FREY - FREYR Battery: Significantly Undervalued Battery Player

2023-05-16 07:30:00 ET

Summary

• FREYR Battery's management gave more details on its plan for Giga America, with a total capacity of 38 GWh for Phase 1.
• Phase 1 will be broken into Phase 1a and Phase 1b, which will begin production in 2025 and 2026 respectively.
• All the capital expenditure requirements for Phase 1a is expected to be met through strategic partners investing at the project entity level.
• Phase 1 is expected to have a net present value of $8 billion, while the $2.5 billion expected from IRA is two times FREYR current market capitalization.
• My 1-year price target for FREY stock is $15.10. This implies that there is 102% upside from current levels.

This article was first posted in Outperforming the Market on May 15, 2023.

FREYR Battery ( FREY ) recently reported its Q1 results on May 15 ^th .

While share price movement was rather muted, I think that there were material insights learnt from the earnings call and Q1'23 print that I would like to highlight.

FREYR Battery - A brief introduction

For those unfamiliar with the company, I have shared with members of Outperforming the Market a deep dive into FREYR, which goes deep into the company's business model, technology, production process and business strategy, amongst others.

As a brief introduction, FREYR is a battery developer and producer based in Norway. It has plans to build up 50 GWh of battery cell capacity by 2025, 100 GWh annual capacity by 2028 and 200 GWh of annual capacity by 2030.

The gigafactories that have been announced are Giga Arctic and Giga America.

FREYR's value proposition includes improving the resilience for the battery supply chain in the United States and Europe, reducing the reliance on Asia and China battery players. In addition, it has a license agreement with 24M to use its SemiSolid lithium-ion battery platform technology. As a result, its batteries are known to produce batteries with high energy density and low cost to customers in the energy storage space, electric mobility space and marine space.

I have written other articles on FREYR, which can be found here .

Giga America roll out

FREYR earlier announced its intention to accelerate its Giga America project as a result of the favorable Inflation Reduction Act. The company released more details about their roll out plan in the quarter, with the intention for an initial 2.5 GWh of capacity coming on in 2025 while a larger plant will begin production in 2026.

FREYR named these two parts Phase 1 , with the first one called Phase 1a and the second larger plant being called Phase 1b. The total capacity for Phase 1 will be 37 GWh and FREYR has plans for future growth beyond Phase 1 for its Giga America business.

The splitting of Phase 1 into Phase 1a and 1b is primarily meant to reflect the two different timing at which they will begin production as well as the difference in financing processes for the two phases.

FREYR expects to fund all the capital expenditure requirements for Phase 1a through engaging with multiple strategic partners. The strategic partners will be investing at the project entity level, which will be attractive to FREYR shareholders as a result of the non-dilutive financing this offers for FREYR's shareholders.

Management shared that they have multiple strategic partners currently doing their due diligence and I am confident that in the next few months, we will see progress on the financing front.

In addition, I am of the opinion that the Phase 1 financial models disclosed reveal how attractive both Phase 1a and 1b are as Phase 1a is expected to have a net present value of $1.4 billion while Phase 1b is expected to have a net present value of $6.6 billion. As such, the total net present value for Phase 1 is expected to be around $8 billion.

To illustrate how attractive FREYR's valuation is today, management showed that the $2.5 billion expected to come from production tax credits from the Inflation Reduction Act is more than two times the current market capitalization of FREYR today.

In terms of the credits relating to the Inflation Reduction Act, management is of the view that the credits relating to the energy storage market are certain and that they are also certain the Inflation Reduction Act will continue until 2032.

Operational update

There are 170 people working at FREYR's two sites in Mo i Rana, with 70 working at the customer qualification plan and 100 working at the Giga Arctic site.

FREYR achieved a milestone in the quarter as it opened its customer qualification plant in Mo i Rana, which is the start of the commissioning of the plant. The company is accelerating startup activities and the first electrode production with active anode and cathode materials is expected to be in the second quarter 2023.

FREYR also introduced 277 standard operating procedures for the operations of the production line, with an expected 15 operators in the day while having 9 operators at night.

Giga Arctic continues to progress well in accordance to the planned capital spending and with an anticipation of a Norwegian IRA response.

Thus far, FREYR has spent $64 million of the previously authorized capital expenditures during the first quarter, which is about 75% of what was allocated to Giga Arctic.

For the construction of Giga Arctic, civil contractors continued their operations on the site, with the picture on the right showing the most recent picture of the progress on Giga Arctic, which is rather obvious when compared to what the site looked like late 2022. It was shared that front-end loading of the design of the production line equipment, along with project engineering continues at Giga Arctic, while Siemens digital experts have begun work on the site as well.

Lastly, the development of Giga Arctic is done alongside the development of Giga America. There is strong interaction and collaboration between the teams of both Giga Arctic and Giga America, using the learnings from Giga Arctic to improve on the processes, efficiency and costing for Giga America.

Sourcing

In terms of sourcing, FREYR is progressing well in securing all its key raw materials needed.

For its Customer Qualification Plant, the team has secured all materials needed for the ramp up. In addition, the company continues to look to increase the resilience of its supply chain by ensuring that raw materials can be sourced either locally or regionally.

For Giga Arctic, FREYR has already secured most of the materials needed and for Giga America, the company is looking to begin the process by looking for almost 20 suppliers.

Lastly, FREYR also signed an agreement with the Finnish Materials Group of Finland, which supports its business case for a potential plant in Finland.

Financial update

In terms of an update on the cash investments that the company is putting in, in the first quarter of 2023, FREYR spent $88 million in net cash, compared to the $107 million spent in the fourth quarter of 2022 and the $41 million spent in the first quarter of 2022. This $88 million comprises of the $64 million spent in capital expenditures, $13 million spent on the operating cash flows while $11 million was due to foreign exchange and other expenses.

In the first quarter of 2023, the company has $475 million of cash and no debt.

For the $64 million spent on capital expenditures, 25% was spent on the Customer Qualification Plant and 75% was spent on Giga Arctic.

Supportive regulatory environment

As highlighted multiple times by management, FREYR expects the EU to respond to the Inflation Reduction Act. There are early progress on this as Germany, France and Spain announced billion-dollar support packages recently. Norway will do likewise as they are expected to align to the EU's response and of course, given FREYR's relationship with the Norwegian government, I do expect that policies in Norway will also be favorable to FREYR.

FREY stock valuation

My 1-year price target for FREYR is $15.10. This implies that there is 102% upside from current levels.

This is based on a blend of the discounted cash flow method and EV/Sales method. I assume a cost of equity of 12% and terminal multiple of 15x. For the EV/Sales method, I assume a 3x EV/Sales multiple on 2025F forecasted revenues. I expect that the revenues will continue to accelerate rapidly through 2025, until 2030, given the ramp up of Giga America. As such, I think that the 3x EV/Sales multiple is justified based on this strong revenue growth profile.

Conclusion

I think that the muted share price response is unjustified given the ability of management to show confidence in providing non-dilutive financing for its Giga America project and also giving evidence as to what the net present value of Phase 1 of the Giga America project is. The quantification that the $2.5 billion expected to come from production tax credits from the Inflation Reduction Act is more than two times the current market capitalization of FREYR today is something that is overlooked by the markets today, in my view.

I also like that the Customer Qualification Plant and Giga Arctic are going according to plan and execution remain good on these two. With the Customer Qualification Plant startup accelerating, I expect customers to be able to do the required testing to further accelerate commercialization, which will in turn lead to easier financing for Giga America.

My 1-year price target for FREYR is $15.10. This implies that there is 102% upside from current levels. While there are many uncertainties, including the execution on production ramp and production yield on high volume production, I think that the current progress of the FREYR management team has shown they have the right team to deliver on FREYR's strategy and their progress thus far have left me confident in delivering strong growth for the company through 2030. As such, I do think the risk/reward skew looks attractive here for investors with a long time horizon and I would be a buyer on weakness as the shares of FREYR Battery looks very undervalued compared to what it will be achieving with Giga Arctic and Giga America.

For further details see: