Zeus Capital visited Esken Ltd (LON:ESKN) wood biomass storage and processing operations at the Tilbury renewables energy power plant. The company, through its Stobart Energy unit, is the leading supplier of wood biomass in the UK; sourcing, processing, and transporting fuel to energy plants such as Tilbury. Supply is typically under long-term and index-linked contracts. Stobart Energy continues to perform robustly and will generate £18m-£20m of EBITDA this year. In Aviation, the company’s other division, London Southend Airport is currently closed to commercial passenger traffic but remains open for cargo; the main global freight customer has just signed a two-year contract extension. Focus is on a reboot for spring and summer ’22. Looking further out, we predict positive Group EBITDA development between FY22e-FY24e. Risks remain but a faster recovery in Aviation could lift profits more sharply and we believe the medium-term value proposition for the company is strong. Our DCF/SOTP-based valuation is 35p, indicating significant potential upside.See our initiation note Esken: Ready for recovery, 22 Sept. 2021.
Stobart Energy is a good cash generator for the Group – We have visited Stobart Energy’s sizeable operations at Tilbury, on the River Thames. The unit is the leading supplier of wood biomass fuel in the UK, and highly profitable. Barriers to entry are high due to the unit’s long-term customer and supplier relationships, operation of complex processing sites, safety regulation and logistics capability. The Tilbury green energy power plant (TGP) is one of the unit’s six key waste wood customers. Stobart Energy generates revenue from charging these customers fees under long-term index linked fuel supply agreements, and by collecting a gate fee from logistics and waste management companies delivering wood to its processing sites and thereby avoiding more expensive landfill tax. Waste wood shipments are received and processed at Stobart Energy’s facilities around the UK, and then delivered to the power generation plants for combustion.
Energy recovery, the outlook is positive – Supply of waste wood and gate fees have recovered with the pick-up in UK construction activity. Higher gate fees, with better plant operational performance led to improved earnings; H1 EBITDA was £9.1m vs. £2.4m previously. For the full year, Energy is expected to generate EBITDA of £18m-£20m (Zeus: c.£18.9m). Over the next few years, Stobart Energy is aiming to supply more biomass to its existing customers, add new smaller power plant customers, lift gate fees in the mix from gathering more unprocessed wood, and potentially handle other forms of waste for EfW power generation.
Esken is an attractive recovery story – Prior to COVID, Esken was starting to trade well. For the recovery, Energy offers strong and stable profits and cash. Aviation offers more upside for the medium-term. Prior to COVID, London Southend Airport was growing strongly. Through the pandemic, cargo volumes increased significantly, and London Southend’s key global logistics partner has just signed a two-year extension to use the airport until October 2023. In contrast passenger traffic through the airport has been minimal. Generally, leisure passenger traffic is slowly picking up across Europe. For London Southend, we assume only a limited recovery in passengers in 2022e, with a modest profit and EBITDA margin achieved by 2024e. Over the medium-term, we expect peak slot capacity in the London Airports System to become constrained again. London Southend, as a well-invested facility with good landing slot availability, is well placed to provide additional supply.