IPO Review: Windlab Limited (ASX: WND)

IPO Review: Windlab Limited (ASX: WND)

Company Overview

Windlab (ASX: WND) is a global renewable energy development company, focusing principally on harvesting wind energy. The business is a leader in the development, construction and operation of wind farms throughout the world.

WND is particularly active in pursuing wind farm developments within Australia. Its immediate priority is a JV with Eurus Energy to develop Phase 1 of the Kennedy Energy Park in Queensland. Elsewhere, Windlab has developed projects in South Africa and North America, where geographical expansion is anticipated.

The company is an exclusive user of Windscape, an “atmospheric modelling and wind assessment” tool used for wind farm prospecting in various geographies. This technology was developed by Windlab’s founder at the CSIRO.

Thus far, Windlab has developed 580MW of operating capacity through completed projects in 3 continents. A further 48 projects form a development portfolio with capacity of 7,219MW. Of this, 10 projects have already received development approval, accounting for 1,333MW.

 

Company Windlab Limited
ASX Code        WND
Website https://www.windlab.com/
Listing Date August 25 (TBC)
Capital Raising $50m
Issue Price $2.00
Market Cap. $134.3m (approx. / undiluted)
Lead Manager Moelis

 

Market

Last year, renewable energy exceeded 55% of new net generation capacity. It also marked the second year running where renewable growth formed the majority. By 2040, experts predict a 60% increase in global electricity demand, with three quarters via renewable sources. Between 2016 and 2021, installed wind capacity is expected to increase by over 80% (Figure 1).

Figure 1

Generating wind energy via turbines is considered to be the cheapest form of renewable energy. It is also viewed as cheaper than traditional production methods like coal-fired power stations.

With wind turbines becoming increasingly sophisticated, unit production costs have decreased. As wind energy generally peaks at night, and solar energy peaks during the day, the two renewables are not necessarily seen as like-for-like replacements.

Unlike fossil fuels, wind generation incurs negligible marginal costs in the eastern and southern markets of Australia (the NEM). Thus, wind generators may increase their electricity output at the spot rate by bidding a price of zero.

Approximately 9% of capacity in the NEM is wind generated (Figure 2), predominantly in NSW, Victoria and South Australia. Notable coal generating projects have been decommissioned in these states. Windlab expect further decommissioning of projects approaching the end of their design life.

Figure 2

Across Australia, renewables are set to take on a growing role in supplying energy (Figure 3). This is largely due to policies resulting from the Federal Government’s commitment to the Paris Agreement. The government is eyeing a “reduction in greenhouse gas emissions of 26-28% on 2005 levels by 2030”. Also supporting this are State targets in Queensland, ACT, South Australia and Victoria.

Figure 3

The Sub-Saharan Africa market is considered the “most electricity poor region in the world”. Many lack access to electricity, or reliable services. Underdevelopment is compounded by limited capacity growth and forecasted demand increasing fourfold by 2040. Recent policy development and investment suggests some African governments, including major coal producer South Africa, are open to renewables.

 

Offer Details and Use of Funds

The $50m IPO is fully underwritten by Moelis. 12.5m new shares will be issued by Windlab at $2 each, and existing shareholders will transfer 12.5m shares at the same price to new investors.

The deal includes an institutional offer, broker offer, and Chairman’s List offer. Given the IPO structure, the majority (50%) of funds will go towards selling shareholders. Remaining proceeds will support the Kennedy Energy Park JV and IPO costs.

Figure 4

 

Windlab’s Operations

 

Projects

Windlab develop onshore wind projects in the eastern and southern regions of Australia (the NEM). This region is considered to be the largest wholesale market. International markets, particularly Sub-Saharan Africa, feature prominently among longer term plans. Figure 5 illustrates the company’s development portfolio.

Figure 5

Phase 1 of the Kennedy Energy Park, which Windlab holds a 50% interest, will initially offer 58MW. The second stage has been supported by government infrastructure investment, and will provide 1,258MW upon completion. The renewable energy developer also has commercial interests in multiple projects in its development pipeline.

Among existing projects, Coonooer Bridge is operating well above the local industry’s average for capacity (34%). With a capacity factor of 46%, the project has been the country’s leading wind farm. Windlab also has equity interest in the Kiata Wind Farm, which is due to be built by December 2017, and a commercial interest in the West Coast One project in South Africa.

 

Business Strategy & Sales

In recent years, Windlab has transitioned from being a developer into a whole-of-life operator. This is through asset management contracts and various levels of project ownership interests.

Figure 6

Revenue is generated through a variety of sources including:

  • Development margins: made from the sale of projects before or upon construction;
  • Success fees: development milestones from projects sold before financial close;
  • Asset management fees: wind farm management services (may include domestic third parties);
  • Commercial interests: equity distributions from interests in completed projects and partner royalties

The North Queensland market is a central part of Windlab’s strategy. This is based on the government’s current subsidisation to provide energy to the region. The company believes generating energy closer to end users can save the government costs. Windlab already owns a large majority of the “scarce” wind resources close to the electricity network in Queensland.

According to the company, a large degree of its success is attributable to its proprietary technology, Windscape. Originating from the CSIRO, the software allows aerology conditions to be mapped in high resolution and the development of virtual wind farms. This allows the energy developer to assess the viability of projects, as well as optimise their configuration to increase returns.

 

Company Management

Name Title Experience Salary
(excl. rights)
Roger Price Executive Chairman & CEO Over 30 years’ experience with multinationals and start-ups. Engineering, manufacturing, business development expertise within telecoms, transport and energy sectors. Multiple Board positions. Currently Director at Audinate. Package: $357,200 p.a. + $200,000 listing bonus + STI: 65% of package p.a. (+350,000 options)
Joseph O’Brien Non-Executive Director 20 years’ experience within the energy supply industry. Former CEO of Hill Michael. Multiple directorships and currently Executive Chairman of PE electricity supply investor, VisIR. $65,000 p.a. (+66,000 options)
Pippa Downes Non-Executive Director Over 25 years’ international experience for global financial services businesses. Multiple Board positions. Roles with investment bodies. Former MD & Equity Partner Goldman Sachs Australia. $65,000 p.a. (+66,000 options)
Charles Macek Non-Executive Director Over 15 years’ Board experience and multiple fellowship positions. Member of various investment governance bodies. Currently Chair of Vivid Technology, and Earthwatch Institute. $65,000 p.a. (+66,000 options)
John Cooper Non-Executive Director Over 10 years’ Board experience within engineering mining, property and construction industries. Former consultant to major companies. Previously CEO & MD of design, engineering and project management company, CMPS&F. $65,000 p.a. (+66,000 options)

Table 1

In addition to the above, co-founders Dr Nathan Steggel and Dr Keith Ayotte are both in senior leadership technical roles. They are paid fixed packages of $215,000 and $185,000 respectively, with each eligible for an STI bonus of 40% p.a. Both founders have extensive experience in the wind industry, with Dr Steggel the lead developer of Windscape.

Other senior management includes CFOO, Rob Fisher, and MD Africa, Peter Venn. Details on their experience and salaries can be found in the prospectus.

 

Capital Structure

Figures 7 and 8 show the business’ capital structure before and after the IPO, first on an undiluted basis, and then fully diluted.

Figure 7
Figure 8

On completion of the IPO, there will be 2,612,000 options issued under the Employee Share Option Plan. Their exercise prices range between $0.465 and $0.75. There is a new Employee Share Incentive Plan, plus various convertible notes and warrants detailed further in the prospectus.

Figure 9 displays the securities subject to voluntary escrow arrangements under the IPO. On an undiluted basis, Windlab’s free float will be 48%.

Figure 9

 

Financials

Over a period of 4 years, Windlab has increased its recurring revenue from 0.8% to 13.5%. In the same period, EBITDA margins have risen from 27.1% in FY14, to a forecast of 63.1% in FY17.

For the financial year ending December 31 2017, pro forma revenue is expected to increase 36%. On an undiluted basis, and pro forma forecast EBITDA of $14.7m, the company’s enterprise value/EBITDA ratio for FY17 is 7.4.

Following the IPO, forecasts show cash reserves of $31.1m plus operating cash flow generated. Directors do not intend to pay dividends for the foreseeable future.

Financial close of Phase 1 of the Kennedy Energy Park is seen as a major financial milestone. If the project does not reach financial close by end FY17 (December 31, 2017), pro forma EBITDA will reduce by $5.3m.

Figure 10

 

Figure 11

 

Figure 12

 

Risks

Company specific risks include:

  • Project Development: External factors, market conditions, finance and planning matters could delay projects. Construction delays or increased build costs would impact returns
  • Project Success: Debt servicing or covenant breaches could impact cash flow from projects and inhibit distributions received
  • Revenue Recognition: Project revenue may slip depending on financial close of the project
  • Environment: Weather and environmental changes could disrupt wind energy harvesting
  • Electricity market: A decrease in electricity prices might adversely impact Windlab’s financial performance. Grid down time or connection issues may hinder output and revenue levels
  • Key Personnel: Founders developed the Windscape technology which the company relies upon
  • Regulations: Regulatory or licensing changes could financially impact WND and its operations
  • Technology: Ongoing maintenance and safeguarding of Windscape (including IP rights) is necessary to maintain a competitive advantage
  • Economics: Movements in forex and interest rates could undermine project viability
  • Third Parties: Windlab’s finances depend on commercial agreements and cooperation with third parties, including local communities. Their failure or non-compliance would be detrimental

 

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IPO Review: Windlab Limited (ASX: WND)
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