Landfill Gas Expansion And Grid Volatility Will Support Stronger Long Term Earnings

Catalysts

About LGI

LGI recovers biogas from landfills and converts it into renewable energy, carbon credits and infrastructure services across Australia.

What are the underlying business or industry changes driving this perspective?

• Expansion of contracted landfill gas rights and new abatement projects is increasing accessible biogas volumes, supporting sustained growth in ACCU creation and fee based services, which should underpin higher revenue and earnings over time.
• Rising grid volatility and widening intraday power price spreads make flexible assets more valuable, positioning LGI's growing battery portfolio and dispatchable biogas generation to lift realized electricity prices and segment EBITDA margins.
• Ongoing decarbonization policy and stable ACCU pricing are reinforcing demand for high integrity landfill abatement, so LGI's larger pipeline of compliant projects can translate higher gas recovery into incremental carbon revenue and cash flow.
• Recent step change in operating megawatt capacity and expected full year run rate from new sites in Canberra and Eastern Creek provide embedded volume leverage, which should drive faster revenue growth than fixed costs and support margin expansion.
• Disciplined capital allocation into higher returning projects such as Belrose and gas field upgrades, combined with proven cost control in operations, is creating operating scale benefits that should improve net margins and support compounding earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming LGI's revenue will grow by 18.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.6% today to 26.3% in 3 years time.
• Analysts expect earnings to reach A$16.3 million (and earnings per share of A$0.17) by about December 2028, up from A$6.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$21.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 31.9x on those 2028 earnings, down from 62.0x today. This future PE is greater than the current PE for the AU Renewable Energy industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Changes to ACCU methodologies and more stringent integrity and baseline rules could reduce the volume of eligible credits from existing projects over time, which would slow carbon abatement revenue growth and constrain earnings.
• Rising grid connection costs and potential delays in obtaining approvals from network operators and AEMO for large scale batteries and new generation assets could defer or dilute returns on LGI's development pipeline, which would put pressure on future revenue and EBITDA margins.
• Persistent drift of wholesale electricity prices back toward long term averages and further weakness in realized electricity prices could offset volume growth in megawatt hours, which would limit energy segment revenue growth and compress net margins.
• Increased leverage to fund high levels of growth CapEx, combined with higher interest costs and any underperformance or delay in new assets such as Canberra batteries, Eastern Creek expansions or Belrose, could weigh on free cash flow and earnings growth.
• Technological and competitive shifts in the energy transition, including cheaper large scale batteries and alternative decarbonization solutions for landfill owners, could erode LGI's pricing power on new contracts and future extensions, which would affect long term revenue and EBIT growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$4.78 for LGI based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$61.8 million, earnings will come to A$16.3 million, and it would be trading on a PE ratio of 31.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$3.88, the analyst price target of A$4.78 is 18.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.