Europlasma simplifies its corporate set up. The group will now own its power generation units and can crystallise the “hidden” value of those assets in the simplification process.

Europlasma should complete by the end of March 2018 a number of steps that will lead it to the full control of the SPVs which are at the heart of its green power generation proposition.

Whereas the cash benefits of the recently-announced transaction are fairly straight forward (halving the debt amount of an operating subsidiary and related financial costs, full access to €6.8m held in an escrow account), the asset reoganisation is a complex one for the non cognoscenti.

The final set up is as described in the following flowchart (company provided). In effect, the main shareholder (with 65%) of the first green power generation SPV (called CHO Morcenx) is recapitalising the SPV and then swapping its existing 65% stake in the said unit for a 20% stake in CHO Power.

CHO Power thus 80% owned by Europlasma raises it stake in CHO Morcenx from 35% to 100%. In the process, Europlasma’s Renewable Energy division called CHO Power is valued at €101m (80% owned by Europlasma), will use that valuation for future capital increases and collects the full profits of the green power generation assets (SPVs such as CHO Morcenx).

Eventually, this means that Europlasma plans to fund and take a controlling stake in every future SPV associated with green power generation.

The reorganisation is a positive surprise. One of the nagging issues with Europlasma moving away from being a pure plasma torch designer to a green power generator based on the use of plasma systems was and is the capital intensity of green power generation.

A typical unit is a c. €55m capex effort, out of reach of Europlasma’s much weakened balance sheet after many years of honing up on its technology. A typical unit would be 2/3rds debt-financed but the €15m equity leg would still be too much with Europlasma settling for a 35% equity stake.

In effect, Europlasma was addressing this attractive new market under four different hats: a component provider, an EPC provider, a risk taker as a minority shareholder in ad hoc power generation SPVs and a power generation manager through a fully-owned subsidiary (CHOpex). The inconsistent bit, out of necessity, was to be a minority shareholder in the SPVs.

This is addressed after the financial restructuring. It does change the business profile as it becomes all of a sudden “consistent”. Being the full owners of green energy SPVs means that Europlasma will book the energy revenues and become a power generator as well as an engineer for plasma solutions.

The complex business model that prevailed up to this reorganisation was that Europlasma would record revenues as an equipment provider, as an EPC supplier, as a power plant operator but only dividends from its minority stake in the power plant. This also meant that economic interests were not aligned between capital providers.

The solution whereby the owner of the first SPV (CHO Morcenx) swaps a controlling stake against a minority stake into a bigger, more ambitious company that will control CHO Morcenx and future SPVs is perfect.

It has an immediate consequence which is to put a price on CHO Power at €101m on which Europlasma retains 80%. This is about 2.5x our previous valuation (but CHO Power was then with only a 35% stake in Morcenx). It also puts a price on Morcenx at c. €30m or possibly twice its initial equity value.

It will take a few extra days to review the modelling of Europlasma. Obviously Europlasma remains only as good as its ongoing projects and Europlasma’s ability to deliver.

But it is already clear that Europlasma ends up as a much clearer investment proposition, that the “sexy bit” (green power) is now controlling the full value chain and that this solves part of the financing issues as Europlasma will have a better control of cash flows.

In short, the underlying cash flows are better captured and shared only as dividends with partners, not the other way round.

Excellent news. We immediately allow for a higher valuation of CHO Power and an 80% holding of CHO Power.