Opportunities in clean energy and nuclear submarines

Over the past few months, the newspapers have been filled with articles about the Prime Minister’s shifting stance towards zero carbon emissions. The Glasgow climate conference is scheduled for next week with talks centered around a net-zero emissions target by 2050. We think this will drive significant investment opportunities over the next few decades and mention an unlisted company Xpansiv and a listed company that we have recently invested in below.

Xpansiv

Xpansiv is the world’s leading exchange for trading ESG assets, which include carbon, water, electricity and fuels. It provides a vertically integrated solution for trading, clearing, settlement and registry. It effectively is like the ASX, Computershare and Bloomberg all combined for these ESG commodities. I have been investing in stock exchanges like Nasdaq and Deutche Boerse for the last few decades and have been attracted to these businesses due to their monopoly-like characteristics and strong free cashflow. They provide a key technology and financial service to enable the trading of assets. What is so exciting about Xpansiv is that it is a globally leading exchange in an emerging and fast-growing asset class.

Carbon trading is growing exponentially given the global focus on de-carbonisation. Carbon trading volumes are up 60% this year. This growth will continue as the world moves towards net-zero carbon emissions, consistent with the Paris Agreement. 

The Business Council of Australia has called for a reduction in Australia’s carbon emissions by 50% by 2030, with the aim of net-zero carbon emissions by 2050. In order to achieve this, the trading of carbon credits will continue to accelerate. The carbon market currently is worth $1.5 billion and is expected to grow to $485 billion by 2030 and $3.9 trillion by 2040. There is also expected to be a cumulative US$56 trillion-dollar investment in green infrastructure globally to meet net-zero by 2050. Xpansiv’s positioning as the leading exchange in ESG commodities will benefit from these investments and tailwinds.

Xpansiv was formed through the merger of CBL Markets and Xpansiv in 2019. CBL Markets was founded in 2009 and operates a global commodities exchange. 

Xpansiv was founded in 2016 and operates a registry and data interface for ESG commodities. Together they form an integrated market operator, registry and market data provider for ESG commodities that include carbon, water, renewable energy and natural gas. The company has developed a unique ecosystem with $10s of billions of registered assets and over 1000 companies. This facilitates the management of derivatives, benchmarks and data products. 

Xpansiv has built a data framework to allow market participants to understand the environmental impact of activities such as mining, production, refining. It links this data with IoT and big data tools and registers that information as a digital asset known as "digital feedstock". This will allow the producers to sell both the fuels themselves as well as the record of the ESG attributes of those fuels. Revenue has been growing at a compounded annual growth rate of 80% over the past few years and is expected to grow to more than $100 million next year.

Xpansiv has the type of management team we look for in a company. It is led by Joe Madden, Xpansiv’s co-founder and chief executive officer. Management and the board own about 20% of the company. Larry Leibowitz is the Vice Chairman of the company and has a deep knowledge of global exchanges having worked as the chief operating officer of NYSE Euronext. The company has 100 employees based in Sydney, San Francisco, New York, London and Milan.

Austal (ASX: ASB)

Austal is Australia’s largest defence exporter and the only foreign-owned prime contractor designing, constructing and sustaining ships for the US Navy. 

The company was founded by John Rothwell, Austal's chairman and largest shareholder in 1988. Over the past four decades, John and the team have built a global defence and commercial shipbuilding company with seven shipyards in the US, Australia, Philippines and Vietnam. 

Austal is currently evolving from the world’s largest aluminium shipbuilder to an advanced maritime technology company with capabilities to manufacture vessels in both aluminium and steel and service them around the world. 

Everyone is currently talking about the $90 billion nuclear submarine contract to build 12 new submarines that Australia cancelled with France, in order to award the contract to the US and UK. We believe there is a tremendous opportunity for Austal to win work from the US Navy as the US and Australia strengthen their military relationship. Interestingly Austal’s CEO, Paddy Gregg, was the head of project construction of the second Astute Class nuclear submarine, developed by the UK’s BAE Systems.

Austal’s shares have dropped recently due to covid causing some volume impacts and delays in their shipbuilding activities in Australasia and the US, as well as concerns around the company’s ability to replace the work from their Littoral Combat Ship construction program, which winds down over the next three years. We expect that this work will be replaced by new orders for steel vessels from the US Navy and last week the company was awarded its first contract of this type worth A$200 million. 

Around 75% of Austal’s earnings are derived from the US and we expect Austal to be well placed in bids for the Offshore Patrol Cutter for the US Coast Guard, the Light Amphibious Warship and longer-term projects such as the Next Generation Logistics Ship. Austal’s strong capabilities in smaller vessels as well as its advanced technology were reflected in a recent contract award to make its EPF 13 an autonomous capable vessel.

 

We are surprised that Austal is trading at a price that values the company below the value of its land and buildings. Especially when some of this land is waterfront properties in the US, such as in Mobile Alabama. Austal has $200m in net cash and generates strong free cash flow. It is the cheapest global defence company trading at an EV/EBITDA of only 3.7x and we think it is significantly mispriced. 

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