NRGV - Energy Vault: A Crucial Second Half Of The Year

2023-09-25 16:29:28 ET

Summary

• Energy Vault is gaining traction with its proprietary EVx long-duration gravity-based energy storage solutions in China and the US.
• The company's revenue is primarily coming from constructing hybrid storage projects for customers, with a strong pipeline of projects.
• Energy Vault is not yet profitable but has enough cash to continue operations and is expected to have a successful H2/23 with multiple projects finishing.
• We're in the middle of a big H2 for the company with multiple projects close to delivery.

Energy Vault ( NRGV ) is an emerging energy storage solution provider that offers its own proprietary EVx long-duration gravity-based energy storage solutions on a license/royalty-based business model, as well as building hybrid storage projects for a rapidly increasing amount of customers.

The shares are falling away, apparently on the re-emergence of the risk-off sentiment, but while rising interest rates are bad for its business, rising oil prices should offer some compensation:

Their EVx solution is gaining traction in China and the US, with the first project in Rudong, China being commissioned in H2/23 and the company gaining a new order in the US for multiple states.

Meanwhile, most of the revenue is coming from constructing hybrid storage projects for customers under a variety of business models driven by its EMs software solution.

The company is establishing a record for delivering projects on time and if they can do that again in H2 this year in my view as the company's revenue will be on a steeply upwards sloping trajectory.

Given the strength of its pipeline, we're not overly worried their business is drying up anytime soon, especially near-term with a number of projects at an advanced stage of completion

Near-term, the company should have a great H2/23 with several projects finishing, bringing in a pretty dramatic acceleration in revenue generation.

The company isn't profitable yet but they still have plenty of cash to keep going.

EVx

Proprietary GESS (gravity-based energy storage) solution based on a license/royalty-based model has several advantages; high-margin, recurring revenue (license, service fees, royalties in the order of 5%) capital-light, and gathering data to improve the solution.

The first EVx will be operative and fully connected by Q4 in Rudong, China. On a four-hour storage basis, the cost will be $350-$500 per KWh but these costs will come down with longer storage duration and EVx innovations (see below).

China Tianying agreed with Wallai County's government to construct another 100MWh Gravity Storage project in Hubei. Over 2GWh of EVx deployments are planned in China.

The company won its first gravity energy storage license and royalty agreement for the United States with a US-based renewable developer for multiple named states.

The license-only portion of the contract will generate revenue of $33M, coupled with project royalty streams of 90% gross margin tied to all future project deployments within the name states.

"This agreement allows for the developer to deploy the technology through a new application of the current EVx technology that enables lower initial CapEx and demonstrates the flexibility of the technology." (Q2CC) .

"Innovations include advances in structural engineering, material science, and software as well as construction automation, all of which contribute to lowering the initial CapEx cost" (Q2CC)

They'll launch their own operated EVx in Snyder, Texas, and ground broke in September 2022, and should be ready by H2/24. It's a showcase project demonstrating the capabilities (including the innovations mentioned above) for the US market.

Strategic partner and customer DG Fuels, recently welcomed two Japanese investors and a third, securing $30 million in equity. Energy Vault has a $520M 1600MWh energy storage agreement deal with DG Fuels in Louisiana closed in October 2021

The EVx in the US can easily be built with 100% US content which sets it up to see significant subsidies from the IRA (Inflation Reduction Act).

Hybrid solutions

Energy Management System Software

Different contract types

While the company isn't a construction company, they are nevertheless involved in the form of EPC (Engineering, Procurement, and Construction) contracts.

This was out of necessity as big construction companies were busy and the prices were a little higher than management expected. But these projects aren't terribly complex, and the more hands-on approach, managing the construction contractors themselves, ensures that projects arrive on time.

They did so in Q4/22 delivering more than $100M in projects on time as a result of this hands-on execution, for instance. While they are managing the EPC, the actual construction is done by smaller localized construction companies (these projects aren't complex to build) and the company is using the same ones for additional projects so there is a learning effect here as well.

Projects

Here are some of their announced recent project wins:

• An EVx license deal in the US for a number of named sites (Q2/23CC)
• January 2023 : A 440MWh utility-scale battery and green hydrogen storage. The energy storage system will be owned, operated, and maintained by Energy Vault while providing dispatchable power under a long-term tolling agreement with PG&E. There is the potential to expand the project to 700MWh.
• December 2022 : A 440MWh battery energy storage system (BESS) in Nevada, expected to be operative by year-end 2023.
• October 2022 : A 500MWh with Meadow Creek solar farm in Australia.
• September 2022 : A 2.4GWh of supply chain equipment for Jupiter Power. Per the Q2/23CC this is now expanded into a 10GWh battery storage contract for the next 2-5 years on the availability of domestic supplies (for instance through Energy Vault's investment and offtake agreement in KORE, a US battery producer.
• September 2022 : A 275MWh Energy Storage with Wellhead Electric.
• September 2022 : A 220MWh Battery Storage with Jupiter Power.
• May 2022 : Expansion of the deal with DG Fuels closed in Oct/21 taking the total to $737M and 2234MWh with additional projects in British Columbia and Ohio.
• April 2022 : A 100MWh EVx system for Atlas Renewable.
• 820MWh project in Europe with a large renewable energy developer (mentioned during the Q3CC)
• October 2021 : a $520M 1600MWh energy storage agreement deal with DG Fuels in Louisiana with up to 200MWh storage from the EVx solution.

Pipeline

There were further improvements in the different categories of the pipeline:

The contrast with the same figure a quarter ago is quite striking :

The progress in the short-listed category is especially impressive but booked orders increased by $161M (for instance a 400MWh project for Jupiter) guaranteeing that nearby revenue growth will continue.

• Q2 bookings increased by $33M on Jupiter and EVx
• Pacific Gas and Electric will be completed mid-24
• Jupiter Power to supply 10GWh of domestic U.S. content battery modules for their projects over the next two to five years.
• Further bookings wins are expected in H2, for instance from a Southeast Asian sustainable energy company for two energy storage projects totaling 500MWh (and more to come as it's part of a broader framework to purchase a minimum 27,000MWh over a three-year period).

Q2/23 Finances

• Revenue $39.7M
• Gross profit $3.9M
• Gross margin 10%
• OpEx was flat q/q
• AEBITDA -$18M
• Share-based compensation $10.1M
• Operating loss $28.4M (versus $32.9M in Q1/23)
• $165M in cash at the end of Q2 ($58M of which is restricted).

Cash swings according to project deliveries (with Q4 a big quarter in terms of deliveries and this is likely to repeat in H2/23. Q1/23 was devoid of project deliveries, hence the cash drain):

Outlook

A huge improvement is coming in H2 as management hasn't altered its FY23 guidance:

H2 revenue recognition will come from several US-based storage projects like the 275MWh system with Wellhead in California with the Wellhead CEO quoted as saying (Q2CC):

there were supply chain issues across the board, but we chose Energy Vault as they were the only company that was able to promise and then deliver what was needed for the project.

• There are two projects from Jupiter scheduled for commissioning in H2 as well.
• Their EVx system in Texas is scheduled for H2/24.

Valuation

• There are 6.1M options
• There are 5.2M (private) warrants
• The fully diluted share count is 154.16M
• At $2.50 per share, the company has a market cap of $385.4M
• The company has an EV of $220.4M
• The shares trade at 0.59x EV/S (at midpoint of revenue guidance $375M).
• Next year's revenues are $754.7M according to 6 analysts so the forward sales multiple is a lot lower.

Conclusion

We see a number of positives:

• Secular tailwind with rapidly growing demand for energy storage as a corollary for alternative energy pushed by major policies like the IRA in the US.
• Proprietary EVx storage with a capital-light license/royalty-based business model is gaining traction with orders from China and the US and a growing pipeline of leads. While it's early days, this line of business is a potential home run, given the capital-light business model.
• Flexibility in designing and managing hybrid energy storage projects according to customer specifications, driven by their flexible EMs software suite.
• Rapidly increasing pipeline and contract wins of hybrid energy storage projects.
• The company has an increasing track record of timely delivery of projects.
• A big H2/23 is upon us , if they can deliver as management argues they will this will add significantly to their track record and boost confidence with potential customers and investors alike.
• With $2.6B in awarded projects and $701M in booked orders there doesn't seem to be any near-term risk of the company running out of business.

There are some risks:

• Execution problems and delays are always possible, although so far the company seems to be doing very well.
• Rising interest rates might dent the demand for energy storage projects, but we believe interest rates are near their top.
• It remains to be seen whether the company can scale up for the more than doubling of revenue expected in 2024.

The upshot: While still speculative, our confidence is growing in the company as demand for their EVx system seems to be taking off, as well as their capacity to deliver these hybrid energy storage projects for customers on time. H2/23 will be a big step forward if they deliver on the projects scheduled for commissioning.

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