Background:

As some of my readers may have noticed, I have delved deeper into the topic of renewable energy and related issues like climate change, net zero goals, etc.

My current conclusion is that We may have reached a real “turning point” in the direction of a significant increase in “electrification”. which in my opinion is driven by a confluence of several factors:

  • The cost of renewable energies (especially solar energy) has decreased by -90% in the last 10 years and is still falling. Solar is (cp) now the cheapest source of electricity available on the planet
  • Battery technology is making leaps and bounds and prices are also falling rapidly, similar to solar energy
  • Some large electrical appliances are already better or almost equivalent compared to fossil alternatives (electric heat pumps already now, electric vehicles in a very short time, DRI and electric arc furnaces for steel, green ammonia, etc.)
  • Money is pouring into the sector like never before, driven by ESG considerations
  • Governments are pushing in the same direction. Europe has led the way so far, but under Biden the US is pushing hard
  • Interest rates are low, which makes new infrastructure cheaper than ever to build

Many challenges remain, particularly the “disruption” of renewable energies and the current lack of solutions for long-term storage. However, significant progress has been made, particularly in the battery room. In addition, all the billions that are now pouring into “green tech” will trigger a “Cambrian explosion” of new technologies in a few years’ time.

Possible consequences:

It is not easy to fully understand the implications of this coming “energy transition”. Many organizations build models to predict the future, but even “only” after 10 years these models differ significantly, especially with regard to the use of fossil fuels. For example, the role of hydrogen varies between different models by multiples of 10x or more.

So I try to just do it and concentrate among the most likely direct consequences, which in my opinion are:

  • Electrification will gain momentum in the coming years / decades (passenger cars, heating, industry)
  • The demand for renewable electricity will therefore increase significantly for a long time
  • Companies that can make a significant contribution to the development should benefit from it

So, as a first step, I’ll focus on companies that I think will benefit most from building this new infrastructure.

It is important to know that just identifying one big trend is not enough, as new big trends usually attract a lot of competition and it is not so clear who will come out victorious, especially in the early days. The investors who invested in German solar manufacturers in the 2000s are now what I’m talking about. I think that “this time around,” but it is still important to be careful.

That is why I am starting this topic with a “basket” where I’m trying to rally a handful of smaller weight companies to get notoriety and learn more.

The new “energy transition” basket

1. Siemens Energy (2% of the portfolio)

The first member of the shopping cart is an existing inventory: Siemens Energy. Unfortunately, the share is not a “pure game”, but there is a high level of commitment through Siemens Gamesa’s participation, but also with regard to its network infrastructure activities. The current weight is ~ 2% of the portfolio, I sold 1/3 of the position a few weeks ago. I think the stock has significant potential if it does well.

2. Orsted (2% of the portfolio)

Orsted is a Danish energy company formerly known as Dong Energy. They have sold all of their fossil fuel activities and are now concentrating exclusively on developing renewable energy projects and operating wind and solar parks. Orsted is the world’s leading provider of offshore wind farms. Developing an offshore wind farm on time and on budget is not easy and Orsted is one of the few players who has many years of experience with offshore wind. Their very first offshore wind farm was established in 1991. They now have almost 30 years of history, unmatched by any competitor.

Offshore wind has pioneered the Nordic countries where sunlight is obviously a problem. However, especially in Asia, it looks like offshore could also become the dominant form of renewable energy due to the lack of land, which is a major problem for both solar and onshore wind.

If you look at the share price, it is clear that Orsted has not been a “hidden champion” as four times the share price in the last 4 years:

Orsted

In terms of valuation, the stock isn’t cheap. The income statement is difficult to read because it is a mix of running profits from generation and the occasional large profits from farm downs, as well as a lot of development costs for development projects. Based on the purely existing generation part, the share is traded with an EV / EBITDA between 20 and 25x.

However, in my opinion, initial access to virtually every offshore wind project in the world will dominate the company’s value. I also assume that offshore wind will be a global growth sector for at least the next 20 to 30 years and that Orsted will play a very important role.

That’s why I invested 2% of the portfolio in Orsted.

3. Aker Horizon (1% of the portfolio)

Aker Horizon is clearly the riskiest position of the top three positions. The company bundles all of the Aker Group’s assets in the “Energiewende” segment and was floated on the stock exchange on February 1st.

The main asset is a recently acquired global renewable energy developer called Mainstream Energy. Mainstream Energy is a developer focused on Asia, which is clearly the most interesting area for renewable energy right now.

In addition, Aker Horizon holds the majority of the listed Aker “Greentech” companies Aker Offshore Wind, Aker Carbon Capture and Aker Clean Hydrogen.

The listed subs clearly have a “venture character” and the question also arises as to how good the newly acquired developer is. On the flip side, there’s the outstanding capital allocation and performance track record of Aker ASA majority owner Kjell Inge Rokke, who has achieved a return of 26% pa for shareholders (or 7x) since 2004. In my opinion, Rokke is a self-made billionaire is one of the most underrated capital allocators and this time he is “big” in the energy transition.

A look at the graphic shows that the IPO was not such a great success, but the share price follows other games of the “energy transition”:

Aker Horizon

Still, I like Aker Horizon as a very dynamic player in the field with a great capital allocator but because of the underlying risk I only invest 1% of the portfolio.

Financing / Exit: Group SFPI

In order to be able to sleep well, I usually prefer a cash payment of around 10%. With these transactions, the cash would decrease to around 7%. I therefore “sacrificed” my SFPI position to the group at around EUR 2.45 per share (~ 3% of the portfolio).

Long-term readers know that I never bought SFPI but became a shareholder when they took over their subsidiary DOM Security. Although I like the CEO, I have never familiarized myself with the overall portfolio of companies. It may not be the best timing, but SFPI was the easiest position for me to sacrifice at this point.

Basket view:

The three positions mentioned above (Siemens Energy, Aker Horizons, Orsted) are only a first step. I plan to increase the basket to at least 10%. It could also be that I exchange positions when I find better alternatives.

There are now guarantees that this basket will do well in the short term, but I think the industry will offer more opportunity over the next decade or two.

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