Strong Q1 figures.
Q1’23 sales of SEK107m (SEK88m), relative to our estimate of SEK93m. Q1’23 EBITDA amounted to SEK76m (SEK61m) relative to our estimate of SEK55m. The main reasons for the estimate beat are better-than-expected realised electricity prices in the production segment and the construction of Kölvallen being recognised in the P&L to a larger extent than we had previously expected in the development segment.

Development

The development segment generated SEK17m in sales (SEK7m in Q1’22) relative to our estimate of SEK8m. EBITDA was SEK11m in the quarter (SEK4m in Q1’22) relative to our estimate of SEK-1m. The driver behind this beat is the Kölvallen construction being recognised to a larger extent than expected. Going forward, we expect Arise to recognise around SEK15m per quarter during the remainder of the project’s construction. This is, however, a mere P&L effect, as the remaining cash flow (earn-out) will be received once the wind farm has been finalised (given that construction goes according to budget). Furthermore, we are positive that the project seems to be going according to plan.

Other highlights in the quarter were the Persson Invest partnership (500MW) and the acquisition of Pohjan Voima (1.8GW) – which we have commented on before. This provides Arise with excellent long-term opportunities within the development segment – and should increase investors’ confidence in the business. All in all, the project portfolio grew 2.4GW in the quarter, now sitting at 5.5GW.

Production – very solid realised electricity prices

The production segment managed to live up to and exceed our expectations, generating sales of SEK82m (SEK75m) relative to our estimate of SEK75m. EBITDA amounted to SEK72m (SEK65m) relative to our estimate of SEK61m. The production figure was 87 (100)GWh in the quarter, in line with our previous estimate of 87GWh.

We consider the high realised revenue per MWh to be the key takeaway from this report. The average revenue per MWh amounted to SEK936 (755), relative to our estimate of SEK867 – thus beating our estimate by 8%. This is even more impressive when bearing in mind that the weighted average price for the quarter in SE3 and SE4 was SEK965 per MWh – down from SEK 1134 per MWh y-o-y. This is a result of Arise’s price hedges which had a very positive effect in the quarter. We had previously highlighted that we expected to see a positive effect, but this clearly beat our expectations.

Furthermore, Arise has also increased its SE4 price hedges for 2024 by 22GWh (total 74.6GWh at EUR110 per MWh) and also holds previous hedges for 2023. This should give good support for high and solid revenue generation during the coming periods, despite a volatile electricity market.

Investments in Lebo and Kölvallen proceed according to plan

Free cash flow in the quarter was SEK-52m, which can be put in relation to the net profit of SEK52m. The main reason for this SEK100m deviation is investments in Lebo and Kölvallen, and also due to Kölvallen revenue recognition being a cosmetic P&L effect (as the final earn-out will be paid once the project has been delivered).

We understand the construction of Lebo and Kölvallen proceeds according to plan. Upon this point, Arise has invested, according to our estimates, around SEK200m of equity in Lebo of the total SEK480m in CAPEX (redeye estimate). We expect the project to have a debt ratio of 60%, which means project financing should start being utilised soon (which is positive from a cash flow perspective).

During the quarter, the final payment for Kölvallen took place, which amounted to approx. SEK50m. The project is expected to be commissioned in 2025, and Arise has now invested approx. SEK170m in equity and remaining financing will be accounted for the JV/SPV with Foresight (co-owner) where project financing has been secured.

All in all, remaining equity investments are very low (or none) for Lebo and none for Kölvallen – who jointly will start producing 175GWh once in operation (Lebo in 2024, Kölvallen 2025). This can be put in relation to the current production of Arise’s wind farms of 343GWh.

Solid growth in the project portfolio

During the quarter, the project portfolio grew from 3100 MW in Q4’22 to 5500MW in Q1’23 (4600MW adjusted for 51% owner share in Pohjan Voima).

The growth is hence primarily due to the Pohjan Voima acquisition, which totalled 1700MW by March, but has grown an additional 100MW since Arise announced the acquisition - therefore now totalling 1.8GW.

Also, the Swedish wind project portfolio grew 200MW, which we believe are projects that are in early-stage. Swedish Solar+storage also grew 120MW, driven by additional projects entering the pipeline. We are positive about this, as we consider the lead time much faster and less complex than wind, therefore giving good support to near-term earnings (1-3 years).

UK solar+storage also grew from 220MW to 500MW, which we are very positive about. We understand this is due to increased capacity in the already communicated 280MW project. We also understand Arise is looking to secure more project rights in the UK, which we find positive.

We find the project portfolio growth very positive as it includes three different technologies and three different geographies, further diversifying and widening Arise’s footprint – reducing market-specific risks. Also, all new solar- and storage projects should have a relatively short and relatively easy permitting process ahead (relative to wind), therefore offering attractive time-adjusted ROI. This should give further support to Arise’s earnings in the coming 1-3 years.

Arise has also increased its personnel base, primarily with project developers, during the last years in order to support growth. We therefore expect to see further organic growth of the project portfolio, which should create significant value over time.

We incorporate Arise’s Q1 financials into our estimates along with the capacity upgrades of existing and new projects in the project portfolio, which further increased the transparency in coming years’ earnings.

We adjust the timing regarding the financial close of Finnåberget and Tormsdale from late 2024 to 2025. We leave the expected gross profit unchanged, but the timing affects our 2024 and 2025 estimates. We increase the UK Solar PV + storage project by 220MW, which increases the expected gross profit from the project by SEK150m.

All in all, our EBITDA estimate revisions look dramatic for the coming years. However, the total EBITDA for the estimate period is actually increased. It is important to point out that we take a conservative apporach regarding project sales timing, and we move projects that we previously expected to be sold in late 2024 to 2025 (as explained previously). This is hence a mere timing effect and does not change our fundamental view of the projects. Instead, we see a potential upside to our estimates if projects are to be sold in 2024 rather than 2025.

Arise’s total project portfolio of 5500MW (4600MW adjusted for 51% owner share in Pohjan Voima) which could generate SEK2.8m in gross profit by 2028 for Arise’s shareholders.

During 2028-2032, we expect SEK3.0bn in gross profit for Arise’s shareholders from the current announced project portfolios. This does not include any organic growth in existing portfolios or M&A (we do, however, expect both organic growth and M&A to take place and we will, therefore, likely increase our project portfolio assumptions in the future).

Our fair value range is increased on the back of our increased estimates and now sits at SEK68 (68) – SEK144 (141) per share with a base case of SEK121 (115) per share.

We continue to see the development segment as the main growth and value driver for Arise in the coming decade (illustrated in the project portfolio table in the previous section). However, investors should not foresee the values in existing production, which managed to generate SEK160m in EBITDA in 2022. These production assets indicated an intrinsic value of SEK1.9bn during Arise’s latest impairment test in 2022 – which is SEK900m higher than the current book value (based on 5-year-old market data and price forecasts and does not reflect current market fundamentals ).

Furthermore, no more equity investments are needed for Lebo and Kölvallen as project financing will start kicking in. These two assets will start generating a combined 175GWh pa by 2024 (Lebo) and 2025 (Kölvallen), respectively, which is a 50% increase relative to the current production of 343GWh.