Grant Thornton questions more than 50c of Tilt valuation

Wednesday 26th September 2018

Above-market assumptions for Tilt Renewables’ cost of capital, the value of its Dundonnell project and the operating life of its other assets may overstate the value of the firm’s shares by more than 50 cents, according to advisory firm Grant Thornton.

Infratil hired the company to review some of the assumptions Northington Partners used when it independently valued Tilt shares at between $2.56 and $3.01. Infratil and partner Mercury NZ are offering $2.30 for the 22 percent of the company they do not already own.

Grant Thornton didn’t conduct a full valuation of its own. But it examined a number of key metrics used in the Northington valuation.

It found no justification for a premium above the $2.30 a share Mercury paid for its 19.9 percent stake in May, given the pair already control the business.

Nor was it convinced Northington’s valuation of Tilt’s 336 MW Dundonnell wind project in Victoria stacked up, given it is not complete and only 37 percent of its output has been contracted.

Grant Thornton also took a longer-term view of government bond rates and a more moderate view of the performance Tilt can expect from its turbines if it extends their operating life by five years.

Collectively, those changes would lower the value range to $1.87 to $2.46, with a mid-point rate of $2.17.

Shares in Melbourne-based Tilt recently traded at $2.34, up a cent. The stock jumped 4.8 percent to $2.41 when the Northington analysis was published on Sept. 17.

Infratil said its $2.30 offer for Tilt is attractive and fair. It “strongly” urged shareholders relying on dividends or not planning to participate in the A$280 million capital raising planned to fund the Dundonnell development to consider the offer.

The biggest difference in the two analyses was in the assumptions about Tilt’s weighted average cost of capital, which for Northington ranged from 5.8 to 6.4 percent in Australia and 6.1 to 6.8 percent in New Zealand. Grant Thornton estimated them at 6.7 to 8 percent and 7.2 to 8.6 percent respectively.

Taking a long-term average of 10-year yields, rather spot rates, gave Grant Thornton a risk-free rate of 3.5 to 4 percent for both countries, compared to 2.6 percent for Australia and 2.5 percent for New Zealand in the Northington analysis.

Grant Thornton also applied higher market and specific risk premiums. It noted that about 75 percent of Tilt’s Australian generation is not contracted beyond 2030, and risks include the future of the federal government’s national energy guarantee and a potential royal commission into the electricity sector.

For Dundonnell, Grant Thornton applied a cost of equity of 11.1 to 12.2 percent, compared to the 9.5 to 10.5 percent assumed by Northington.

It said the higher rate was reasonable given the project has not reached financial close, and the risks in the Australian wholesale market.

It noted the Northington valuation implied Dundonnell has an enterprise value of A$280,000 to A$370,000 per megawatt.

Grant Thornton observed that Origin Energy’s A$110 million sale of its 530 MW Stockyard Hill wind project to Goldwind in May 2017 provides a valuation of A$210,000 per megawatt.

That project is the largest in Australia and has 100 percent of its output and renewable energy credits contracted to Origin out to 2030.

“Accordingly, we do not believe that the Dundonnell project should be valued at a premium to the Stockyard Hill project.”

(BusinessDesk)

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