Completion of financing heralds a new dawn

Revenues, excluding CHF3.5m grant income primarily for a European ferry project, halved to CHF11.7m year-on-year during FY17. Lack of finance prevented the ramp-up in large-scale energy storage systems that management had expected, resulting in a fall in revenues from this sector from CHF20.4m in FY16 to CHF3.1m. Revenues from the commercial and industrial battery systems segment rose by 32% year-on-year to CHF6.0m, boosted by a subsidy in the Swiss canton of Vaud for energy storage systems deployed at the individual household level. Revenues from the energy efficiency solutions segment dropped by 22% to CHF2.2m as the business focused on more profitable lines. Revenues from e-transport, excluding CHF3.4m grant for the European ferry project that was classified as ‘other income’, were similar to FY16.

As in FY16, the cost of raw materials and consumables was roughly in line with revenues (including the ferry project) as the company worked on projects with low or negative margins to take market share (management has decided not to pursue this strategy). Personnel costs fell CHF1.5m to CHF17.9m as a result of the restructuring and cost-reduction exercises in late FY16 and early FY17. However, this was offset by a CHF3.0m increase in consulting costs to CHF5.2m and a CHF1.5m rise in commissions on financing to CHF2.1m, as a result of which EBIT loss widened from CHF34.5m to CHF36.1m. Net finance costs reduced from CHF3.2m to CHF2.6m because of lower levels of convertible loans.

The 2017 cash flow was adversely affected by a CHF14.9m increase in working capital. Inventories rose CHF3.1m because of a build-up of modules for the Canadian project, which were mostly delivered in H118, and because modules delivered for the Cremzow project are treated as WIP until the revenue is recognised on completion of the project. Receivables increased by CHF8.3m because of the short-term loan related to the Canadian storage project and advances to suppliers. Payables decreased by CHF3.5m as financial constraints eased towards the year end. Capital expenditure, primarily on R&D equipment and two module assembly lines, one for stationary storage projects and the other for e-mobility projects, totalled CHF2.5m. Management was very active during the year, reducing indebtedness and raising additional finance. Although cash used in operating activities plus capex totalled CHF47.2m, net debt (including CHF24.1m convertible loans) increased by only CHF1.7m to CHF19.5m. The financing activity continued into Q218 (see Exhibit 2). Management notes it has sufficient funding to fully finance the company through to FY20, when it expects to be EBITDA positive.

As a result of this financing activity, Golden Partner, which is the ultimate holder of funds administered by Finexis, has substantially increased its stake in the company. At the end of FY17, it held 31.4m shares, representing a 45.1% stake. We estimate that, following the conversion of the CHF16.5m convertible loan in February 2018, this stake increased to 52.6%, hence the award of an exemption from a mandatory takeover at that time. We model the outstanding convertible loan as debt. Excluding the CHF11.8m that will be repaid in June 2018 this totals CHF74.5m, which is equivalent to 39.6m shares at the current share price. If these were all exercised, this would give Golden Partner and its associates a 68.2% stake in the company. Golden Partner has recently confirmed its plans to convert CHF20m of its debt to equity (this is in addition to the CHF16.5m converted in February). A further takeover waiver is being sought to cover this transaction, which we estimate will take Golden Partner’s shareholding to 59.0%. Golden Partner has also agreed to provide a conditional CHF50m facility for acquisitions and joint ventures; up to CHF20m has already been allocated to set up a JV in India. We note that Leclanché is acquiring an energy management software suite from a US vendor.

Management notes it is working on a confirmed order book of over 50MWh, which is scheduled for delivery during FY18. This represents CHF40-50m of revenue. It expects the combination of revenue and margin growth to result in a break-even situation at EBITDA level in FY20 rather than late FY18/H119 as per our November note. It is focused on developing the utility scale generation and e-transport segments, which is where the largest growth opportunities are. We reinstate our estimates, which are based on the assumptions outlined below.

While the ramp-up in growth in large-scale energy storage systems that was expected during FY17 was held back by lack of financing, these projects have been delayed rather than awarded to competitors and additional work has been secured during the period. However, the total volume of confirmed orders is less than the 115MWh referred to in our November note because management has decided not to proceed with any projects where it needs to help provide finance. We note that Leclanché has demonstrated conclusively that it can deliver large-scale projects, having delivered 30MWh of capacity during FY16. Our estimates show the year-on-year increase in megawatt hours delivered: 70MWh in FY18, 100MWh in FY19 and 150MWh in FY20, converting to strong revenue growth throughout the forecast period. The committed projects detailed in Exhibit 1 underpin our FY18 estimates. Our view of growth in FY19 and FY20 is based on an order pipeline, which remains at the 450MWh level because projects where help with financing was required have been replaced by other activities.

Leclanché is involved in a range of projects in the e-transport sector. Our estimates show segmental revenues ramping up from CHF1.0m in FY18 to CHF16.9m in FY19 and CHF17.9m in FY20 as two key projects transition to volume production (one with Skoda Electric, the other with an Indian automotive integrator). Assuming trials of the technology are successful and the Indian integrator rolls out its network of fast-charging points as planned, the annual volume delivered for this project would be 90-150MWh (equivalent to 3,000-5,000 Nissan Leafs) from FY20 onwards.

Management expects revenues from the Swiss army to continue at around FY16 levels during the forecast period. We expect this to be supplemented by revenues from the material handling segment and sales of the energy storage systems suitable for individual homes and businesses. We note that Leclanché’s PowerPack energy storage solution for households with solar panels was the first to meet the requirements of a subsidy provided by the canton of Vaud.

Leclanché is engaged in initiatives that will expand both the portfolio of third-party batteries it offers and the sales channels. Management expects these will deliver segmental growth through to FY20.

Revenues: we assume that now the company has resolved its funding issues, the sales pipeline will convert more rapidly, resulting in strong revenue growth throughout the forecast period and a break-even position in FY20. The main reason for the reduction in our revenue estimates is management’s decision not to pursue projects where it would need to help provide financing.

Gross margin: noting that management has decided not to pursue projects without a satisfactory gross margin, we model 10% margin on stationary systems in FY18, rising to 20% in FY19 as module production is brought in-house.

Capex: our model allocates CHF14.0m for capex in FY18, CHF12m of which is to rebuild the equipment damaged in the fire and CHF1m to upgrade the enterprise resource planning system. The CHF5.5m capex allocated for FY19 includes c CHF2m expanding battery production capacity in Germany and c CHF2m establishing a module assembly line elsewhere (probably in China or India) to serve local projects.

Financing: our model treats all of the outstanding convertible loans as debt. We assume the interest relating to this debt is added to the principal.

Because Leclanché’s revised strategy has not yet generated operating profits, the use of peer-based multiples is limited as a valuation methodology. Moreover, while management has good visibility of projects totalling over 1GWh of capacity, there remains considerable uncertainty as to how quickly it will be able to deliver on the projects. Given this level of uncertainty, we present a scenario analysis with the base case adopting the rate of revenue growth and costs as shown in our estimates from 2018 to 2020. Using this as our basis, we model potential revenues and EBITDA out to 2027, assuming that a substantial proportion of battery cell manufacture from FY20 onwards will be carried out by local partners for projects in China or India, thus reducing capex, and that large projects will be funded by third parties. Applying a terminal growth rate of 3% and WACC of 10%, our base case gives an indicative valuation of CHF2.51/share. Our previous indicative valuation of CHF4.34/share assumed that Leclanché would be able to work with third parties to create special purpose vehicles for financing large projects, thus delivering substantially faster volume ramp-up. This previous valuation also applied a WACC of 15% to reflect the risk associated with completing the financing for Leclanché itself, which has now been secured, and finding financing for large projects, which are no longer included in the cash-flow projections.

Clearly there is no certainty that the individual projects contributing towards the revenue growth adopted in our valuation will progress as expected. However, we note the technology being deployed is proven and Leclanché has already demonstrated it can deliver on large projects. While there remains a risk that individual projects may not come to fruition, there is rising demand for battery energy storage for both stationary grid-related and e-transport applications, with very few companies able to offer the battery modules, energy management software and engineering, procurement and construction services as Leclanché can. This puts it in a good place to win work on alternative projects. Given the lower levels of funding risk, we now adopt a WACC of 10% for our indicative valuation.

The current share price suggests the market is assuming a slower growth rate than that adopted in our estimates. Our reverse DCF calculation generates an indicative value similar to the current share price when revenues are scaled back by 5%. This indicates the potential for substantial share price appreciation as Leclanché demonstrates it is able to convert the existing pipeline and achieve the growth rate shown in our estimates. Conversely, scaling up revenues by 5% gives an indicative value of CHF3.15/share.