Reserve power will be increasingly important to the UK as the country becomes more dependent on renewable energy sources. The phasing out of coal-fired generation and reduced capacity for other baseload generation has left a requirement for flexible generation distributed around the electricity grid in order to cope with the intermittent electricity generation from wind and solar.
This will require significant capital investment over the next decade. Mast Energy Developments (LON:MAST) intends to develop a portfolio of reserve power assets. The first projects should be up and running this year.
The share price increase to 16.25p on the first day of trading, which means that Mast Energy is valued at more than £30m. There are currently no revenues, but they should build up over the next year as projects start generating electricity.
Mast Energy should be highly cash generative once it is selling electricity from a range of projects and this cash can be ploughed into additional projects. Given the opportunities more cash will be required if the company is going to take advantage of the potential for reserve power projects.
Investors need to take a long-term view of the company. It may be tempting for those that bought shares in the placing to take a short-term profit, but there should be further gains over the coming years. Mast Energy has excellent prospects, but it may be wise to let the share price settle before considering buying on the market.
Mast Energy Developments (LON:MAST)
Small-scale power generation
Flotation date: 14 April 2021
Issue price: 12.5p
Amount raised: £5.54m
Market capitalisation: £23.6m
Broker: Clear Capital Markets
What does it do?
AIM-quoted, Africa-focused power projects developer Kibo Energy (LON: KIBO) set up Mast Energy to buy and develop flexible power plants that will supply the reserve power market in the UK. This is a market required to provide back-up to the more intermittent renewable power sources.
Two-fifths of UK electricity currently comes from renewable sources, while two-thirds of the traditional power plants could close by 2030. It has been estimated that up to 4,500MW of reserve capacity will need to be installed over the next few years. It could be more if the move to renewable generation continues at a rapid rate.
Reserve power plants can respond quickly and run for several hours. This flexibility commands higher electricity prices than regular generation. Mast Energy will be using proven technology. There will be long-term agreements for electricity sales.
The first projects with production capacity of 9MW will start generating revenues within six months. Production capacity could be 29MW in one year. More projects will be acquired, and each will be owned by a special purpose vehicle. The focus is sites that already have relevant planning permissions.
Combined reserve power and battery storage sites may be developed in the future.
Mast Energy did not trade between its formation and 8 October 2020. The main subsidiary Sloane Group had no revenues and was loss-making up until the end of June 2020.
There is £4.75m left after paying the cash costs of the flotation. The rest of the expenses were paid in shares.
The Bordersley project is being developed jointly with AB Impianti and this will use £1.14m of the funds raised. There will be £1.5m used to acquire a project at Alferton in Derbyshire, with £180,000 being spent on a West Midlands project. The rest of the cash will cover operating costs.
There are £2.49m worth of loans from Kibo, which it says will not have to be repaid in the next 12 months, unless Mast Energy would still have sufficient working capital for its requirements. Given the potential for acquisitions that appears unlikely.
On 8 October 2020, pro forma net assets were £4.84m, which includes £300,000 of goodwill and £2.6m of intangible assets, which are power project rights. Mast Energy has a power purchase agreement for the Bordersley project with Statkraft Market GmbH, which will supply gas and sell the electricity generated.
Louis Coetzee (Non-exec chairman)
Annual fee: £36,000
Paul Venter (Chief executive)
Annual salary: £108,000
Candice Theron (Non-exec director)
Annual fee: £36,000
Parent company Kibo Energy has retained a 55.4% stake in Mast Energy. St Anderton on Vaal Ltd is the other major shareholder with 19.6%, which it obtained in return for its 40% stake in Mast Energy Projects. Chief executive Paul Venter is beneficial owner of 50% of the St Anderton on Vaal Ltd stake, with Darrel Krowitz owning the rest.