(Mirabaud is a bookrunner for Savannah)
Following news in December of further positive changes to the Seven Energy transaction we are upgrading numbers on SAVP. Our EBITDA estimates for FY19 & FY20 rise 79% & 81%, respectively, to US$173m & US308m, reflecting SAVP’s enlarged 75% share of cash flows and full consolidation of Seven into SAVP’s financial accounts. In parallel, under the revised structure, our Total NAV increases 24% to 89p/shr, suggesting fair value approaching 3x the current share price. With the Seven deal now in final form and expected to close this quarter, in our opinion, the scene is set for a material re-rating in the near-term. Accordingly, we maintain our BUY recommendation with a refreshed target price of 89p/shr – up from 72p/shr previously.
Revised terms deliver control of infrastructure and equity alignment: through a series of deal modifications agreed with PE partner African Infrastructure Investment Managers (AIIM) SAVP has recast the terms of the Seven Energy acquisition. The revised structure will see SAVP acquire an incremental 55% of Accugas and in parallel divest 25% of the Uquo gas field, resulting in SAVP owning 75% of Seven’s midstream (Accugas) and upstream (Uquo gas) units, and AIIM the remaining 25%.
Through increased ownership of Accugas (20% to 75%), SAVP gains control of a key piece of regional infrastructure which acts as the gateway to energy hungry gas customers in southeast Nigeria (see Accugas’s pipeline network in map in Figure 4, below). In our view, this is key to capturing the longer term growth opportunity around consolidating stranded gas resources (estimated at >40 tcf in the wider area), tapping into new regional power stations (such as Alaoji) and supplying high-paying industrial customers (currently burning diesel for an equivalent cost of >US$10/mcf – versus Accugas’s current weighted average sales price of US$3.5/mcf). Furthermore, equity alignment across Seven’s integrated gas business ensures the wider operation can be run as efficiently as possible.
AIIM cash consideration boosts liquidity and supports our wider valuation case: in consideration for its 25% stake in Seven’s Uquo and Accugas assets, AIIM has agreed to pay SAVP US$70m in cash on deal completion. This provides SAVP with a fresh source of liquidity coming out of the deal, bolstering the group’s finances and providing growth capital for Nigeria and/or Niger. Furthermore, by paying US$70m for 25%, AIIM has in effect franked the value of SAVP’s Accugas and Uquo stakes at US$280m/21p (including US$70m of cash receipts). This compares to SAVP’s current share price of 31.5p – implying little value for the Stubb Creek field (in Nigeria) or the potential in Niger. To put this in perspective, our aggregate NAV for the Niger portfolio and Stubb Creek field stands at 36p risked.