Synertec Corporation Ltd (ASX:SOP) has received a buy recommendation with a share price target of $0.42 per share in its initial coverage from Shaw and Partners.
The analyst anticipates multi-year tailwinds with a highly profitable ESG focus for the company, backed by a commercial order from Santos and strong unit economics in its Powerhouse technology.
Synertec is currently trading at $0.25 on the ASX with a market cap of $96.81 million.
Following are the excerpts from Shaw and Partners’ coverage:
Unique technology with rollout visibility
SOP is a technology design and development company enabling a low-carbon future through innovative technology solutions. The group is commercialising scalable, environmentally friendly and energy-efficient technology for global markets in energy, critical infrastructure and advanced manufacturing through innovative partnerships across a portfolio of blue-chip customers
Products/segments include:
- Powerhouse, SOP’s most exciting technology and presents the most significant potential for scale in our view, enabling users to supercharge a solar battery array. Powerhouse applies sophisticated AI to optimise energy discharge, delivering 100% renewable, reliable and uninterrupted variable base load electrical supply, replacing existing diesel generators and reducing carbon emissions.
- Custody Transfer System (CTS), enabling the measurement and metering system for the safe and accurate fiscal transfer of liquified natural gas (LNG) between parties.
- Composite Dry Powder (CDP), a technology to rapidly convert hydrocarbon drilling mud and wastewater into non-polluting soil and high-strength building materials.
- Engineering the design, supply, manufacture, construction, installation, integration, testing and commissioning of various systems.
Commercial order from Santos, large-scale rollout potential
With a commercial order from Santos announced in March and revenues expected from April, discussions are underway for a large-scale commercial Powerhouse rollout to other Santos sites (expected 2H23).
We see strong visibility to earnings and unit deployment over time, with Powerhouse expected to save Santos material carbon emission tonnage per year with extensive ESG applications.
Further, the Biden Administration’s ~US$400 billion Inflation Reduction Act (IRA) could present an opportunity for funding and awareness of the technology which we currently do not factor into our estimates (ie we currently assume full debt in the medium term during ramp-up phase).
BOOM pathway proven on ASX at 8-9x EBITDA
With once ASX-listed Pacific Energy and Zenith Energy acquired in the near past at ~8x and ~9x EBITDA respectively, we see strong comparable transaction support around these levels.
With our forecast ~$35 million EBITDA in FY27 and multiples of this in outer years, SOP remains highly undervalued at its current ~$90 million valuation if it can execute on its material Powerhouse rollout trajectory.
Significant earnings and cashflow potential
The unit economics of a Powerhouse unit are highly attractive. We anticipate CF BE at the beginning of year 5, with total net cashflows of $1.3 million at the end of year 7 and ROIC of ~30%, with potential upside on alternative funding and longer useful life (potentially 10 years).
Under our Base Case Scenario and forecast of 275 units by FY30e, we expect SOP will generate in excess of $200 million revenue with significant EBITDA margins approaching 70%. We assume equity raisings in 2H23e and 2H25e to support BS, alongside debt funding secured against the Powerhouse equipment.
Whilst in the early stages of commercialisation, over time we see the Powerhouse becoming a strategic asset with significant IP and earnings potential.
Key risks
Customer risk, competitive pressure, technological risk and change, international operations, plant, site and equipment risk, capital requirements, weather and safety, among others.
Recommendation
With a commercial order from Santos and strong unit economics in its Powerhouse technology, we anticipate multi-year tailwinds with a highly profitable ESG focus.
Initiate with Buy recommendation.