A fair wind
A month ago Renewable Energy Generation (WIND: 49p), an Aim-traded renewable energy company with 11 wind power projects on the go, and bio-power plants too, received an unsolicited non-binding approach for its trading subsidiaries from a buyer who is described as a “highly credible, fully funded counterparty able to implement the offer through a streamlined and timely acquisition process”. I would point out that the potential offer is not for the company’s shares, but for its assets, and is pitched at around 60p a share, or £62m.
This represents a sizeable 61 per cent premium to Renewable Energy Generation’s share price prior to the news breaking and the share price immediately rose from 37.25p to a high of 56.5p. But it has drifted back since then and currently trades on a bid-offer spread of 48p to 49p which is why I am now interested in this bid situation. That’s because if the bid materialises, and it has been pitched below Renewable Energy Generation’s last reported net asset value of £72m, then there is a potential 22 per cent share price rise on offer. In this scenario, the independent directors will put forward proposals to cancel the Aim listing, put the company in voluntary liquidation, and return available cash to shareholders.
If forthcoming, it’s an offer I can see shareholders accepting as the share price has been under pressure for the past 18 months, losing half its value, and even after the recent rise is still less than half its listing price in 2005. The industry backdrop has not been favourable as the UK government’s decision to close the Renewables Obligation one year early for onshore wind farms has created considerable uncertainty. In addition, the retroactive removal of Levy Exemption Certificates for renewable energy generators and removal of support for large scale solar schemes are impacting the industry's cost of capital too.
That said, Renewable Energy is progressing procurement of four new UK onshore wind projects totalling 26MW: Mynydd Portref (12MW) in Wales; Rodbaston (4MW) in South Staffordshire; Brackagh Quarry (6MW) in County Derry; and French Farm (4MW) in Cambridgeshire. It is in discussions with potential funders for these projects which once operational will have a combined annual output of 65,000MWh, increasing its annual wind power output to 155,000MWh. These projects are unaffected by the early closure of the Renewables Obligation for onshore wind.
But other projects have been affected and the board are awaiting further clarity from government regarding support for its recently consented Welsh wind sites at Mynydd Brombil, Abergorki, and Pen Bryn Oer. As a result of these changes, Renewable Energy has undertaken a review of the carrying value of its capitalised development costs assets and will book a £7m non-cash impairment charge in the fiscal year to end June 2015. The balance of capitalised costs, a sum of around £6.5m, relates to projects which the board feel have commercial potential.
Those financial results were scheduled to be released last week, but have been postponed pending the outcome of the bid talks. In the meantime, Renewable Energy has confirmed that cash profits will be in line with market estimates of £1.3m, excluding the impairment charge.
End game for Renewable Energy
So what does the unnamed bidder get for its money? For starters, the company has a track record of developing, constructing and operating wind farms, and generating power from refined used cooking oil. It has also completed asset sales to its long-term partner BlackRock. For instance, the sale of two such projects to a fund managed by BlackRock in the first half of the 2015 fiscal year (June year-end) yielded net proceeds of £13.8m and a profit on disposal of £4.5m. And in February 2015, the company sold its 10MW Denzell Downs wind farm project to BlackRock Renewable Income UK.
Under the agreement, Renewable Energy will oversee construction of the project and operate the completed wind farm on behalf of BlackRock with the latter providing the funding. The company received an upfront cash consideration of £10.5m, with a further £3.9m payable following commissioning of the scheme, anticipated to be in early 2016, so will recognise an initial £11m of profit on the sale. Or put it another way, the profit generated on this sale exceeds the aforementioned £7m impairment charge on its existing projects, so the bidder is still getting its hands on at least £72m of Renewable Energy’s net assets for £62m. Deferred consideration from asset sales of £5.9m is recognised as receivables in the company’s accounts. Also, the company’s asset management business runs three projects on behalf of its partner BlackRock totalling 28MW, the income stream from which is expected to grow quickly.
It’s worth noting too that the acquirer will take on the net debt of the group too, so shareholders are not being left with unwanted liabilities. Renewable Energy had cash balances of £15.5m, including £2.7m restricted cash, and bank’s borrowings of £26m at the end of September 2015.
So taking into account the substantial asset backing, I still think the indicative price being offered is as attractive for the bidder as it is for shareholders of Renewable Energy. And with upside potential of 11p a share matching the likely downside in the event of a formal bid failing to materialise, then a small interest in the shares is worth having if you can stomach the risk. Speculative buy.
Plethora gets a boost
The other news that caught my eye was the bid approach from Hong Kong-listed Regent Pacific (Hong Kong Stock Code: 575), the investment vehicle of Jim Mellon, for Aim-traded Plethora Solutions (PLE: 5p), a UK-based speciality pharmaceutical company dedicated to the development and marketing of products for the treatment and management of urological disorders. Plethora's principal product is PSD502™, a prescription treatment for male premature ejaculation that obtained marketing authorisation from the European Commission in November 2013.
Regent Pacific and its concert parties together already hold 29.88 per cent of Plethora's issued ordinary share capital and their indicative offer has been pitched at 15.7076 new Regent Pacific shares for each Plethora share. On the basis of Regent Pacific’s share price of HK$0.10, and using a sterling to Hong dollar exchange rate of £1:HK$11.71, the potential offer values each Plethora share at 13.4p, the company’s issued ordinary share capital at £110m and fully diluted share capital (excluding the out-of-money outstanding options and warrants) at £131m.
This represents a thumping premium to Plethora’s sagging share price of 2.75p prior to news of the offer being made. But before you get too excited it’s worth flagging up that there is no cash element and Regent Pacific only has a market value of £30m. That’s less than Plethora’s market value of £41m and explains why there is such a big difference between the implied offer price of 13.4p a share and Plethora’s current share price of 5p. Still it’s fair to assume that a formal bid will be made as Regent Pacific has since received letters of intent from investors controlling 10.96 per cent of the Plethora’s issued share capital, so now has almost 41 per cent of the equity backing the bid.
Clearly, it’s not going to be possible for everyone to buy Plethora’s shares in the London market at 5p, sit back and wait for the formal bid to be made, and then sell your Regent Pacific shares immediately at 13.4p in Hong Kong. If every investor attempts to do this then Regent Pacific’s share price will fall sharply given that it is issuing 15.4bn shares or more than four times its current issued share capital. That said, one of the reasons Plethora’s shares were so weak in the first place was down to the fact that the company is short of funds, so the price has been depressed due to financial distress. Eliminate this factor and a higher valuation is warranted.
Prospects for PSD502™
Indeed, Plethora only has cash balances of £1m, and guidance is that commercial operations under its current operating plans will face a “significant negative impact in January 2016 in the absence of further funding being available to Plethora.” Regent Pacific has net cash and unpledged listed equity securities worth about £8.9m on its balance sheet which it can use in order to develop and commercialise PSD502™, and meet the substantial funding needs of Plethora in the near future.
Moreover, it is desirable to progress with planned expenditure in key areas which support the development and commercialisation of PSD502™, such as manufacturing of a reduced fill can for the product, and research and development spend associated with a New Drug Application approval with the US regulator. A key objective is to obtain EU approval by 30 June 2016 for its reduced fill product, such that Plethora can obtain the variation payment of €6m from its European licence partner Recordati (REC:MIL), a €4.8bn pharmaceutical group listed on the Milan Stock Exchange, in preparation for its commercial launch in the EU; and firming up licenses for other territories too.
Plethora’s board has had discussions with partners in Latin America, Asia Pacific and South Africa, and with a multinational pharmaceutical company for 'out licensing' the grant of rights by Plethora in respect of PSD502™ for countries in the Middle East. In all cases the parties have entered into non-binding heads of terms and have moved into discussions on the licence agreement which anticipate an upfront payment to Plethora followed by additional payments upon the achievement of certain milestones plus royalties linked to sales.
However, before negotiations can complete a reduced fill product for PSD502™has to be developed and manufactured under good manufacture practice conditions. And for that Plethora needs more funding. This is where Regent Pacific comes in.
Implied value of Plethora
Clearly, Mr Mellon and his concert party can see great potential in PSD502™otherwise the bid would not have been pitched at such an elevated level. Indeed, in the first half of this year, Regent Pacific acquired certain rights and obligations under a promissory note, worth up to £4.58m, in respect of services provided to Plethora in relation to out-licensing of PSD502™ under the Recordati agreement.
Furthermore, it’s worth noting that Plethora self-developed this product and had not capitalised any of the costs incurred, nor any of the future value it may derive. Regent Pacific, with the assistance of a professional independent valuation expert, Jones Lang LaSalle Corporate Appraisal and Advisory, determined the fair value of PSD502™ based on the “relief from royalty method” to be in the region of US$253m, or £167m at current exchange rates. This explains why Regent Pacific’s indicative offer values Plethora’s equity north of £100m. Only time will tell whether this is a fair valuation or not.
Frankly, whether or not PSD502™ is a success is not the issue here. I am far more concerned as to what will happen to Regent Pacific’s share price if it launches a formal bid and Plethora shareholders are then issued with a slug of equity. Realistically I can see the price in Hong Kong soften, but certainly not deflate by 60 per cent which is the implied discount in Plethora’s share price. In fact, I reckon that if Regent Pacific launches a bid there could be upwards of 50 per cent upside to Plethora’s current share price of 5p. The interest of Hong Kong investors is being aroused by the potential acquisition too which explains why Regent Pacific’s share price has perked up since news of its bid approach emerged. At around the 5p level, Plethora shares are worth having a small interest in. Speculative buy.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven-year high', 10 November 2015)
■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)
■ Epwin: Run profit at 138p ('Decked out for further gains', 10 November 2015)
■ Plethora Solutions: Speculative buy at 5p, target 7.5p; Renewable Energy Generation: Speculative buy at 49p, target 60p ('Playing the takeover game', 11 November 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
