Description

This is a brief profile on a liquidation play that is best suited for PAs, Maxim Power (MXG) has been written up quite a few times on VIC and elsewhere - the story largely remains the same and has oversold for reasons we believe provides an opportunity for incoming retail investors. Simplistically, Maxim Power is a sub-scale power generator that is in the process of developing the last of its core Alberta projects to shop around.

We believe that in light of this positive optionality, there is ample margin of safety amidst a purchase price that would provide attractive IRRs over the next couple years.

MXG’s stock had dropped quite a bit over the past half year as a result of management selling MUSA at a firesale price to Hull Street Energy. With the exception of management, shareholders were none too happy with selling the crown jewels at roughly 5x EBITDA. The consensus had overestimated management’s ability to shop their own assets!

Herein lies the dichotomy shareholders aren’t too comfortable with.

The scenarios flows two ways: 1) by pursuing liquidation, management needs to sell their Alberta assets which, upon some extrapolation, likely spells value destruction for shareholders. 2) management decides to develop their Alberta assets fully as a going concern - this scenario introduces uncertainty amidst MXG’s abhorrent operational track record and to the consensus, is a perception of larger value destruction.

The variant view however, is a little more optimistic. Management has demonstrated intentions of pursuing the former path, and now has de-levered to a debt-free balance sheet. MXG’s Summit Coal asset has much of its intrinsic value impaired in light of the Canadian government implementing a phase-out of coal production, intending on accomplishing this huge shift by 2030 to more sustainable sources. Arguably, the asset is probably worth 0. The consensus has also valued the core Alberta assets, HR Milner, Gold Creek, Deerland and Buffalo Atlee assets at 0.

While Summit Coal’s lack of value is justified, we believe that the core Alberta assets are very positive optionality.

Alberta has recently announced its intention to transition towards a capacity market. Naturally, this favours higher capacity generators; additionally, they favour power plants that are within locational proximity. For the most part, the brownfield assets fit both bills, as they are conveniently located within relative proximity of Alberta’s two largest cities: Calgary (Bufallo Atlee wind project) and Edmonton (Deerland).

These assets will supply electricity to the broader Calgary and Edmonton demography. Their earnings power will stabilize in a capacity market, and will benefit from the tailwind of the coal phase-out. The Buffalo Atlee wind project, located in Brooks, Alberta will likely fetch a higher valuation as the massive Sheerness Generating Station is placed at a disadvantageous position: ATCO-TransAlta will likely be required to layout incremental capex to transition its production capabilities. There are few power plants of comparable size near Brooks, Alberta.

Management has assessed and intends to develop their brownfield assets to fetch a higher price than 0. For purposes of conservatism, we value this segment at 0, though we believe the probability of that is very low - at the very least, we believe this optionality is positive enough to support the liquidation value with ample margin of safety.

The valuation is quite simple, and can be completed on the back of a napkin. At current exchange rates as of writing, the SOTP valuation is as follows:

• Proceeds from French asset sale: $65m CAD

• Proceeds from MUSA sale: $110m CAD

• FERC Line Loss Settlement: $40m CAD

Recent press releases has indicated progress to receiving the settlement, and will likely be closed within 2-3 years time.

Hugely incremental to the valuation are credits which protect the value of the assets and MXG’s earnings power, should they pursue business as a going-concern:

• Deferred tax assets north of $185m CAD at year-end, @25% has a value of ~$45m CAD

• Remaining environmental credits: ~$5m CAD

Debt-free and on a share count of 55m, your upside ranges from $3.90/sh - $4.80/sh.

It is notable to re-iterate that management owns more than 50% of the shares outstanding, and are well incentivized to close the gap in liquidation value as their stake is well below average cost  - they have been well profiled in previous write-ups.

Irrespective of their ability to shop their assets, we think that there is a high probability of closing the gap, net of some cash burn from asset development.

Though the risks with developing their brownfield assets exist and are valid, it is worth the risk with a large margin of safety padded in at current prices.

Risks:

• “Exchange rate normalization”

• Operational risk

• Marginal cash burn may not be marginal at all.

• Time Horizon draws out longer than expected

Catalyst

• Receipt of FERC Line Loss Settlement

• Positive value placed on Alberta core projects

• Return of capital via special dividend