Daily Brief Energy/Materials: Origin Energy, Indika Energy, Empire Energy, ADF Group and more

• On the 31st October, AustralianSuper (with 13.67% of shares out and Origin Energy (ORG AU)‘s largest shareholder) argued the Brookfield/EIG-backed Consortium Offer remained substantially below its estimate of fair value.
• Brookfield/EIG have now increased their Offer by 8% to $9.53/share from $8.81/share, which now comprises cash components of A$6.59/share and US$1.86/share. A consideration-reducing fully-franked dividend of A$0.39/share is expected.
• The Offer is declared “best and final.” It is above the top-end of the IE’s valuation range. AustralianSuper should accept the revised terms. But they say no.

• Origin Energy (ORG AU)  has disclosed a best and final offer from Brookfield/EIG at A$6.59 and US$1.86 per share, which implies A$9.53 per share, 8.1% higher than the previous offer.
• AusSuper will vote against the final offer. Taking advantage of the share price dip, AusSuper is said to have further increased its shareholding to 14.98% of outstanding shares.
• The scheme will likely fail as a minority YES vote turnout of 88% is required to pass. Brookfield/EIG could return with an off-market takeover offer, but it also faces issues. 

In our view, Indika Energy’s 9M/23 results were weaker than expected due to a sharp decline in Kideco’s production and sales volume in Q3, lower-than-expected profitability at Kideco (which accounts for 90% of Indika’s EBITDA) and negative OCF, which came as a surprise. The balance sheet turned to a net debt position, after a few quarters of net cash. Liquidity remains sound, with a large (albeit fast shrinking) cash position.

OCF and FCF were negative, which was surprising as Indika has previously managed to generate positive FCF even when coal prices were lower than current levels. The last time the company generated negative FCF was in 2015, during a major coal downturn. We believe that the negative OCF may be due to the new businesses, which are ramping up. Indika’s key business strategy in the medium term is to diversify away from and reduce its reliance on coal-related activities, with the company aiming to derive 50% of its revenue from non-coal sources by 2025. The new businesses include a gold mine, renewable energy solutions (mainly solar power), electric scooters and several digital technology businesses.

• Empire Energy Group Limited (ASX:EEG) is an oil and gas producer/developer, with onshore Northern Territory (NT) and US oil/gas production assets.
• EEG has the largest tenement position in the highly prospective Greater McArthur Basin, which includes the Beetaloo Sub-basin.
• The investment case is building with the development model becoming more defined after the completion of the Carpentaria-3H testing campaign. 

• ADF is entering a multi-year growth phase due to major tailwinds in infrastructure spending and non-residential construction.
• ADF Group Inc. (DRX:TSX, ADFJF:OTC) is a North American leader in the design, engineering, fabrication, and installation of complex steel structures for non-residential construction.
• ADF has posted a long-term track record of growing revenue and EBITDA, but we believe it has entered a multi-year growth cycle where it can post consistent growth and FCF generation.