The reported production amounted to 69GWh in the quarter (54GWh in Q2 2023), relative to our estimate of 84GWh. Production EBITDA amounted to SEK23m (SEK36m in Q2 2023) relative to our estimate of SEK30m. We consider the main reason for the deviation to be Lebo not being fully consolidated and lower production than expected.

Lebo is now fully operational

We understand that Lebo contributed around 8-9GWh to the production segment in May and June, and we believe that 4-5GWh contributed to the development segment in April ahead of its commencing date in May. As such, Lebo’s total production seems to have amounted to around 12-14GWh, while we expected a total of 15GWh from the wind farm. According to our calculations, the winds in Q2 2024 were stronger than in Q2 2023 but still lower than the budget.

For modelling purposes, we decided to include 100% of Lebo’s production in the production segment, but in order to make numbers comparable, it seems that Q2’s total production amounted to 74-75GWh, which compares to our estimate of 84GWh. Going forward, Lebo will be fully consolidated into the production segment, and it is also worth highlighting that no CAPEX remains related to the project.

Average realised revenue per MWh was solid in the quarter

The average realised revenue per MWh amounted to SEK549/MWh (SEK947/MWh in Q2 2023). This compares to our estimate of SEK528/MWh and the average weighted market price of SEK507/MWh. The positive deviation from the market price is due to favourable price hedges. We consider the realised price level positive and in line with our estimates.

However, according to our calculations, the capture price discount (realised price vs average market price adjusted for hedges) was around 30%, significantly higher than our future estimates of 15-20%. We understand the reason is due to very volatile spot prices during Q2, but if this discount level persists, we might need to revise our estimates. Arise’s management expects a level of around 15% going forward.

Hedge portfolio remains intact

Arise did not increase its price hedge portfolio during the quarter, but we understand that it keeps monitoring both volumes and price levels. We get the impression that the price levels are currently below what Arise thinks they should be, and it expects price levels to increase during the coming quarters – where we expect Arise to be opportunistic if attractive price levels present themselves. The hedge portfolio can be found in our detailed estimates tables.

We do not make any significant estimate changes for the production segment following the Q2 report, and we also keep our electricity price assumptions for the coming 3-year period intact. We also wish to highlight that Arise still sees values in its own wind farms exceeding the book value by EUR60m in its latest impairment test.

The development segment generated Q2 2024 EBITDA of SEK33m (SEK42m in Q2 2023), relative to our estimate of SEK26m. The reason for the y-o-y decline relative to Q2 2023 is due to lower revenue recognition in projects. The deviation from our estimate, however, seems to be due Lebo contributing positively as its production of 4-5GWh was included in the segment until May, and also due to slightly higher costs than expected. Arise also received a EUR2.4m result boost from the earnout related to Rana- and Salsjöhöjden.

Arise has increased its headcount for 11 consecutive quarters to support growth, which has been slightly ahead of our expectations (although we do not consider it a negative). However, as we slightly increase our FTE expectations, the personnel costs increase somewhat, which is the only material estimate change we will make for the segment in this quarter.

The project portfolio keeps growing

The total project portfolio amounted to 7865MW by the end of the quarter, growing 745MW since the previous quarter. This growth is primarily due to the 500MW agreement with Finsilva, as well as the organic growth of the portfolio. Also, 175MW has entered the late-stage portfolio, which we consider positive. In total, the proportionate project portfolio sits at 6096MW.

We notice that the work with Finnåberget continues, and the target remains to divest it during 2025. However, there are still uncertainties regarding the final capacity, and we understand that it will become clearer in H1 2025 when the grid company has made its final decision. We will continue to monitor the progress of the project closely.

The UK market is sending positive renewable signals

We also note that the UK is sending positive renewable energy signals following the recent election. To our understanding, the new government wants to increase renewables share of the production mix, which implies 2x for onshore and 3x for Solar PV by 2030. We consider this very positive as it could increase the likelihood and possibly improve the pace at which Arise can realise its regional project portfolio. We also think it increases the likelihood of new projects entering the portfolio, which supports the long-term case in the UK business.

Increasing investor appetite

We understand that investor appetite seems to be increasing following lower interest rates and more stable CAPEX levels. Despite no investment decisions being taken in the Swedish onshore wind market during Q2, we still think that the case for onshore wind is strong and that profit levels should be normal/attractive going forward (given that the projects are sound).

We believe this is further supported by the fact that companies such as OX2 (one of the biggest renewable energy developers in Europe) received a bid with a 43% premium from private equity giant EQT. We have also seen Swedish solar PV project developer Helios Energy being acquired by an infrastructure company for an attractive price tag. We argue that this clearly illustrates their beliefs in the sector and that valuations could be considered low.

Arise’s strong financial position allows for value creation

We think that Arise, who historically has been dependent on the current market conditions when divesting projects, now finds itself in a position (thanks to its financial position) where it can be flexible in either divesting an RTB project or starting construction and creating further value, and divesting further along the road. We think this significantly reduces the market timing risk while allowing Arise to extract further value.

Strategic partnership with Finsilva

We consider the 500MW strategic partnership with Finsilva through Pohjan Voima to be very positive. Arise will account for all project development, whereas we understand that Finsilva will take part in future profits the projects generate. We understand that projects could reach RTB (ready to build) status as soon as 2027/2028-2030.

The partnership does not impact our growth assumptions but increases our confidence in Arise reaching its financial targets of divesting >500MW pa during 2026-2028. Finsilva is one of the biggest landowners in Finland, and we think that the partnership is a testament to Pohjan Voima’s reputation in the Finnish market. We understand that profit levels are in line with Arise’s target (or slightly below), and we understand that Finsilva has the opportunity to acquire minority shares in the projects (both solar PV and wind) in conjunction with the FID (final investment decision).

The solutions segment developed positively during the quarter, reporting income of SEK14m vs SEK10m last year. EBITDA amounted to SEK3m (SEK0m Q2 2023) relative to our estimate of SEK2m, and we argue that the segment has reached a new and stable level of profitability, which should have good grounds for growing in coming years (as new construction agreements are signed and new asset management contracts enter the portfolio). The reason behind the Q2 EBITDA growth is driven by the construction agreement of Fasikan and the asset management agreement for Skaftåsen.

The net cash flow in the quarter was SEK-131m, where operating cash flow after changes in working capital amounted to SEK24m. The difference between these lines is explained by CAPEX, amounting to SEK-59m (driven by Lebo, but which is compensated in the cash flow by new loans), and due to dividend and share repurchases taking place in the quarter – totalling SEK-100m.

Arise has no CAPEX requirements (apart from the EUR18m Pohjan Voima earnout, which we expect to be paid out, step by step, during the coming 2-3 years) other than if it decides to construct projects rather than selling them as RTB (which we would consider value accretive). This means that cash generation from the stable production segment should be strong going forward, as Lebo has now also been finalised.

With SEK804m in cash on hand and a relatively low net debt level of SEK328m (given its operational assets and cash generation), we think Arise has a wide range of opportunities to deploy this cash. Either through M&A, which it has highlighted often or by further shareholder distribution (dividend or share buybacks). We believe all these factors could support the share price.

We make minor estimate changes following the Q2 report, which refer to a slightly increased personnel cost run-rate. At the same time, we slightly reduced our other external expenses, which slightly increased our total OPEX assumptions. We also increase our D&A assumptions following Lebo becoming operational, which increases the D&A but has a neglectable impact on our valuation. Our EBITDA estimate remains intact, while the net profit is somewhat reduced following the increased D&A.

The following table illustrates the key assumptions in our base, bull, and bear case scenarios. Our fair value range remains intact at SEK22-111 with a base case of SEK79 per share, despite minor negative estimate changes, which are offset by Arise’s share repurchase of shares, which positively affects our valuation.