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On July 18, 2014 Active Energy Group Plc (AEG) announced that it had entered into
a landmark joint venture agreement to commercialize over 250,000 hectares (ha)
of land in Canada, which contain at least 108,000 ha of mature timber as well as
other natural resources. Since that date, the companys stock has gone up by 75%
to USD 0.076 per share, implying a market capitalization of just USD 42 million.
AEG LN
0.076
(5.05 GBp)
0.260
(17.35 GBp)
42.0
Net debt, $ mn
1.9
EV, $ mn
43.9
Jun-14
Sep -14
Dec-14
Mar-
However, in our view AEGs stock price is largely undervalued, considering that the
company can net as much as USD 130 million in value over the next few years
from its JV project by realizing long-term Tree Farming Permits to timber
investment management companies (TIMOs). At the KAQUO Mtis Settlements
Economic Development Summit, held on 27 January 2015, KAQUO commented that
it had received three non-binding, conditional offers, in aggregate amounting to
USD 300 million subject to further due diligence, which demonstrates a high level
of interest by investors in the asset. Moreover, with the Canadian project, the
company has signicantly changed its business and risk prole expanding from
its original business of wood chip manufacturing exclusively in Ukraine to
timberland and natural resources development and management in Canada.
Thus, given the joint venture value and the considerable international growth
opportunities in the companys other market sectors (wood chip for MDF/OSB
panel board manufacturing, wood chip for power generation, and biomass fuel
technologies), we issue a BUY recommendation for the stock with a target price of
USD 0.260 per share, implying 244% upside.
Investment summary:
Source: Bloomberg
Shareholder structure
Gravendock
27.3%
Eastwood SA
10.9%
Windstar Investments SA
10.2%
Held in treasury
10.0%
Free oat
39.6%
AEGs Canadian JV may generate USD 130 million in cash ow over the
years 2015-2017. According to a forestry sampling study that the
company commissioned, out of the total land area of 250,000 hectares,
108,147 hectares were classied as being the most commercially viable,
with an estimated merchantable timber volume of 34.8 million m3 (322.16
m3 per hectare on average). We believe that over the next three years the
JV can commercialize that valuable timberland by selling long-term Tree
Farming Permits, which at a rate of USD 3,300 per hectare (the median
price for recent transactions in Canada & the US), AEGs 45% stake in
the JV can be valued at USD 160 million. However, assuming only 90%
of the JV prot is distributed as dividends, and a dividend tax rate of
10%, this yields a net cash ow to AEG of USD 130 million.
AEG is the largest exporter of wood chip from Ukraine, supplying highquality material to several MDF manufacturers in Turkey (the leading
country for MDF production in Europe). The company has conrmed offtake wood chip contracts with Turkish customers for 2015 that represent
a 100% increase on 2014 shipped volumes of 210,000 tonnes, which
themselves represented a 300% increase on 2013 volumes. As
shipments from Ukraine offer several key advantages over traditional
transatlantic supply sources, we believe that AEG has the potential to
increase its share of the Turkish imported wood chip market to at least
25%, or 700,000 tonnes per annum, by 2018.
Our valuation target is a sum of the DCF valuation for AEGs wood chip
business and the value of its Canadian JV project based on a transaction
comparison approach, which are USD 34 million and USD 114 million
(discounted value) respectively, implying a USD 0.260 target price per
share, or 244% above the current market price.
Revenue by segments
Dividends from KAQUO
150
104
26
2014e
2015f
2016f
Key nancials,
USD mn
Revenue*
Dividends**
(KAQUO JV)
EBITDA
Net income
Net debt
2014e
2015f
2016f
26.3
56.3
69.0
47.9
81.5
0.5
58.5
91.9
(0.9)
55.7
89.5
2.0
2.0
2.0
Contents
Table of Contents:
Company description..
Canadian JV..
Market overview
Wood chip for MDF manufacturing... 12
Canadian lumber market 16
Wood chip for power generation (BFE)
21
Management team.. 23
DCF valuation..
24
P&L statement. 26
Important disclosures start on page 27
Company description
Overview
Active Energy Group Plc is an AIM-listed (AEG.LN) international supplier of
timber products and forestry management services, headquartered in the UK,
with operations in Ukraine, Canada, Spain and Montenegro. We understand that
the company has other markets under development including the UK and UAE,
as well as Turkey.
The Groups core business activities are supplying industrial wood chip and
timber products for Medium-Density Fiberboard (MDF) and Oriented Strand
Board (OSB) manufacturing; producing Biomass for Energy (BFE) fuels,
including wood chip, and providing timberland and natural resources
development and management services.
To date, the Groups primary operations have focused on procuring raw timber
(primarily logs, technical lumber and forestry residues) from a number of stateowned Ukrainian forestry enterprises, which deliver it by rail to its facilities in
Yuzhny Port, near Odessa on the Black Sea. It processes the timber into highquality wood chip, loads the nished material into time-chartered bulk cargo
vessels, and exports it under off-take agreements to leading MDF
manufacturers in Turkey.
AEG also sources nished wood chip from Montenegro and Spain on an ad hoc
basis when raw material specications and prot margins are acceptable and
supplies it to biomass-fuelled power plants in Italy. However, volumes have
been limited over the past few quarters, as the company has signicantly
increased its MDF wood chip activities.
The company holds a 45% stake in a joint venture timber and natural resources
development project (KAQUO Forestry & Natural Resources Development
Corporation) with several indigenous Mtis settlements to commercialize
250,000 hectares of valuable land they own in Alberta, Western Canada.
Over the past year AEG has invested in research and development of important
new environmentally-friendly technologies, including biomass fuel pelleting
solutions that will materially increase the caloric value of wood chip from waste
residue, and allow the switch from burning coal to clean energy power
generation with no cost of retro-t for existing coal-red power stations.
Overview
AEG operates a wood chipping facility at Yuzhny Port on the Black Sea with a
current nominal processing capacity of 960 tonnes per day (313,500 tonnes per
annum, assuming 330 working days). The company has supply contracts with
more than 30 state-owned forestry enterprises in Western and Central Ukraine
to provide hardwood and softwood timber feedstock (primarily logs, technical
lumber and forestry residues). We estimate that in 2014 AEG produced approx.
210,000 tonnes of MDF-quality wood chip (1H2014: 61,185 tonnes).
In the near future, the company plans to extend its production capacity by 120130 tonnes per hour (500,000-560,000 tonnes per annum) by installing another
xed wood chipper at Yuzhny Port. Assuming that the additional facilities will be
commissioned by 2H2015, we estimate AEGs annual capacity at 580,000
tonnes in 2015, or up more than 163% y/y, and 780,000 tonnes onward.
The wood chip is delivered by sea to Turkey, where it is used in the production
of Medium-Density Fibreboard (MDF). Turkey is the largest manufacturer of MDF
in Europe, producing 4.3 million m3 in 2013 from six major plants, most of which
are located close to the Black Sea.
Location of AEGs facilities
600
500
210
It is worth noting that supplying wood chip from Ukraine has a number of key
advantages over traditional transatlantic supply sources, as transportation costs
are signicantly lower and shipping times considerably shorter, which provides
manufacturers with substantial cost savings and cash ow advantages, as well
as fresher product (a key requirement). Thus, we believe that AEG can exploit
these advantages to greatly increase its share of Turkish MDF wood chip imports.
On 12 January 2015 AEG announced that it will expand its MDF wood chip product
offering to include Pine-based softwood wood chip in 2H2015, which we believe
will open further long-term supply opportunities and give further certainty to
volume enhancements.
4
The TIS terminal is Ukraines largest dry cargo port with freight turnover of 21.4
million metric tonnes (MMTs) in 2013 and approximately 26 MMTs in 2014. Its
deep berths are capable of receiving Panamax-class vessels, which could carry
as much as 40,000 metric tonnes (MTs) of wood chip (a substantial increase
over the 14,000 to 16,000 MTs capacity of the vessels that the company is
currently utilizing on a time charter basis). In fact the port is capable of receiving
Cape Size vessels of well over 100,000 MTs capacity, but these vessels are not
used for wood chip. AEG currently uses the MV Sider King (14,000 MTs) and
the MV Amar Meray T (16,000 MTs) and is negotiating time charter
arrangements for another two dry bulk vessels to support its increased shipping
volumes.
5
Canadian JV
Metis settlements location and
Alberta topographic map
Overview
AEG holds a 45% stake in KAQUO Forestry & Natural Resources Development
Corporation (KAQUO), a Canadian-incorporated joint venture company that it
formed with Grand Chief Ronald M. Derrickson of British Columbia and three of
the Mtis Settlements of Northern Alberta in Western Canada, owners of large
areas of valuable land, which include standing prime forestry assets.
KAQUO has the exclusive right to commercialize over 250,000 hectares of
timberland on the Paddle Prairie and Peavine Settlements, of which 108,147
hectares of mature forests contain some 34.8 million m3 of merchantable timber
(approximately 70% hardwood and 30% softwood).
The Paddle Prairie Settlement spans over 169,000 hectares and contains
approximately 58,000 hectares of commercially viable timberland, while the
Peavine Settlement spans over 82,000 hectares and contains approximately
50,000 hectares of merchantable timber.
KAQUO holds a 197-year exclusive license on the total area of 250,000
hectares, and has already commenced the process of marketing Tree Farming
Permits to investors for a period of 99 years with a possible extension of another
98 years. Current monetization opportunities include saw-log export, pulp and
paper production, sawmilling, panel board manufacturing (MDF and OSB) and
biomass fuel processing.
We believe that KAQUO will realize the full value of the Tree Farming Permits
over the next few years. The company may initially operate the forestry assets to
enhance the value of an operating business and establish the licenses. Upon
establishment of operations, the sale of Tree Farming Permits would likely be at
the higher end of the value range approximately USD 3,300 per hectare.
At a recent economic development summit in Edmonton, AEG management
revealed that several investors were interested in buying Tree Farming Permits
and/or nancing their joint venture with the Mtis Settlements, and that some of
them were looking at the option to nance the establishment of an operating
business with KAQUO. The decisive factor will be the value of the Tree Farming
Permits and the desire of the partners to operate a business.
It is also worth noting that the partners in KAQUO have long experience in the
timberland business: the Mtis have a history of operating as contract loggers
for the forestry industry, while Grand Chief Derrickson, Chairman of KAQUO,
pioneered the modern large-scale aboriginal forestry business as Chief of the
Westbank First Nation in British Columbia. From its side, AEG has expertise in
value added wood processing facilities including logistics and biomass power
station supply. Furthermore, the JV will offer direct employment for the Mtis
and the opportunity to participate in work skills programmes including
arboriculture and logging qualications.
As was mentioned at the recent Mtis Economic Development Summit in
Edmonton, AEG has strengthened their management team for the KAQUO joint
venture with the appointment of three individuals specically engaged for the
development of the Canadian forestry business.
Canadian JV (continued)
Paddle Prairie
The Paddle Prairie Settlement is located in Northern Alberta, Canada within the
County of Northern Lights and adjacent to Mackenzie County. Its area is
reported at 169,069 hectares. The Settlement develops along the Mackenzie
Highway (Highway 35), approximately 52 km south of the Town of High Level.
Furthermore, the Settlement is connected to Edmonton via the Canada National
(CN) Railway Network.
Paddle Prairie Settlement map
Canadian JV (continued)
Peavine
The Peavine Settlement is located in Northern Alberta, Canada within the
Municipal District of Big Lakes. Its area is reported at 82,364 hectares. The
Settlement develops around Highway 750 to the northeast of High Prairie, and
is connected 50 km South to High Prairie through Rd 679, which is connected
to Edmonton via Hwy 2, 43 and 44 (average distance is 365 km). Peavine is
also connected to Edmonton via the Canada National (CN) Railway Network.
Peavine Settlement map
Canadian JV (continued)
Commercialization opportunities
According to the statements of the companys management, there are several
commercialization options for the KAQUO joint venture, including operation of
the raw material business (exporting saw-logs and selling wood pulp locally),
building a biomass-fuelled power plant that will incinerate waste material from
main forestry operations (thinnings and tree-tops), and selling Tree Farming
Permits to third parties (timber industry operators and TIMOs).
However, due to the lack of actual data on the biomass-fuelled power plant, we
analyzed the commercial possibilities of entering into the wood farming
business. Due to the differences in wood type and quality, there are two
separate markets that should be considered in this case:
1.
2.
According to the forest survey, with 2% of the total forest area (approx. 108,000
hectares of commercially viable timberland) being cut annually, production of
pulpwood at Paddle Prairie and Peavine could reach 388,000 m3, although this
gure could be higher as there has been no harvesting for many years.
The most viable commercialization strategy would be to supply the volume of
larger saw-log (greater than 20cm in diameter) to Asian and Far East export
markets (China, Japan, Korea) with the smaller saw-log (less than 20cm in
diameter) supplied to local pulp factories, as both settlements are located within
a 150km range of the nearest pulp mills (for example Daishova-Marubeni Intl).
Estimated costs and prices of wood pulp
40
30
average price
20
10
0
Paddle Prairie
Logging
Peavine
Transportation
Considering transportation costs (USD 6-7 per m3) and logging costs of around
USD 12-13, as well as current low market prices of Northern pulpwood at USD
25/m3, this yields an operating margin of USD 4-5/m3. As a result, we
understand that this is not considered to be a core business, but will provide a
contribution margin to the overall timberland operations.
10
Canadian JV (continued)
Annual production of saw-logs from both Settlements is estimated at 368,000
m3. The logs can be transported to a collection yard close to the intermodal
terminal in Edmonton, loaded in containers and shipped via railcar to the point
of export (Vancouver port facility).
In this case, however, transportation expenses will be much higher reecting
additional costs for railway transportation, transloading, and container shipment.
We estimate total CIF China costs to be around USD 100/m3 for Peavine and
USD 118/m3 for Paddle Prairie (the higher cost for the latter is explained by a
larger distance to container terminal), while import prices of lumber in China vary
in the range of USD 130/m3 (hardwood) to USD 160/m3 (softwood). Overall, we
expect that the total operating margin for lumber shipments will be 23-25%.
Estimated costs and prices of saw-log
160
140
120
100
80
60
40
20
0
Paddle Prairie
Logging
Transportation
Transloading
Peavine
Container handling
Shipping
Stumpage fees
Additionally, we expect that around USD 1,500/hectare (or USD 3-4/m3) should
be spent on planting, although these expenses can be delayed by 2-3 years.
However, this is outweighed by the change in fair value of biological assets,
which should be in the range of USD 8-10 million (assuming a 2% rate
of growth).
The total sales volume is expected to be around USD 62 million (of which
roughly 16% will be generated by pulpwood sales, and 84% by lumber
shipments), with an estimated net income of USD 17 million (accounting for the
organic growth of forest, and assuming a total income tax of 25%). Assuming an
after-tax cost of capital of 7% and a terminal growth rate of 2%, this translates
into a fair value per hectare of USD 3,200.
11
The volume of woodstock harvesting from all types of logging in 2013 amounted
to 18 million m3 (SAFR14.4 million m3). Logging volumes were far below the
allowable cut limit, while the overall annual growth of wood in the forests
managed by SAFR reached 24.6 million m3. This policy has allowed Ukraine to
expand its timberland area by 1%, and increase woodstock inventory by 12%
over the last 10 years.
AEG has concluded long-term contracts with 30 state-owned forestry
enterprises to secure supplies of raw materials to produce wood chip. Raw
timber (primarily non saw-logs, technical lumber and forestry residues) is
delivered by rail to the companys processing facilities at Yuzhny Port.
12
700,000
Wood sawn/sliced/chipped
600,000
500,000
400,000
300,000
200,000
100,000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e
Last year, Ukraine exported 207,000 tonnes of sawn, chipped and sliced wood
worth USD 47 million to Turkey, while total exports amounted to USD 273
million. At the same time, the countrys exports of wood chip amounted to
195,000 tonnes or USD 19 million, 128,000 tonnes of which was supplied to
Turkey.
In 2013, the Turkish MDF market was estimated at 4.3 million m3 produced
annually, with approximately 9-10% of the end product shipped to the Middle
East and Europe. According to the UNECE/FAO forecasts, Turkey should
produce 5.0 million m3 of MDF in 2015, and export 583,000 m3 of it abroad.
Turkeys production of MDF (000 m3)
5,000
4,000
10y C
AGR:
2 4%
3,000
2,000
1,000
0
2004
2005
Source: FAOSTAT
13
2006
2007
2008
2009
2010
2011
2012
2013
8.4
1200
8.8
6.9
1000
4.7
4.1
2.1
800
3.0
600
0.7
400
200
-4.8
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e
Source: OECD
The Turkish construction sector, however, was performing much better than the
economy as a whole, growing by 7.1% in 2013 and becoming one of the main
drivers of the local economy. The construction permit statistics point to a
sustained growth of the sector in 2014.
In 2013, the government introduced an Urban Transformation project, which
envisages the demolishing and renewal of millions of buildings (6.5 million over
the next 15-20 years) deemed to be unsafe in the countrys earthquake-prone
regions. The project is likely to induce a higher rate of growth in the construction
and related industries.
According to IBS Consulting, the Turkish breboard industry is expected to
grow by 8% annually reaching USD 2.7 billion by 2017, while the production
level is expected to reach 5.6 million m3.
14
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
420
404
394
377
2009
2010
15
2011
2012
2013
Out of the total timberland area, 153 million hectares of forests have been
independently certied as sustainably managed. It is worth noting that about
90% of Canadas forests are publicly owned. Provincial governments regulate
harvest levels on provincial Crown lands by specifying the annual level of harvest
allowed on a particular area (annual allowable cut or AAC). However, according
to NRCan, Canadas estimated sustainable wood supply is currently much
higher than the annual volume of harvested timber (227 million m3 vs. 148
million m3 in 2012).
16
It should also be noted that while the MPB epidemic has now spread into
Alberta, the forests in the Paddle Prairie and Peavine Settlements are mostly
composed of Spruce and only a small amount of Pine. Furthermore, the latest
maps of MPB population prepared by the Environment and Sustainable
Resource Development Ministry of Alberta show either no MBP infestation or a
decreasing population of MBP near the Settlements.
The reduction of the annual allowable cut in Quebec and Ontario provinces will
also affect the North American timber supply in future. Reductions in Quebec
began in 2008 as a result of the Coulombe Commission report on the
sustainability of public-forest management, which concluded that the forests
were overharvested and recommended a 20% cut in production. However, the
provinces authorities later introduced a 35% reduction in AAC.
17
1,200
1,000
sawn softwo od
industrial roundwood
30,000
800
20,000
600
400
10,000
200
0
2009
2010
2011
2012
2013
2014
2009
2010
2011
2012
2013
Source: UNECE/FAO
Another big export market for Canadian lumber is China. Shipments of softwood
lumber to China have been rising steadily over the past few years, reaching 7.96
million m3 in 2013 (12 times as much as in 2007). We believe that the growth of
exports to the region will slow down in 2015 due to Chinas economy losing
steam, but Canada is likely to stay one of the key exporters.
Monthly shipments of softwood lumber to China (000 m3)
1,000
US
Canada
800
600
400
200
0
Oct-07
Oct-08
Oct-09
18
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
sawlogs
pulpwood
80
60
40
20
0
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
At the same time, average coast log prices for SPF (Vancouver log market) were
USD 116-117/m3 in October, while prices for Birch and Alder were in the range
of USD 55-65/m3.
US prices of framing lumber have failed to recover from a sharp selloff in spring
2013 after disappointing housing starts data, and stayed in the range of
USD 350-400/1,000 board feet (tbf) in 2014. However, positive economic data
on the US economy (+5% GDP growth in 3Q2014) and revival of housing starts
gives hope for a rebound of prices in 1Q2015.
US prices of framing lumber ($/1,000 board feet)
500
450
400
350
300
250
Jan-13
Apr-13
Jul-13
19
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Location
Acres of
timberland
Deal size,
$ mn
$/acre
$/ha
Mar-14
US/Georgia
36,340
74
2,036
5,032
Sep-13
US/Alabama
72,000
90
1,250
3,089
Jul-13
US/Virginia
39,945
17
413
1,021
Jun-13
Canada/British Columbia
634,000
170
1,073
2,651
Apr-13
US/Georgia
46,000
72
1,565
3,868
Dec-12
Texas
62,600
88
1,406
3,474
Oct-12
US
29,300
21
700
1,729
Oct-12
US
2,000
1,000
2,471
May-12
US
4,700
1,766
4,364
Dec-11
US
7,400
797
1,970
Nov-11
US/Texas
7,000
12
1,763
4,356
May-11
US
2,600
2,346
5,797
7,678
22
2,867
7,084
14,280
18
Feb-11
Sep-10
Canada/British Columbia
US/Texas
1,268
3,132
Average
1,446
3,574
Median
1,337
3,303
Considering the recent increase in the price of softwood lumber, as well as likely
shortages of supply from the British Columbia due to the MPB (mountain pine
beetle) infestation, we believe that the timberland assets of KAQUO may be
priced close to the median level for comparable transactions at USD 3,300 per
hectare (USD 1,330 per acre), which brings the total possible cash ow to AEG
to about USD 130 million (assuming that 90% of the revenue of the KAQUO JV
is immediately distributed as dividends, and a 10% tax rate is applied on
dividends under the Canada-UK legislation on avoidance of double taxation).
It is reasonable to assume that the company will be able to sell Tree Farming
Permits for several areas of the timberland controlled by KAQUO, rather than the
whole asset itself. Thus, selling a permit for 25,000 hectares (61,750 acres)
could net AEG a total of USD 30 million in dividends (after taxes). We believe
that KAQUO will be able to commercialize the entire asset in 2-3 years.
20
Wood pellets
11%
Sawdust and wood waste
13%
383
327
262
213
56%
Fuel wood
14%
403
457
2009
2010
549
284
456
504
2012
2013
2011
The majority of coniferous wood chip was also imported from the EU-28
countries (72%), while Russia and Belarus accounted for another 25% of total
exports to the EU (in value terms). However, the share of intra-EU shipments of
hardwood chip is only 43%, while major exporters are Uruguay (34%), Germany
(8%) and Russia (7%).
The demand for woody biomass is mostly driven by the evolution of the biomass
power plant industry. Thus, according to Ecoprog, at the beginning of 2014
there were around 1,200 active biomass power plants in Europe. This number is
expected to grow to approximately 1,750 by late 2023. In South Italy alone, the
total feedstock demand of biomass power plants is forecasted to increase from
1.1 million dry tonnes p.a to 1.7 million dry tonnes p.a. due to new projects
coming online in future, according to Pyry.
21
Source: BiomassTradeCentre
Source: BiomassTradeCentre
Over the rst half of 2014, in Croatia, Romania and Germany prices of wood
chip have increased by about 7% and 8% respectively compared to 2H2013. In
Austria the prices decreased by around 11% and in Ireland remained at
approximately the same level.
22
Management team
Richard Spinks, Chief Executive Ofcer
Mr Spinks is a seasoned entrepreneur, with a proven track record in business
development within the hi-tech, food processing, agriculture and forestry/
biomass industries. He has worked in Central and Eastern Europe since 1980,
gaining vast experience and a network of high-level contacts across different
industry sectors in a number of emerging markets, including Russia, Ukraine
and Poland. Prior to his appointment as Chief Executive Ofcer at Active Energy
Group Plc in 2012, he founded and served as Chief Executive Ofcer (20042009) at Landkom International Plc, the rst AIM-listed company in the
agricultural sector, based in Ukraine.
Matteo Girlanda, Chief Operating Ofcer
Mr Girlanda has over ten years experience in pan-European wood trading,
processing and logistics for the biomass fuel and MDF manufacturing sectors,
as well as considerable knowledge of forestry management, renewability and
sustainability. He has worked in Ukraine since 2005, initially as Director of ICL
Ukraine (2005-2011), a wood chip processing and shipping company. He then
founded and headed up Nikofeso Group, which owned and operated highvolume wood chip processing, logistics and port facilities in Western and
Southern Ukraine, and which he developed to become the countrys leading
exporter of wood chip to the EU and Turkey.
Brian Evans-Jones, Chief Financial Ofcer
Mr Evans-Jones is a qualied Chartered Accountant, with many years
international experience working with start-ups and established businesses
across a broad range of industry sectors. He has acted as a consultant to,
ofcer of, and investor in a number of businesses in the food, manufacturing,
construction and property sectors across the UK, Europe and CIS, including
several turn-around situations and early stage companies. His clients have
included Harsco Inc., Ensemble Combined Services, Celtic Oriental,
Boditronics, Ty Nant Spring Water (where he was a Founder and Finance
Director) and Seconds Ahead.
Frank Lewis, Non-Executive Chairman
Mr Lewis is a highly-experienced and accomplished public company director,
having served as Non-Executive Chairman and Director for a number of
international publicly-quoted rms with interests across the UK, Europe, Far
East, Middle East and Africa. He is a Fellow of the Institute of Chartered
Accountants in England & Wales and serves as a committee member for its
special interest group for Non-Executive Directors, and was previously a
member of the AIM Advisory Council, which advises the London Stock
Exchange on matters relating to the AIM market.
Giuseppe (Joseph) Valoroso, Non-Executive Director
Mr Valoroso has been involved in the forestry and timber products industries for
almost ve decades, and has signicant experience in large-scale commercial
logging operations. He founded his rst logging rm in British Columbia in 1965;
before establishing Valoroso Logging (1972-1987), which he developed to
become the largest logging company in the territory, supplying large volumes
(up to 3,000 m3 per day) of high-quality timber to sawmills and wood
processing rms throughout the region.
23
DCF valuation
Assumptions
For the purposes of this valuation we excluded any cash ow to/from AEGs
BFE fuel pellet division, as the technology is still in its early stages and cant be
valued properly on the data we have right now.
We estimate that the company will be able to gradually ramp up its wood chip
for MDF division to 700,000 tonnes supplied in 2017-2019 due to a planned
increase in production capacity from 80 tonnes per hour to 200 tonnes.
However, we conservatively assume that AEG will limit its sales of Biomass for
Energy (BFE) to 50,000 tonnes annually as currently margins remain quite low.
We estimate that the companys MDF wood chip gross margin will improve to
about 24% in 2015 on back of the positive effect of the Ukrainian hryvnia (UAH)
devaluation on costs, but gradually decrease to 16% in 2019 as cost ination
catches up, while a strong US dollar and weak Turkish lira will not allow wood
chip prices to increase substantially.
As for the BFE segment, we estimate that margins will eventually improve to
about 10% in 2017 as the company improves the efciency of its operations.
Parameter
2014
2015
2016
2017
2018
2019
210,000
500,000
600,000
700,000
700,000
700,000
42,629
25,000
50,000
50,000
50,000
50,000
109
109
109
109
109
109
81
76
74
77
79
81
13%
24%
21%
18%
17%
16%
0%
3%
5%
10%
10%
10%
2,523
4,627
5,672
6,575
6,584
6,594
800
2,000
250
250
250
250
USD:UAH
12.50
25.00
25.50
26.01
26.53
27.06
EUR:USD
1.25
1.05
1.00
1.00
1.00
1.00
Volumes, tonnes
Prices
Gross margin
Other items
Working capital
CAPEX
Exchange rates (avg)
We expect that the companys working capital will be around 30 days of sales,
as shipping time is relatively small, while payment from clients is usually
delivered without delays.
Moreover, we forecast that the company will need about USD 2 million of
additional investment to expand the capacity of its MDF wood chip division in
Yuzhny Port and install equipment needed to produce softwood wood chip
(log debarker).
As for the value of the companys share in KAQUO, we assume that the JV will
be able to sell Tree Farming Permits for 108,000 ha over a two-year period at a
price of 3,300/ha, which brings the total possible cash ow to AEG to USD 130
million (assuming that 90% of the revenue of the KAQUO JV is immediately
distributed as dividends, and a 10% tax rate is applied on dividends).
24
2014e
(1,394)
2015f
4,697
2016f
7,793
2017f
8,332
2018f
8,524
2019f
7,799
148
10,115
10,433
10,887
10,001
9,087
18%
18%
18%
18%
18%
18%
- Tax
(27)
(1,821)
(1,878)
(1,960)
(1,800)
(1,636)
+ Depreciation
308
508
533
558
583
608
(800)
(2,000)
(250)
(250)
(250)
(250)
- WC change
(1,023)
(2,104)
(1,044)
(903)
(9)
(10)
WACC
27.5%
27.5%
27.5%
27.5%
27.5%
27.5%
Discount factor
0.82
0.65
0.51
0.40
0.31
Time factor
1.00
1.00
1.00
1.00
1.00
3,873
5,041
4,228
3,394
2,436
- CapEx
FCFs Discounted
WACC to perpetuity
Sum of FCFs
Terminal growth rate
20%
18,972
3.0%
Terminal value
47,253
NPV of TV
14,761
WACC calculation
Risk-free rate (UST)
2.3%
Unlevered beta
1.00
Levered beta
1.49
5.6%
33,733
23.5%
114,206
34.2%
147,939
18.0%
AEG premium/discount
10.0%
Tax rate
18.0%
0.260
23.0%
Current value
0.076
%D
60%
Upside
244%
%E
40%
TV contribution to EV
Segment value
44%
-1,825
-1,048
Equity value
Value per share, USD
145,067
WACC (USD)
25
27.5%
P&L statement
USD 000
Sales
COGS
Gross prot
Gross margin
Admin. Expenses
EBIT
EBIT margin
Finance cost
EBT
Taxes
Net income
NI margin
2014
26,312
-23,414
2,898
11%
-2,750
148
1%
-1,050
-902
0
-902
-3%
2015
56,298
-43,159
13,139
23%
-3,025
10,115
18%
-625
9,490
-1,708
7,781
14%
26
2016
69,004
-55,395
13,609
20%
-3,176
10,433
15%
-600
9,833
-1,770
8,063
12%
2017
79,995
-65,773
14,222
18%
-3,335
10,887
14%
-700
10,187
-1,834
8,354
10%
2018
80,111
-66,608
13,502
17%
-3,502
10,001
12%
-700
9,301
-1,674
7,627
10%
2019
80,229
-67,466
12,763
16%
-3,677
9,087
11%
-700
8,387
-1,510
6,877
9%
T/F:
Sales:
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Equity Research
Eugene Petrusha
About us
Empire State Capital Partners is a full service investment company with Western roots headquartered in Ukraine. We
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brokerage, asset management and structured products. Our team is comprised of experienced professionals from
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