 2023.

EQTEC will charge Deeside WTV for up to £5.5 million in development services fees, largely settled from the consideration being applied to Deeside WTV, payable in instalments between completion of the share purchase agreement with Logik and the project reaching financial close – expected to occur in H1 2023.

Consideration will be paid in two tranches, with the first £6 million coming when the parties enter into Definitive Documents and the second tranche of £9 million due upon completion of the deal. The current expectation is that Definitive Documents will be entered into as soon as reasonably practicable, and in any event by 30^th November 2022, with completion to occur by the long stop date of 28^th February 2023.

Of the initial £6 million; £0.5 million with go to EQTEC for 100% of its equity in Deeside WTV; £1.5 million will be paid to Deeside WTV to cover all outstanding budgeted development costs to financial close; with £4 million paid to Deeside WTV to fund its payment of the option fee to Logik under the updated terms of the share purchase agreement.

The further £9 million payment will see £6 million go to Logik to acquire Logik WTE and accordingly the project land, with £3 million paid to Deeside WTV to fund its partial payment of EQTEC’s development service fee. The total consideration to be received by EQTEC for the development of the project is £6 million.

The investor will also pay for all agreed development costs until execution of the Definitive Documents and in turn will be granted exclusivity until 30^th November 2022 to complete the transaction. Should the option to acquire land company Logik WTE not be exercised by the long stop date, Logik will retain the business and the investor, through Deeside WTV, will have the option to enter into a lease with Logik WTE. The full £5.5 million development service fee due to EQTEC by Deeside WTV will remain outstanding until financial close and payment will be guaranteed by the investor for £4.5 million.

Development progress

Meanwhile, further progress is being made on the development side at Deeside. In March 2021 EQTEC agreed a deal with Toyota Motor Manufacturing UK to explore a sustainable waste-to-energy solution for Toyota’s nearby engine manufacturing plant. The two parties are now said to be in the final stages of discussions toward agreement of heads of terms for the supply of gas and electricity from the plant.

Also, the project has received updated heads of terms (subject to contract) for gas and power offtakes, with new tariffs that significantly improve project economics, from TotalEnergies, a company producing and marketing a variety of energies on a global scale.

Announced earlier in September, discussions with shortlisted technology partners are ongoing so that the selected companies can provide their technical and commercial proposal for the downstream technology to convert syngas into hydrogen.

ASSESSMENT

EQTEC has alluded to this deal for some time so it is good to see that the Head of Terms have now been signed and that value from Deeside should be released in the coming months. As we discussed in our most recent research note on the company, EQTEC’s current strategy is to focus its efforts on its high-margin technology and innovation services, with money raised from selling project SPVs used to develop and fund the capital projects that will deploy the technology. This deal is in line with that strategy and also comes on the back of an announcement earlier this month from the company’s at Southport.

At Southport, new agreements will release the company from a requirement to purchase the project company and ensure it receives outstanding development fees and future technology sales and engineering services fees. Selling the project SPVs releases the company from large capital commitments and also allows it to focus on becoming an exclusive technology innovator and licensor, in line with the stated strategy.

Our last full update on EQTEC was in April this year, a time when we noted that the company has set itself up nicely for strong growth over the coming years. Its progress in advancing projects towards financial close and commissioning comes under the backdrop of a continuing global effort to reduce waste, increase the use of alternative sources of energy and achieve net zero carbon emission targets – three things which the company’s market leading Advanced Gasification Technology has been designed for. Of course, rising energy prices and the requirement for energy security are also playing into the company’s hands.

EQTEC shares have come down to 0.38p on the back of the discounted placing completed in July and the current market malaise. This price is well off highs of around 2.75p seen at the start of 2021. Despite the dilution, the fall seems overdone to us given that EQTEQ has made significant commercial progress and grew revenues by 410% in the 2021 financial year. Our last valuation of the company derived an EV/EBITDA multiple based target price of 2.41p, which we have revised to 2.21p to take into account the placing dilution. With this target remaining well above the current price we retain our stance of Conviction Buy.

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