By Richard Gill, CFA

EQTEC (EQT), the waste gasification to energy technology provider, has announced the acquisition and planned recommissioning of a 1MWe waste-to-energy plant in Castiglione d’Orcia, Tuscany, Italy. The biomass-to-energy plant, originally commissioned in 2015, is built around EQTEC’s Advanced Gasification Technology.

Under the deal, EQTEC has acquired the plant and will lead a consortium to repower and operate it. The consortium includes an Irish Family Office, an Italian Family Office and AIM listed partner MetalNRG. Together, these three parties will participate in a Special Purpose Vehicle, EQTEC Italia MDCSrl, investing an aggregate €2.1 million for an initial 80% equity interest, with EQTEC holding the remaining 20%. A Heads of Terms Investment Agreement has been signed for the funding of the SPV, with financial close due imminently, subject to execution of the final form agreement by the parties.

The plant is due to be fully recommissioned and operational by Q2 2022 and to produce c.1MW of green electricity annually from one tonne of straw pellets and wood chips sourced from local farms and forests. The plant will subsequently be upgraded to process a greater diversity of biomass feedstocks over time. Connection to Italy’s national grid is already in place and the project will benefit from the country’s favourable tariffs for electricity produced from waste biomass until the end of 2027. 

 The contract value of EQTEC’s technology sales for the plant is expected to be €1,750,000 in technology and engineering upgrades. Also, EQTEC is expected to be appointed as the O&M contractor for the plant following its recommissioning, with an annual contract value of c.€215,000. Additionally, EQTEC estimates that the plant will generate an unlevered IRR of 20% and annual EBITDA in excess of €750,000.

The Italian plant is the first of two such facilities with EQTEC’s technology that have been decommissioned by previous owner-operators in recent years and that EQTEC has targeted for repowering to full operation. The Italian plant is intended to become the first of the company’s ‘Market Development Centres”, which will showcase its technology in a fully operational, commercial setting. Details on the planned acquisition of a facility in Croatia are expected to be made in due course.

ASSESSMENT

This deal is in line with EQTEC’s strategy to pursue the recovery of plants built with its technology where operations have been suspended by owner-operators for lack of technical integration capabilities. We like this approach for a number of reasons. Firstly, as EQTEC already has the technical know how to run the plants, it is a relatively quick and easy way to build up income streams, both in the form of technology and O&M sales along with any equity related distributions. Secondly, such deals provide an attractive rate of return, with the 20% stated for this deal well ahead of a typical project IRR of around 10%. With the plant expected to be up and running within around a year, this will act as another reference case for EQTEC’s technology in its key European target markets, helping to attract project owners and other waste to energy plant industry participants. 

Shares in EQTEC currently trade at 1.625p, down from highs of c.2.75p seen earlier this year. Back in April we updated on the company following the announcement of a positive trading update which highlighted significant growth in the project pipeline and the expectation of strong growth over the coming years. We are expecting maiden profits at the EBITDA level this year of €3.425 million, rising to  €10.9 million in 2022 and then €23.5 million in 2023 as the operational gearing kicks in and more projects are executed on.

For our target price we have a blended valuation comprising of 50% of our EV/EBITDA valuation and 50% of our peer comparable valuation. This gives a figure of 3.115p per share. We also note that EQTEC is set to be included in the MSCI Global UK Micro Cap Index at the end of May, which should help to boost demand for the shares. Our stance remains at Conviction Buy.

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• EQTEC