OPG Power Ventures (UK MicroCap)

Background

OPG Power Ventures (Ticker OPG, #OPG, $OPG) operates and develops power generation assets in India. It's main asset is a 414MW coal thermal power station in the state of Tamil Nadu (near Chennai), with OPG currently owning a 100% stake in the plant. OPG also has a 31% stake in 4 solar farms in the Karnataka state:

- 20MW (Mayfair renewable energy pvt ltd)
- 20MW (Aavanti Renewable energy pvt ltd)
- 20MW (Aavanti Solar EnergyPvt Ltd)
- 2MW (Brics Renewable Energy Pvt ltd)

OPG has been listed in the UK stock exchange for over a decade, with market capitalisation reaching an all time high of ~£400m in July 2015 and been on a declining trend since, it's current market cap is £25m. What has changed? 

In 2016, OPG announced its investment in the solar assets described above, which was funded by group and project level debt. At the time, OPG's Net Debt / EBITDA was at 6-7x level so OPG was not in a position to embark on new investments and market got apprehensive. The rationale behind the investment in solar was OPG's desire to re-position the business into renewables. 

OPG's financial situation wasn't helped by the fact that the 2nd coal thermal power station that OPG had at the time (a 300MW plant Gujarat) had significant challenges with disputes with the local authority which led to missing debt repayments, and OPG ultimately deciding to write off their ownership in the plant in 2018. By then, the market capitalization had fallen to £60m (with net debt at close to £100m) and Net Debt/EBITDA at over 3x. Since 2018, the business and operational performance has been stable (ignoring COVID-19 for the time being) albeit (and understandably so) the focus has been on de-leveraging. As a result, cash dividends were halted on 31 March 2018, and all cash generated pre financing (over £100m until now) has essentially been used to repay debt. Debt is pretty much fully repaid currently or at least cash is set aside for repayment when it comes due in the next 12 months. Net Debt is therefore close to 0 currently. 

Thermal Power Coal Station Operations

The Tamil Nadu power station was commissioned in stages as shown below:

Typically, coal thermal power stations have a useful life of at least 25 years hence all units have significant useful life remaining. 

The main driver of revenue from the plant is the energy sold to customers which for OPG is both corporates as well as the local electricity company (Tangedco). Across contracts, most of them will be base on specified tariffs which may be renegotiated on annual basis. 

The main cost input into generation is coal prices with OPG's plant running on a blend on Indonesian (prime product) and Indian Coal (more basic product). The average coal price that have generated power for OPG is summarised below:

As expected, with the re-opening of global economies following COVID-19 (not helped by the Ukraine/Russia war) there has been significant demand for coal worldwide and coal prices have sky-rocketed. This has made operations for OPG challenging with OPG consciously running the plant at a lower load factor ("PLF") to ensure profitability. 

The first half of the year (ending March 2023) has been challenging for OPG with the continued heightened coal prices and hence plant running at a lower PLF. Nonetheless the business has remained profitable and is well positioned to re-start operations strongly as coal prices stabilise at a lower level. The Indonesian Coal Futures show the volatility in coal prices in 2021/2022:

Thermal Coal Generation Market in India

Despite the Decarbonisation agenda worldwide, India will continue to rely on thermal coal as part of its energy mix until 2050. 

S&P - https://www.spglobal.com/en/research-insights/featured/special-editorial/energy-transition-thermal-coal-will-remain-important-in-asia-pacific

CEA - https://economictimes.indiatimes.com/industry/energy/power/coal-to-dominate-india-power-to-2030-despite-renewables-boost/articleshow/70040887.cms?from=m

This is further evidenced by the amount of coal thermal power plants that continue to be commissioned recently, for example:

1) Uppur Thermal Power Project (1200 MW) -  Expected Cost 12,655 Crore

2) North Chennai Thermal Power stage III station (800MW) - Expected Cost 6,376 Crore

3) Uduangudi (1320 MW) - Expected Cost 13,077 Crore

4) Yamunanagar (800MW) - Expected Cost 5,352 Crore

For these new plants, the implied cost of construction per MW ranges from ~£0.7m per MW to ~£1.1m per MW. (Using a Crore to GBP exchange rate). 

Whilst there is a shift in investor appetite for these assets, especially across the Western World, with a lot of investment managers agreeing to have coal generation as part of their investment exclusions in the short term, the market is still active and attracts considerable levels of interest. This is evidence by transactions of thermal power plants in India in recent months:

1) Feb 2020 - JSW Energy agreed to acquire GMR’s Odisha thermal plant for 5,321 Crore. This a 1,050 MW plant commissioned in 2013/2014. The implied purchase price of this was ~£0.56m per MW

2) Sep 2022 - NTPC agreed to acquire a 50% stake in Jabua Power Limited, which owns and operates a power plant of 600MW for 925 crore through bidding via a liquidation process. The plant was commissioned in 2016. The implied purchase price of this was ~£0.34m per MW

3) April 2021 - JSPL agreed to sell a 96.4% stake in Jindal Power to Worldone for 3,015 crore. Jindal Power is a 3,400 MW power plant, commissioned in 2007 and 2015 (various units). The implied purchase price of this was ~£0.46m per MW

4) March 2021 - JSW Energy agreed to sell an 18 MW thermal power plan to JSW Cement for 96 Crore. Whilst this was a related party transaction the price was determined by an independent valuer. The implied purchase price of this was ~£0.58m per MW

5) November 2022 - Adani Power is in the process to acquire a distressed power plant, Lanco Amarkantak Power, with the latest bid submitted totalling 2,950 Crore. The power station has installed capacity of 600MW but has the approval to expand and construct further should the buyer decide. The latest bid implies a purchase price of £0.54m per MW. 

So all in all, the evidence is that new thermal coal power plants cost ~£0.7m-£1.1m per MW to build and transactions for operational power plants are at ~£0.4m-£0.6m per MW, which makes sense. A new plant will have a longer useful life and likely be more efficient and hence command a premium in cost/valuation. 

A reminder that OPG's plant has installed capacity of 414MW. Even taking the lower end of the transaction multiple range (which was applicable to a plant which was going through liquidation), £0.34m x 414MW = £141m. A reminder that OPG's market cap is £25m hence this represents material upside of over 5x to the current share price. Whilst book value is a very flawed metric, the coal power plant's current book value is ~£185m so essentially its cost minus depreciation to date is actually not too dissimilar to the market valuation for the plant. Since 2018, the average Price to Book for OPG has been 0.8x. Currently it sits at 0.1x. 

Solar Projects

The 4 solar farms were commissioned in 2018 and funded with equity as well as debt at the project level. The other shareholder in the solar plants is IBC Solar Venture India BV, a large renewables developer (https://www.ibc-solar-energy.com/). The plants have operated as expected and have solid credit ratings (of which reports on operations can be access online). However, given high levels of debt used to finance them, OPG extracts limited cash-flows from them (also due to their 30% Share). As a result, as part of the deleveraging strategy, it was decided that OPG would look to divest of its stake in these projects. The process has been impacted by COVID and despite receiving offers early on in the process it has never completed. 

The projects remain classified as Assets Held for Sale in OPG's Balance Sheet with an attributed value of £13.5m (which I think they'll do extraordinary well if they can get that on a sale process). Looking at transactions for solar assets I would estimate the value of OPG's stake in the projects is more like £6-8m. I think this explains why they haven't yet found a buyer for the asset, they are holding out for a higher valuation. A reminder that OPG's market cap is £25m hence even if these assets are only worth £6m, this would still account for ~25% of the current market cap. 

Financials

A few snapshots are shown below (no massive red flags). Cash-flow generation is good, and revenue/EBITDA solid if we account for COVID and some of the market dynamics explained above. 

Shareholding and Governance

The Gupta family owns over 50% of OPG and has family members both in CEO and Chairman roles so overall governance is not great. Equally, there is also limited interactions with the market (investor calls etc recently). This is obviously not a positive... M&G Investment has historically held over 10% of the shares in OPG but has been in divestment mode for many months due to their corporate commitment on Coal Power generation. In mid-January 2023, M&G announced its disposal of its stake in OPG. Given the sizeable stake that M&G wanted to divest, OPG being a microcap and operating in a sector which is probably not very desirable by institutional investors, finding a new home for M&G's stake must have not been an easy task. Once the buyer is announced, the expectation is that more scrutiny on governance or focus by Management on investors will take place. 

Valuation

The upside on value is evident from what I've written above. The question then becomes can Management unlock this value for shareholders. I see two possible ways of doing it:

1) Reposition the company completely. Divest of the Thermal Power Plant and invest in renewable projects in India. The divestment will yield multiples of the market cap in cash so as long as Management allocate the cash effectively, buying assets at sensible valuations, this would create immediate value. Becoming a renewable player would open the pool of institutional investors once again for OPG. 

2) Share buybacks + Dividends. Now that debt is fully paid off (albeit there might be a convertible loan note being issued in the short term, unclear what the purpose of this is for), the business generates ample cash on an annual basis (refer graphs above). Doing share buybacks and paying dividends has the potential to signal to the market the belief in the company as well as attract yield focused investors.