AMPIL2 (AMP Clean Energy Update)

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We first looked at AMPIL (AMP Clean Energy) in December 2022, club members can find our detailed piece here: https://www.europeanhighyield.online/aggregated-micro-power-infrastructure-2-plc-ampil2/.

Earlier this month the company released FY23 numbers, which largely affirm our existing narrative.

The company is performing in line with (if slightly below) our expectations & management guidance. This is encouraging, as shows that the business is (roughly) following the script as we understand it, and that management communication with stakeholders has been well intentioned & credible.

Speaking more narrowly to the results themselves, this was an ‘exceptional’ year – both in the literal and accounting sense, following a period of extreme volatility in energy markets in calendar year 2022, the companies’ gas turbine peaking units (dubbed ‘Flexible generation’) were immensely commercial. FY 23 revenue + 275% to 82.8m, EBITDA +407% to £58.3m and cash +4529% to £32.4m.

However, some of our initial concerns are also coming to light, we noted in our initial review that we thought the covenants were fairly generous in their allowance for dividend payments up & out to non-guarantor entities.

A DSCR covenant regulates the upstreaming of dividends out of AMPIL2 and is currently set at DSCR 1.25x. The forward DSCR as of FY23 stands at 2.16x.

In FY23 the company paid a dividend of £6m, however, post filing the accounts management have announced further dividends totaling £27m so far in FY24, vs a FY23e ending cash balance of £32m. The covenants allow for no material restrictions on the upstreaming of cash should the DSCR be greater than 1.25x. Our core concern has always centered on the amount of buffer left for periods of less than exceptional performance.

Cash leakage:

Ultimately, the company has delivered on its capital deployment. The portfolio is now mature and FY24e capex is set to materially decline to £1.9m from £21m in FY23e, which sets the business up to churn off satisfactory amounts of cash flow (we have penned in ~3m – 5m of LFCF post dividends, interest payments & bond amortization).

December 2022 EHYO model:

This view is principally threatened by contract risk – the failure of multiple of it’s major customers (contract risk). The headline here is that ~50% of EBITDA from the biomass segment comes from the three largest customers, while the top 10 customers account for 79% of revenues.

We assessed contract risk in detail in our long form piece and concluded that it was moderated by the strong credit profiles of two of the three largest customers (A ratings), and the ability of customers to sell their assets to new operators should they face financial distress.

We did identify one customer that we would approximate to high yield – Muntons – a malt supplier. A review of Munton’s most recent accounts shows that net leverage has increased from 4.21x (FY21), to 4.96x. Overall performance at Muntons was relatively flat – revenue grew from £108m to £130m but rising input costs meant that EBTIDA was flat year on year. Leverage increased due to increased drawing on Muntons secured credit lines with HSBC, before their three-year extension signed in April 2023.

Muntons KPIs:

Summary

In conclusion, we weren’t surprised by the update, the drivers of the credit continue to churn as we understand them, there are material risks due to the loose covenant package & potential contract risk as the UK economic outlook remains mixed. However, the company has a clear purpose, the assets are cash flow generative, and management has been credible, open, and responsive.