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I have done more research and thought about t some more. if the revenue from a GRID can drop off that quickly and if the revenue curves are thatt inaccurate, the margin for error must be larger.
there have been a bunch of people in energy storage who think they are smarter than they are and GSF is certainly one of them. they thought they were smart to choose smaller batteries which turned out to be incorrect (because they cannot participate in Blaancing Mechanism which will become the larger part of grid revenues in UK). GRID is spending money upgrading their systems to longer duration to allow them to be more flexible with their assetts - GSF is arrogantly contuing to purse their expansion into more small batteries in the UK without really considering the futurre rrevenues tthese will ggenerate (or more importantly how). GSF think they know it all but it has proven to be false so far in UK.
in the USA grids will clearly follow a similar path to the UK since the UK is just ahead by a few years. givenn the USA has also got the 30% capital refund, the BESS systems will saturate the grid even faster there.
GSF and rest of 'im the smartest guy in the room' will end up being acquired at below NAV once the dust settles and smart people with good capital allocation can acquire these muppets et al.
This is not about UK capitulation - there are many UK stocks trading at much higher levels than 3 or 6 months ago, this is about people now wanting to be left holding something that doesnt avtually produce the expected cashflows.
at the moment Gore street has done a terrible job of annticipating UK revenues (and their capital allocation) and they will likely have similar issues in the USA as grid saturation takes hold there.
Gore street has a right and wrong price. this is the wrong price and its likely the right price is 50 or in the worst case 45 -and ill be buying a lot then, but not much at theese levels.
GDF does have some bond like properties but thats not even the point. there are risks that have simply not been discussed sufficiently by the management - technological obsolescence, market saturation, regulatory risks. there is a half hearted attemmpt at risk management but the sensitivity analysis is only for show.
GSF mgmt need to be much better at capital allocation and ensure all assets are performing as well as possible (which means choosing the best operator aggresively). they need to provide more forward guidance and regular updates on performance of asstes to investors if possible but they also need to consider scenarios where rates stay at 5% for 3 years or so (or maybe longer as govt spending is high so rates dont affect the economy as much).
can they still earn any kind of return if rates stay at 5% and loans are at 8%? i think not much - not without some careful capital management.
They mentioned that forward rate curves where accurate (in their latest RNS update)- well if thats the case did they predict the massive slump in the uk market? Lets have a look at annual report page 31 - Revenue curves for the UK indicate an expected revenue from UK of £90-100,000/MW/Yr (and this to be steady for over 20 years).
BUT LETS HAVE A LOOK AT ACTUAL PERFORMANCE: https://www.bessanalytics.com/performance
gore street has managed only £25k/MW/Yr in the uk on its assets over the last 90 days (thats 25% of the expected revenue curves which they said were accurate QUOTING THE 5th Feb RNS "Storage investors have relied on forward-looking revenue curves to make capital deployment decisions and determine asset values. The revenue curves employed in valuing GSF's assets have proven to be the closest to actuals amongst those disclosed in the market, avoiding Net Asset Value volatility."
so the company is earning 25% of the expected revenue and they say its accurate.
https://www.gsenergystoragefund.com/content/news/archive/2024/050224
I dont think its tthe end of the BESS story, or even that Gore street is going to fail, i just think there are risks we should be paid for and this price is probably a good price to buy, ideally i would like to buy at 60
Sodium ion batteries have been demonstrated by the chinese at a large scale and at energy densities similar to the new LFP lithium batteries (though lower number of cycles for now, they are close). they will take another 5 years of testing and improvement until they reach the market but they will (as will other battery tech including improvements to LFP chemistry)
Therefore Gore street should be very careful not to over invest in this tech without getting a good return with a relatively short payback - if the payback is too long its possible the battery loses value before its completed payback. I think this is likely in the UK market - though hopefully usa market holds up long enough for a payback.
of course sodium ion and other battery tech will not immediately flood BESS. other companies have also invested a lot in lithium ion and as the BESS get slowly replaced by sodium ion or other tech (starting 5 years from now) - the storage costs will continue to decline - and quite possibly this part is not factored in by Gore street. Even if existing BESS providers wont have more capital to reinvest into sodium ion, new entrants may be taking market share with cheaper technology by that time.
Gore street should be very careful with their capital allocation going forward - like others have mentioned they should consider carefully the current trajectory of spending with a higher hurdle rate due to these risks. Other companies like tesla can afford to have a year or 2 of 0 revenues in BESS since they are diversified, while gore street would have more issues in that case. I would especially say that Gore street needs to seriously review all UK projects in light of potential technical obsolescence, regulatory risks etc - that would likely mean waiting until rates are significantly lower to expand uk storage. In the US given the 30% rebate and higher yield i think it makes sense.
there are some positives too however, the grids will need a huge amount of storage over the coming years and if the UK or other markets get saturated, it should self balance since a reduction of supply should follow.
Overall the risks are not fully considered in the analysis by gore street - they have no sensitivty analysis to battery life (or battery tech life), they have not completed their NAV sensitivity analysis in an honest manner (why is the low case for revenue not actually the low case on p 33 annual report). they also use peer revenue curves for their assumptions/calculations, i would have thought that they looked into this themselves and would have their own view/analysis. Finally the discount rate is too low given the risks above - many companies are looking to generate 15% on equity to account for the risks in their business. applying a 15% to GSF would reduce nav around 50% to 55p which is where i guess the SP is going.
Also annual report page 33 , Stony was meant to be energised end of July and ended up being energised much later in Nov
Thanks for the information, i did figure that (though as you say they depreciate the NAV). however we do have no visibiity on any of the projected cashflows, depreciations etc. if they are adding up all the expected revenues over the life of the batteries (accounting for revenue curves) and discounting by 10% then i guess thats fair - however it does mean that buying at the NAV effectively caps your return at 10% minus inflation.
some risks which are not even visible also include technical obsolescence, battery lifetime variability, weather events distrupting operation and greater variability in the revenue curves (given that they must be projected out to the lifetime of the batteries which must come with a big risk margin).
given that we have none of the information above - neither the DCF analysis with expected cashflows and retired batteries, nor do we have a serious risk analysis out to past 5 years, then its no wonder its trading at a significant discount to the NAV
Why has the fund and no one else ever mentioned depreciation of their assets? the NAV calculations never mention this. How can a battery storage system not depreciate when it has a useful working life of 15 years or perhaps 20 at the most? if GORE street has a NAV of 480 million (lets assume once it is all built out) - it will depreciate by over 20 million a year. the depreciation was shown in the annual report FY ending MAR 2023, however in the half year report ending sept 2023 it is missing from the updated NAV! how is this inconsistency not called out
BTW this is interesting, im a little worried that they are letting share price drop a lot for a takeover, since they would still net big mgmt fees - although this could almost be fraud:
https://citywire.com/investment-trust-insider/news/gore-street-nets-strong-battery-returns-and-adds-takeover-fee/a2405232
I dubt it should be delayed by much but maybe slightly since there are many grid connections waiting (same problem in USA). i would like to see Gore street write down some assets if thats the case and delay some of the investment. they have 100 mil in cash earning some 5 million interest, plus if they write down the assets it will count as a loss and therefore taxes will be 0 (while they could continue paying the dividend).
I have seen that UK auction prices for energy have recovered in last couple of months but the medium term trend is still likely down a bit if not flat, usa will be down significantly soon too but it cant go too low or supply will simply decrease.
i think on balance, given Gore street is earning 30m a year and (stony plus feymoor) might increase that to some 34 mil (close to 36 million for the 7.5 p dividend) i think that the dividend is a bit higher bbut likely to be maintained. However we should be very careful if the company starts paying a dividend and borrowing money to fund US and other projects without doing very deep analysis as they currently have a slightly shady history of very bad capital investment (raise 150 million at 110 - share price is now 73, where did all that capital go? poor acquisitions of assets which were not propery risk assesed - same story in many companies)
What happened today, lots of sells after a special meeting for analysts? and the investment manager bought shares at 78. what a mess, at 73 i think its a good buy - could be ana amazing buy at 55 or so if it gets there, lets see
30 million in profits to mar 23.
550 million in assets (according to their evaluation of course).
The BESS markets in Cali, Texas and UK are quite saturated and will become more so, but this is already priced in to the estimates by Gore Street (see the presentation for price delcines expected).
My Basic calculation is that by the end of 2024 the revenue should be c. 68 million (based on the capacity incoming in UK, NI and California in 2024). given costs might not increase much - that could be a profit of 50million thus covering dividend (36 mil @7.5p and quite a bit more on top), however im not sure exactly how much debt, if any, they would need to take on to fund the projects to year end 2024 (maybe someone knows)
some risks:
-i think the pricing risk for BESS price/Watt is already discounted in by Gore Street
-Execution risk (ive noticed that Stony project has been delayed - it was initially intended around aug but we have no notification of its electrification and this was also mentioned in latest querterly) if other projects are also delayed this could present a big risk and this should actually be answered by mgmmt.
-risk of not getting the 30% capital grant from USA - i think this is low
-operational risks - probably low since these systems are commercially standard and run by large operators
- competition - although there is a huge amount of competition, at the current price i think Gore street is relatively immune. the BESS price per watt is going down and that would reduce competition in the long run since it is being oversupplied. Gore street managed to raise a lot of funds (bad for the subscribers of the issue, good for people buying now at 80), therefore its got cash to survive any problems in the market.