God the market is weird. For over 4 years Genterra traded at a totally irrational price (see my original investment memo). Immediately after the company announced a share buyback and spin off worth CAD$ 2.25 (CAD$ 1.96 in cash and $0.29 of value in a new security) there were two trades at $1.91 and $1.97 allowing you to create Genterra Energy for free (see my update article). Now the security trades at $2.45 valuing Genterra Energy (“GEI”) at an equity return as low as c. 2.6% for a yield stock with no growth prospects.
In addition to the valuation of GEI I was also going to comment on independent valuation included in the management information circular as I think it is flawed in a number of places but have decided against it as my time is probably better spent searching for the next Genterra as opposed to railing against being short changed vs fair value.
To be clear I am selling my Genterra stock tomorrow as soon as there is a bid in the market.
You can find the management information circular here which provides all the detailed background on the transaction and GEI.
Appendix E deals with the valuation of GEI and provides you with the following key inputs:
- The annual energy output is 812,495KWh
- The Feed In Tariff (FiT) has a 20year life expiring in 2014 and is set at CAD$ 0.635 per KWh
- To reflect the decline rate in the solar panels over time you should reduce the energy output but 0.7% per year
- GEI has a $60k per year management agreement with Highroad (related party owned by the Letwin family)
- There is a loan of $2,557,970 which bears a 4% interest rate and amortises in equal instalments of $511,594 in years 2030 to 3034
There is no mention of rent payable by GEI to Genterra but in previous reports of Genterra they have mentioned that $50k per year of rent was payable by GEI for use of the roof of their properties. It is also worth noting that Highroad was previously happy to manage the solar park for $30k per year as per the last Genterra reporting.
I built a rough and ready model for GEI the output of which you can find here: Genterra Energy Valuation (2015.08.02).
My model shows equity free cash flow without ongoing rental payments from GEI to Genterra and also net as it is not clear from the circular. It is worth noting that operating and administrative expenses for GEI for the first 6 months equated to c. $67k which might point to rent being paid going forward. It also does not ascribe any value to the solar equipment at the end of its 20 year life. From the little I know there is value to the “repowering” of solar parks at the end of their life but given GEI doesn’t own the land on which its solar assets are on I don’t think you can assume that any benefits would accrue to GEI in this case.
The market is currently valuing GEI at CAD$ 0.49 vs my view of fair value at CAD$ 0.21 which is derived from wanting a 15% equity return over the life of the FiT whilst assuming no repowering and also that Genterra charges you rent.
Put another way the current price indicates that investors are willing to earn a 2.57 – 4.55% equity return over the 18 years depending on the answer to the rental question. On top of this the security will be very illiquid as the free float will remain at 28% of total shares. In addition you will still have the risk of related party transactions as you did owning Genterra, namely that Genterra related entities are providing: all management services for GEI, are the landlord for the site your park is on, and; are your lender.
It feels great to take advantage of Mr Market’s irrationality both on the way in and the on the way out as my track record is much closer to both buying and selling too early.
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