EverGen Infrastructure Corp V.EVGN

More RBC

[retiredcf]

Their upside scenario target remains $8.00. GLTA

May 25, 2022

Outperform

EverGen Infrastructure Corp.

Waiting to build out RNG; lowering PT to $5.00 (from $6.00)

Our view: EverGen has a number of near-term opportunities across Canada to significantly grow its RNG production capacity. However, we believe the market is waiting for additional details with respect to the timing, cost, and project economics. Given the potential capital required to build out its pipeline, particularly in the current inflationary environment, we believe another focus would be the company's funding approach. We are lowering our price target to $5.00 (from $6.00) to reflect the uncertainty around the timing, cost, and funding approach of the near-term RNG developments.

Key points:

Expanding east into Ontario. After establishing a hub of three facilities in B.C., and announcing an LOI to acquire a 67% interest in a biogas facility in Alberta, EverGen announced that it has entered an agreement to acquire a 50% interest in three Ontario RNG development projects (Project Radius) for $1.5 million in cash (half the initial development funding). The total project cost has yet to be finalized, but management broadly expects the total project cost of all three developments to total $180-200 million, with an EBITDA build multiple of ~5-7x. Management believes their net equity investment could be limited, while maintaining a significant portion of their ownership in the projects, which leads us to believe the company may sell down a minority interest potentially on financial close. Management expects construction to begin in 2023, with a completion date roughly 12 months later.

Clarity on the funding plan becoming more important. EverGen ended the quarter with ~$17.5 million of cash and equivalents, ~$2.7 million of restricted cash, and ~$6.3 million of loans outstanding. The company has pending acquisitions with initial cash commitments of ~$4.8 million (plus $4.0 million of contingent cash consideration), and two RNG expansion projects (FVB and NZWA) that will likely cost ~$45 million over the next ~18 months. We expect some of the growth capital will be funded with company level as well as project-level non-recourse debt. We expect the company to provide further financing details in the coming months.

Tweaking estimates. We have revised our 2022, 2023, and 2024 EBITDA forecasts to $4.0, $11.2, and $23.9 million, respectively (from $3.8, $10.0, and $22.7 million). The increases to our estimates primarily reflect the contribution from phase 1 of the GrowTEC RNG development in Alberta, beginning in Q4/22 (management expects phase 1 to reach COD in Q3/22).

Lowering price target to $5.00 (from $6.00). We have lowered our price target to $5.00 (from $6.00) to reflect the uncertainty around the timing, cost, and funding uncertainties of the near-term RNG developments. Our price target is based on a sum-of-the-parts analysis and our $5.00 price target implies an EV to 2023E and 2024E EBITDA of 8.6x and 7.3x, respectively (previously 9.7x and 7.7x, respectively)