Hei,
Kopierer inn min analyse av Skandia GreenPower her, som jeg syns er et meget interessant setup. Den er skrevet på engelsk, håper det er ok.
Skandia GreenPower (SKAND.OL)
Current Price: 0.75 NOK
Market Cap: 42.48m NOK ($3.9m USD)
CEO ownership: 71%
Background
Skandia GreenPower is a Norwegian electricity provider. It buys electricity from producers at spot (price) and sells it to consumers at spot while charging a small fee for doing so. There’s close to no competitive advantage in the industry, it’s known to have a lot of sleezy CEO’s who try to trick their customers, and companies are willing to acquire customers at a loss. To be frank, it’s a shitty industry.
Skandia GreenPower IPO’d in February 2021 at the heights of the stock market craze. A lot of well-known Norwegian investors and VC funds owned the stock and the IPO was very public. Since then the stock is down 94% - go figure. By late 2022 the company was close to bankruptcy having burned through close to 200m equity in 2 years. I won’t go into the full story of how the former management team and board ran the company but suffice to say it was a shit show.
Enter current CEO Tommie Rudi. In February of 2023 he bought 71% of the company for 12.5m, which valued the company at 17.6m. The first thing he announced was a cost cutting program with the aim of turning the company profitable by the end of 2023. He also changed the entire board right away. By August the company announced they had now successfully turned around the company and it now had operating profit and expect to be profitable going forward. So within 6 months Tommie had cut 80% of opex and capex, without hurting revenue, and turned the company profitable. Whether that’s impressive by Tommie or just shows how inept previous management was – I’m not sure. It’s probably a bit of both.
Let’s address what most readers are probably thinking after reading the previous paragraph. How can we trust that they are actually profitable? They haven’t released any financials since filing the 8K in September. Also, the 8K said they reached operating profitability which does not necessarily equate to cash flow positivity. All fair pushbacks. First, we do not know if they are actually profitable going forward, or if they have been since August. But given that they filed an 8K saying they had operating profit in August, we can feel pretty confident that’s true at least. Other than that, you simply have to decide if you trust Tommie or not when he says they are going to be profitable going forward. Regarding their cash conversion, we can’t be sure about that either. The company has no interest bearing debt, they don’t pay taxes, and they have a history of having some financial income on their P&L (we’ll get back to the last two points later). So their net income should actually look better than their operating result. In terms of cash flow, this is a negative working capital business. They pay the electricity producer after they have received payment from their customers. It’s not totally correct to say they get paid up front, but it has the same effect. With that detail disclosed, and looking at previous cash flow statements, this company should be cash flow positive as long as net income is positive. But again, we can’t be 100% sure of this since they haven’t filed any financials since the 8K. Also note that they have cut all capex.
Opportunity
Sure, so the CEO has turned around the business (if you choose to believe the company), but this is still a shitty commodity business. What’s the opportunity here? Luckily, it has nothing to do with business quality, revenue growth, margin expansion, or all the other aspect one can look at when assessing a business. This opportunity is all about valuation and the balance sheet.
I have spoken to Tommie on several occasions and one of the questions I was keen to ask him was; why did you buy this unprofitable company that is soon to go bankrupt? He highlighted a few reasons:
- He thought he could turn the company profitable with 12.5m-20m. We now know he did it with only 12.5m.
- He saw that the company had a tax benefit which was worth multiples of the market cap at the time.
- He saw that he could sell the part of the customer portfolio that was unprofitable.
- He saw that the company had contractual rights on guarantee of origin quotas worth millions.
- The portion of the customer portfolio that was profitable had value.
- And while he didn’t say it in so many words, I got a strong impression that he intends to sell this company.
So let’s go through those points.
Tax benefit
Skandia has a tax benefit on their balance sheet with a book value of 46.7m. I should clarify, the tax benefit isn’t actually on the balance sheet in the sense that it’s not included in their assets. Any company that isn’t expected to be in a position to utilize the tax benefit in the foreseeable future should not book their tax benefit as a “precautionary consideration”. They only need to disclose it through the notes. So in order to figure out that the company actually has this tax benefit, one would have to read the notes. But now that the company is profitable I believe they can book the tax benefit on their BS again, which will highlight the value without having to read the notes. The tax benefit wouldn’t be interesting for just any buyer as it would have to be a buyer within the same industry to allow them use the tax benefit. Good thing this is an industry riddled with M&A. The only “downside” is if the company doesn’t get bought within a reasonable amount of time, as they can then start to eat into the tax benefit because they are profitable. The tax benefit has a 1:1 value, while we don’t know what management would spend the “untaxed” money on.
Customer portfolio
As part of the cost cutting program, the company sold their customer base which used the platform that former management had developed called “Elkompis”. These were unprofitable customers and Skandia sold the customer portfolio to Klarkraft in exchange for 18% of Klarkraft, which at the time was worth around 5m.
Guarantee of origin quotas
Another item that is not the balance sheet, and that one simply can’t calculate the value of, is the guarantees of origin quotas that the company reserved the rights for a couple of years ago. According the Tommie, the one good thing that former management did was to reserve the rights on “a ton” of guarantee of origin quotas, as these have a cost basis of roughly 0.3kr/kwh while the current quotas have a cost of 0.5kr/kwh. The current market price to customers is 0.10kr/kwh. Meaning the company, and a potential buyer, has an additional 0.2kr in revenue at 80-90% margins on every quota sold. According to Tommie, these guarantees are worth “millions”. I also spoke to an investor who was offered to buy Skandia before Tommie did, and he simply said “this is for real” – referring to Tommie saying they are worth millions. The investor I spoke to did not know the exact value, but he did buy shares in open market recently which probably tells us he thinks the company is undervalued as well. The reason we can’t calculate the value of these ourselves, is that they are only expensed as they are used. The rights themselves has no book value, it’s only contractual and no money is exchanged before the guaranteed is bought buy the customer. Again, it’s difficult to assign any value to the guarantees, but with the guarantees being one of the main reasons Tommie bought the company, I think there is validity to it.
Current customer portfolio
The remaining 15k customers in Skandia (after the sale of roughly 4k customers to Klarkraft) are all profitable. It’s difficult to assign a value to these as well. In one of my talks with Tommie, he mentioned the number 33m. I’m not sure where he got that from, but I think he simply used the market cap of the company before he bought it at a steep discount. This is probably too simple of an analysis, but it shows his mindset and what he believes the current customer portfolio is worth and what he would sell it for.
Net cash
I will add that even with the high accounts payable, the company is trading at net cash. The company uses provision for losses on AR of roughly 5% based on data from Intrum. As of 1H23, the company had 18.8m in AR (adjusted for losses of 5%) and 64.4m in cash. They had 60.4m in accounts payable. Meaning their net cash position, assuming that they won’t see higher AR losses than 5%, is 22.8m.
Other tidbits
While there’s no use in doing business analysis here, there’s a few other aspects worth mentioning. The fact that Skandia has a contract that allows them to get paid by their customer before paying the electricity provider is very rare in this industry. It also de-risks the company, as it results in them having financial income in the form of interest when the electricity price goes up. For competitors, it’s a huge risk when the electricity price goes up, as they risk having to buy electricity at higher prices than they can sell it. Tied to this is the fact that Skandia only has variable contracts and not fixed contracts like many others do in the industry.
Secondly, most competitors try to acquire customers at any cost. Yearly revenue per customer is usually around 1500kr/year. Most companies in the industry is willing to have a CAC of 3-4500kr, meaning they have a payback period of 2-3 years. They do this with hopes of selling their customer portfolio to a competitor before they run out of money. Skandia is not focused on high growth. They have a steady portfolio of 15k customers, with minimal churn. Their CAC is 1000kr, which means their payback period is 7-8 months. Not focusing on massive growth, and growing at any cost, allows Skandia to be profitable. And with the underlying values in the company, we don’t need them to grow. We don’t want them to grow. We want them to be profitable and retain the cash.
Both a board member and the CFO bought shares in the open market recently in the mid to high 0.4’s. Always a good sign when a CFO buys shares given the balance sheet play that this basically is.
Lastly, in terms of valuation we have a few comps. While there is a ton of M&A in this industry, most of the deals are private and so it’s difficult to find the valuations. But if you look at what profitable, publicly traded, electricity companies such as Skandia has historically traded at and been bought for (in Norway), it’s been fairly consistent at roughly 3x net revenue. Skandia should end the year at around 20m in net revenue which suggests that their current portfolio of customers should be worth 60m. I think that’s high, which is why I have used Tommie’s number of 33m, but the 3x net revenue is worth noting.
What gives me comfort with Tommie at the helm, is that he has basically done everything he said he would do, and he highlighted that he is fully aware of the underlying value in the company. He also told me that in the event of a bid for all or parts of the company from a third party, or purchase options with settlement in new Skandia shares, the board will emphasize underlying values in its recommendation, not just the share price at the relevant time. Sure, it might be all talk, but he’s saying all the right things and in my opinion his actions thus far are backing it up.
Adding it all up
At 0.75kr per share, the math looks something like this:
As one can see, the upside is significant here. Even if you want to discount the cash and/or the current customer portfolio, the upside is attractive. This is without giving any value to the guarantees of origin, which if we are to believe Tommy, is worth millions. The big question is obviously how one is going to extract this value. As previously mentioned, I think Tommie is looking to sell this company. That’s the strong impression I got from talking to him at least. The company also released news on November 2nd stating that they are now assessing strategic alternatives and has started initial dialogues with several actors, adding to my inclination that this company will get sold. With Tommie’s previous comments regarding not looking at the share price when determining the value of the company, and the fact that he is highly incentivized to maximize shareholder value through his 71% ownership stake, I believe shareholders are in good hands when it comes to unlocking the underlying value in Skandia GreenPower and that we won’t have to wait long.
