Engie EPS (a play on Energy Transition)

Background and Business Update

Originally founded in the late 2000s from within the Politecnico de Torino university, Engie EPS (EPA:EPS / EPS / $EPS) (formerly known as Electro Power Systems) has grown from strength to strength and is currently a global leader in energy storage and eMobility. The early years of operations were focused on R&D and commercial development concentrating on emerging markets. The focus on the Asian markets did not deliver the expected results and hence in 2013 on the borderline of bankruptcy, the company underwent a corporate restructuring , led by one of its main shareholders (360 Capital Partners, an early VC Fund) to streamline operations and focus on activities in Europe and USA. At the time, the VC sent its own employee (Carlalberto Guglielminotti) to manage the process and extract any possible value from the existing assets. Upon arrival at EPS, Carlalberto started designing what he thought was a possible way forward and committed to becoming the CEO of Engie EPS should 360 Capital Partners believe in the plan. And believe it they did.

Two years after, in 2015, the business started getting commercial traction and upon discussions with investment banks decided to pursue an IPO to raise €15m. The IPO at ~€7 per share implied an Enterprise value of ~€50m. At the time, the business had some contracts in the pipeline (backlog of ~€2m for 2016) but the revenue in FY15 was only €0.4m. Nonetheless, the ambition and scale up of the business was evident, 29 employees in 2014 became 57 in 2015 and 86 in 2016. By the end of FY16 the company had generated €7.3m in revenue (and had a backlog of €6.4m), mainly through 1) microgrid installations and 2) hybrid energy storage systems. It was working with Enel, Terna, Toshiba, GE Energy, all across the globe, completing in total 36 large scale projects in FY16.

FY17 was another solid year for the company, with revenues up to €10m (and backlog of €25m). The strong growth of the company in a growing industry prompted Engie S.A. to acquire a 50.1% stake in the business in January 2018 at €9,5 per share, with Electro Power Systems rebranded to Engie EPS and continuing to be traded in the stock exchange.   

The growth continued under the Engie umbrella with FY18 revenue of €15.7m (and backlog of €36m), with the business benefitting from the focus on cleantech and renewables worldwide. The bulk of the projects making up the revenue continued to be 1) installation of microgrids, with the business now recognised as a global leader in this by consultants such as Navigant Research, and 2) energy storage (Solar + Storage installations). By the end of 2018 the business had grown to 100 employees.

2019 saw the introduction of a third segment to the business, eMobility, with focus on both charging stations and charging systems and benefit from the boom in EV sales. Revenues in FY19 continued to grow, with total sales of €20.2m (and backlog of €30m). The growth trend was halted with COVID-19 especially on projects in the USA, and the business ended FY20 with disappointing total sales of €11.1m (backlog of €33m). Despite this, Management re-affirmed its medium term strategy with FY22 revenue guidance of €100m and FY25 revenue guidance of €400m (excluding the eMobility JV which I will discuss below).

The positive news for FY20 was the development of the eMobility segment, with distribution of the easyWallbox charger (“plug and play” charger) starting in 19 European countries through an unofficial partnership with Fiat Chrysler at first (focusing on providing the charger for one Jeep and one Fiat model), and production ramping up to a target of 50,000 units per year (at June 2020). In November 2020, a memorandum of understanding was signed to set up a JV with Fiat Chrysler with the aim to become a European leader in eMobility. The FCA merger with the Peugeot Group was completed in January 2021, creating Stellantis. At the same time, Engie EPS announced that the JV agreement for eMobility would go ahead with the Stellantis group. On 31 March 2021, Free2Move eSolutions was announced and the JV transaction was concluded on 3 May 2021. Stellantis is investing heavily on the EV market and expects to sell more than 400,000 electric vehicles in Europe during 2021 (equivalent to 14% of sales), to up to 70% by 2030. In a recent investor presentation, Engie EPS Management confirmed that the JV is ramping up production to 100,000 units per year and based on the Stellantis ambition this will continue to increase. Engie EPS also stated that the JV will be consolidated at Engie EPS’s level so the revenue associated with this segment will start to be reflected in the back end of FY21 but more materially beyond FY21. Whilst there’s no guidance on revenue associated with the eMobility segment, Management sees this becoming as large as the existing business of microgrids and storage systems. A recent broker note from Societe General had forecast revenue for the eMobility segment of ~€90m in FY22. Management also highlighted that the capex for the eMobility segment would be fully funded by Stellantis so Engie’s EPS capex deployment would be limited.

In September 2020, Engie launched a strategic review of various non-core segments including its investment in Engie EPS. This process culminated with an agreement in April 2021 to sell their 61% stake in Engie EPS to a Taiwan listed industrial group (Taiwan Cement Company, TCC) for €17,10 per share, implying an enterprise value of ~€200m. Whilst the acquisition price was at a premium to the last 12 months share price, the Engie EPS hovered over €20 per share for various weeks during 2021. TCC in their stock listing disclosures assessed the fair value of Engie EPS to be €16.24-€21.92 per share, hence the proposed acquisition price was towards the lower end of the range. All in all it pointed towards being a decent deal for both parties with Engie booking a healthy gain on its 3-year investment and TCC getting a good deal compared to recent share price and comparable company valuations. Whilst not confirmed by any party, based on my perception of Engie EPS Management and the positive relationship existing between Engie and Engie EPS, it is likely that the preferred acquirer of Engie’s 60.5% majority stake was a strategic/industrial player that would be able to open some doors for Engie EPS to grow, rather than a purely financially driven player (hedge fund etc). I suspect this is why TCC might have got a better deal than the market expected. The transaction is yet to officially complete (subject to the usual financial market regulations and approvals) however TCC has already outlined (as explained by Engie EPS Management) it won’t force a squeeze of minority shareholders and wants the company to remain listed. TCC has historically focused on production of cement (and is one of the world’s largest manufacturers) and in the last couple of years has committed to achieving carbon neutral products by 2050. As a result, it is investing heavily in renewable energy and battery storage so the acquisition of Engie EPS fits very well with this plan. The company has a market capitalization of over $10 billion so has a scale of operations and relationships especially in Asia that would open doors to Engie EPS in the region. 

Investment Thesis

There a few main pillars that I think form the basis of the investment thesis:

• Industry: The business operates in various sectors that are expected to grow significantly in the next few years, some of which they are industry leaders such as the installation of microgrids. Yes there is competition on storage systems and eMobility but the expected industry growth is so large that even if Engie EPS capture a small fraction of the markets it will generate significant revenue.

• Valuation: Due to the expected growth in these industries, comparable companies and transactions tend to be at obscene multiples of sales. Engie EPS currently trades at 6x 2021E Revenue and 2x 2022E Revenue (excluding the eMobility segment which is not yet incorporated into the guidance). Consensus based on 2022 Revenue of €120m also forecasts EBITDA of €26m. So Engie EPS is trading at 10x 2022E EBITDA. Despite it being a frothy valuation for the existing business on a current basis it becomes cheap if you believe the growth within 2 years. And then there’s the eMobility segment and the most recent transaction in the sector, with the Barcelona based Wallbox being acquired through a SPAC merger with Kensington Capital Acquisition II. Wallbox was founded in 2015 and is a global EV charging and energy solutions provider. In 2020 it generated revenue of $24m and the expected 2021 revenue is $79m. It expects to reach EBITDA positive in 2024 when it projects to achieve revenue of $780m. The pro-forma valuation of the merger is $1.5bn, or 20x 2021E Sales or “1.3x 2025E sales” as they are currently rationalising it. Being honest, I have not yet done my due diligence on the deal nor have I compared the products between Wallbox and Free2Move Solutions. But even if Wallbox’s products are superior, by virtue of Engie EPS being a JV with Stellantis, one of the largest automotive groups in the world with ~25% of market share, there is a sort of minimum guarantee of demand. The summary introductory video (https://www.youtube.com/watch?v=-Z5gTCihisQ). As a result, even applying a much lower multiple of sales to the potential revenue associate with this JV provides a nice upside to the share price of Engie EPS, which is currently being ignored by the market due to the early stage of the JV.

•  Management: Carlalberto Guglielminotti has helped turn this company round in 2013 and remains CEO of the business which shows the passion and belief he has in the future of Engie EPS. His profile alongside other senior Management is impressive and all the presentations and Q&A sessions I’ve observed prove that they are very capable team.

•  Partnership with TCC: Management have made it clear on various occasions that the Engie partnership was great and helped the growth of the EPS but had its limitations as Engie EPS wasn’t able to tender for certain contracts (presumably because of its ties to Engie). TCC will open doors to the Asian market where Engie EPS is weak.

 Overall, I think the current share price of ~€17 is a great entry point into Engie EPS. My initial position was at €11 a share but I’ve recently averaged up and bought additional shares at around ~€17. The investment thesis is more qualitative than quantitative which is typically not the way I like to analyse companies but I think the opportunity is too good to pass on.