I am holding/building a position with a 2-year horizon – here my basic reasoning:
Current valuation: about $150mil. = about $2.1 per share
Next milestone: to bring the first 20MW Frequency Regulation Plant online by April 08
US Market (2005) for Frequency Regulation services (states with deregulated energy sector currently accessible to Beacon): $600mil. annually
Further growth likely by opening of additional US markets, and increased use of renewable energies.
Basic Business Model:
Cost to build 20MW plant: $30mil.
Est. Annual Earnings per 20 MW plant: $8mil.
Est. 10-year value per plant: $50mil
Est. number of plants to be built in the next 2 years: 8-12
Est. Company Value in 2 years: between $400mil. and $600mil. ($5.6 per share - $8.40 per share)
Additional upsides:
- Market might be growing faster than expected, opening of Canadian- and South American Markets
- Increased production capacity may increase the number of plants that can be built per year
- Possible licensing or technology sales to Europe and Asia
- Rising energy prices will drive up the cost of conventional frequency regulation services – increasing operational margins
- Depending on growth rate and size of opportunity – valuation multiple could be larger
- Additional efficiencies of scale will lead to lower costs per plant, possibly increasing 10-year plant value to $60mil.
Downside risks:
- Possibly ongoing patent issues, maybe settlement needed
- Possible performance, operational problems at the first plant
- Entry of new competitors, or different technology
- Possible overall reduction of market potential because the faster response provided by the new tech. may reduce the amount of frequency regulation services actually needed
$2.06 (10/25/07)
