Merkado Barkada
September 10, 2024 | 8:00am
SP New Energy [SPNEC 1.24, down 5.3%; 382% avgVol] [link] was halted for the first hour of trading yesterday to allow the general public the chance to read about and digest the news that broke over the weekend about Actis, the global renewable energy investment fund, signing agreements to invest $600 million into Terra Solar for a 40% stake in the project. Once the halt was lifted at 10:30 AM, the first trades crossed at around P1.38/share (+5%), but consistent selling pressure gradually eroded that early gain throughout the course of the trading day. The stock closed at its session low of P1.24/share, a 5.3% drop from its pre-announcement close of P1.31/share.
> Huge volume: Over P240 million in trades were done on a day that was an hour shorter than usual. It was the largest value traded for SPNEC since February 6’s P248 million on a 1.7% drop.
> Confirmation of deal details: The press release from SPNEC helped clarify some components of the deal, namely, that Actis would be entering as an equity investor at the Terra Solar level (receiving shares in Terra Solar, not SPNEC or some other entity). They also referred to Actis as a “strategic partner”, which is coded language in the financial world used to refer to investors that are more long-term, hands-on, and who usually come into the deal with a level of subject matter experience that both sides hope to leverage in some way. This differs from a financial investor, who is focused primarily on financial returns and who usually invests with a tighter time horizon. A good example of a financial investor is Warburg Pincus with Converge [CNVRG 15.44, up 1.1%; 55% avgVol]. Once their capital helped frame CNVRG for its IPO, they exited. The implication is that Actis will be in it for the long haul.
> Start of a larger relationship? Some of the media surrounding Actis seemed to indicate that the global fund could be interested in doing more business in the Philippines, though it wasn’t clear if that business was to be done with Meralco [MER 404.40, down 0.1%; 49% avgVol] or with SPNEC. Come for the global-scale mega project, stay for the supplemental margin builders?
> Terra Solar timeline: MER and SPNEC anticipate this investment deal to close in “early 2025”, with the first phase of Terra Solar to be finished in 2026 and the second (and final) phase completed by 2027. Several news outlets have quoted Manny V. Pangilinan (MVP) as saying that the Terra Solar project is “around 60-57% completed already”, and that “by the end of September, it’s going to be about 80-90% completed already.” It’s not clear if MVP is referring to Phase 1 or to the entire project, or if the transmission components of the project are included in that assessment of the project’s progress.
> Long-term issues? It’s easy to overlook the size and scale of this project. Make no mistake, if SPNEC executes this even reasonably well, it’s going to be a huge deal for SPNEC’s profitability and the stock’s price is going to reflect that. The thing that makes me nervous, though, is the battery storage component. Operationally, I’m nervous about how the battery storage will endure the climate (heat humidity) and the changing weather patterns (typhoons, flooding, and other severe weather events). I’m curious to see if there are any uptime issues just like anything else. In the long-long-term, though, I’m concerned about obsolescence. The demand for battery storage solutions is skyrocketing. Not just for renewable energy, but for handheld products (phones), cars, and pretty much everything that we are trying to power without cords or fossil fuels. Will there be some kind of advance in the next couple of years that will allow other projects to come online quicker, cheaper, and with better performance and price points for the electricity produced?
MB bottom-line: I think MER and SPNEC are doing a good job if I have to start thinking about the likelihood of a civilization-changing advance in battery storage technology to find something to worry about. In the realm of renewable energy, solar power is by far the easiest to build at scale, so I don’t have the same worries that I would have if the company were building something like a dam or an offshore wind project that would have more potential for delays and cost overruns. One thing that I’m keeping an eye on is how MER treats SPNEC going forward. Will MER use SPNEC as its vehicle for all future renewable development, or just solar? Will it leave it as-is with a smattering of smaller solar projects dominated by the Terra Solar project, and develop future project with Actis (or other investors) through MGen or other MER subsidiaries? The answer to this question could have a considerable impact on SPNEC’s value as Phase 1 and Phase 2 of this project come online and investors start thinking about what comes next.
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