Large Capital Return – 30%+ Upside (at NOK 5.93/share)
Aker Carbon Capture (ACC) is a cash shell which is trading at a large discount to NAV and which is likely to return a large portion of capital to shareholders shortly. Although the stock is listed in Norway, it can be acquired via Interactive Brokers.
As the name implies, the company used to develop carbon capture technologies for the industrial sector. Earlier this year, it sold all of its business to Schlumberger (SLB) for NOK 4.12bn in cash and a 20% stake in newly formed JV. This left ACC almost as a cash shell with a super clean balance sheet. Despite that, the stock trades at 21% discount to net cash – NOK 3.6bn market cap vs 4.6bn cash position. Management is now deciding what to do with the cash and plans to update investors in Q1 2025 – there are reasons to believe most of it will be returned to shareholders. Such an announcement would be a hard catalyst for ACC shares to re-rate, maybe not all the way to NAV, but at least half way there.
Besides cash reserves the company also has:
- Put option to sell the 20% stake in the JV to SLB after 3 years for NOK 1.03bn–2.06bn. Interestingly, SLB also has a call option to acquire ACC’s stake, but at a higher price of NOK 1.5bn-2.6bn. Only minimal details have been disclosed on these options.
- Performance payments of up to NOK 1.36bn, contingent on the JV business hitting certain undisclosed targets between 2025–2027.
No matter how you cut it, ACC’s NAV sits substantially above today’s trading prices. If I value the stake in JV at put option exercise prices discounted to today at 10%, I arrive at NAV of 5.3-6.1bn NOK. The present value of Performance payments adds a further 1bn NOK. In total that’s 50%-100% above today’s prices. My calculations are shown in the table.
I first came across this idea on VIC – the write-up is in public domain, but free guest account is required to access it.
ACC’s parent is over-levered and would benefit from capital return
ACC’s controlling shareholder, Aker Horizons (AKH:OL, owns 43% of ACC). The broader Aker Group, controlled by the Norwegian billionaire Røkke family, is a big industrial conglomerate (NOK 41bn mcap). Aker Horizons acts as its green business arm, focusing on renewable energy, hydrogen and carbon capture technology.
Aker Horizons has been struggling due to the slowdown in the renewable energy sector and major issues in Chile, one of its key markets. This led to a technical default on one of its debt facilities last year. AKH’s stock price has collapsed, falling from nearly 50 NOK/share in March 2021 to just 2 NOK/share today (1.4bn NOK mcap).
Aker Horizons faces a wall of near-term debt maturities: 6.1bn NOK is due in 2025 and early 2026. Out of that, only around 2bn NOK is intercompany debt issued by Aker Group, the remaining c. 4bn NOK is a real debt that will have to be refinanced soon. On top of that, Aker Horizons could be on the hook for a further 1.4bn NOK in the struggling renewables’ subsidiary debt, which has been guaranteed by Aker Horizons, and is callable in January 2025.
As of Q3, Aker Horizons had only 3bn NOK in cash and is burning it at a very high rate – operating cash flow was a negative 1.1bn NOK in 9M’2024 and negative 1.3bn NOK in 2023. While Aker Horizons does have access to a 5.9bn NOK credit facility, it’s hardly a lifeline, given how fast the cash is going out. Also, the RCF is meant for general corporate purposes (capex, acquisitions, expenses) and not debt repayments.
Aker Horizons is likely to face significant challenges refinancing its outstanding debt. Most of it was secured during peak optimism in 2021, with very low interest rates ranging from 1.5% PIK to 3M NIBOR + 3.25% (currently about 8%). Given the massive value destruction and its strained liquidity, any new debt will likely come at much higher interest rates if there will be any willing creditors at all.
It’s actually quite likely that ACC’s business sale was driven by pressure from Aker Horizon’s creditors. Local media portrayed the transaction as great news for Aker Horizons stating that, “two of the company’s creditors are now envisioning a major cleanup of its capital structure” (translated with Google).
What are the concerns?
The risk that ACC will squander cash reserves on random new assets is low. The main concern is that Aker Horizons, given its dire liquidity situation, could find a way to extract more cash from ACC than what it would get via capital return for its pro-rata ownership stake. As one Norwegian financial outlet put it (translated with Google):
Simply put, anything that weakens the financial position of Aker Horizons increases the incentive to grab a larger share of the cash in Aker Carbon Capture. This is to have enough cash to cover the debt in Aker Horizons, a large part of which is issued by Aker ASA. If Aker Horizons is to get hold of more than its pro-rata share of the cash in Aker Carbon Capture, this will necessarily come at the expense of the minority shareholders.
There are probably lots of ways this could be done, but one simple option would be if ACC acquired some assets from Aker Horizons.
ACC’s management is already taking rather long to review its options. The sale closed in June, and yet the decision on cash won’t come until Q1 2025. In the latest Q3 report, management tried to justify the delay by saying the company is evaluating its obligations related to the 20% stake in the JV, including “remaining pro-rata guarantee exposure for ongoing projects”.
However, it’s not clear what exactly does this “exposure” entail. As explained by local analyst (translated with Google):
If a project fails, the bank guarantees are first drawn on, so that the implementation guarantees only take effect if the bank guarantees are not sufficient, and then Aker Carbon Capture will be responsible for 20 percent of the remaining. Therefore, it seems a bit far-fetched that this should hold back the decision on the use of the cash reserves.
So it’s possible (but unlikely) that management / Aker Horizons are contemplating ways to screw the minority shareholders out of their pro-rata share of cash.
Regardless of what is happening behind the scenes and why it is taking so long, a lot of the uncertainty/risk seems to be already priced in, and there are a couple of mitigating factors:
- The Røkke family runs the show, and they likely care about protecting the reputation. I haven’t found any history of them screwing over minority shareholders – aside from this recent public spat with another Nordic billionaire over refinancing of an oil company.
- Both Aker Horizons and ACC are tiny pieces in the broader Aker conglomerate (which has a market cap of 41bn NOK). The equity value held by ACC’s minority shareholders is a drop in the bucket, so hard to imagine the family would risk their reputation just to move some cash around within the holdco structure.
- An EU-based hedge fund, Greenvale Capital disclosed a 5.21% stake in ACC shortly after the sale/JV was announced. It is not clear how much of this stake was acquired after the sale announcement (report is only about the 5% threshold breach), but to increase the position Greenvale had to be bullish about ACC’s discount to NAV and potential return of cash to shareholders.
One more risk relates to taxes on any capital return – it is not clear what form the potential capital return will take and whether it will be taxable for minority shareholders. However, I think the announcement of capital return itself, regardless of the form or taxation, will narrow discount to NAV.
Sky high scenario
Despite the relatively small size of the JV compared to its own EV, Schlumberger has given it quite a lot of time for it in the Q1 and Q2 conference calls and was very bullish about it. So I think there is a non-zero chance that those Performance fees will get paid out, and that the 20% stake in JV gets called by SLB at a premium valuation (the sky-high scenario in the table).
The JV has recently secured a major contract with CO280 for front-end engineering and design of a large-scale carbon capture plant on the US Gulf Coast. The project aims to capture 800,000 tonnes of CO2 annually. To put that into perspective, JV’s other three projects (still in development) target a combined 1m tonnes of CO2 capture. This recent win nearly doubles project’s pipeline.
Any idea what they will be required to invest in the JV for the capex in the ongoing projects?
On ACC’s conf. call management noted that SLB will fully fund the JV during the first 3 year lockup period. So no expenses to ACC. No details what happens after that, but its likely that the remaining ownership of ACC will be divested to SLB one way or another.
Contrary to what the writeup suggests, Kjell Inge Røkke (and his companies) has been notorious in the Norwegian financial scene for screwing minority shareholders – leading to his companies typically trading at larger discounts to NAV than peers. This has been known as “Røkke rabatten” (or the “Røkke discount”). In recent years they have (seemingly) improved, leading to smaller discounts than what has been seen historically. This situation specifically has led to speculations that this will change for the worse again. There has also been multiple, smaller shareholder groups raising their concerns about this in the Norwegian financial press recently, and ACC has been included in what has become known as the “charlatan trade” (basically a few COs trading at discounts to NAV due to perceived bad governance) in Norway. Aker representatives have responded to some of the criticism in public in a “non-direct” way which suggest they will consider it (and care somewhat about their reputation), but it is far from guaranteed
A friend who has worked with a Røkke family member on a project confirmed the sentiment conveyed in the comment above.
Thanks for additional color. Obviously my quick scan about the family and their governance did not produce the correct results.
But with ACC trading at such a wide discount to cash + stake in JV, do you think there is much risk in waiting to see how strategic review turns out (expected Q1 2025)?
I don’t really have a specific view wrt that, but fwiw I don’t own it currently. I just thought it should be known that this is not a “hidden cheapie” in Norway, and that the discount is there for a reason. In related news, another Røkke associated “to be” cash shell, Philly Shipyard, just today announced they were going to return at least part of the cash proceeds to shareholders once their transaction closes. That at least could be interpreted somewhat positively
Haven’t been following this closely but I think taxes are a key issue here. I don’t think a large distribution could qualify as a return of capital given the share capital of the company.
And, I’m not very familiar with the Norway tax code but I would note that at first glance it seems that Aker Horizons owns ~43% and consolidates ACC on its balance sheet. As such they might have different tax incentives. For example, an upstream dividend could be tax-efficient for them but not for outside shareholders.
d’Ieteren in Belgium is a recent example of a company that paid out an extremely tax-inefficient distribution (30% withholding tax ..) just because the controlling family doesn’t give a **** about tax consequences for outside investors.
Anyway, still an interesting idea, thanks for sharing!
Yes, have thought about this as well, but max WHT should be 15% for investors from countries that have taxation treaties with Norway (US and most of the EU included). This still leaves plenty of upside.
Does the treaty rate get applied in Europe in practice though? From what I understand brokers don’t have processes in place to apply treaty rates in countries other than the US. Claiming tax refunds is impossible in some European countries and tax refund specialist firms don’t take you on because fees would exceed your claim unless it’s in the millions.
IB in my experience only applies treaty rates to US and Canadian stocks. Which means I have to apply for a WHT refund for other countries. Norway takes 2 years to process it! I haven’t applied but the value of my Norwegian refund of large enough to try. I should also do it for Spain, France and Italy but if Norway takes 2 years then….
Does Norway really take two years though? In my experience reclaims in the Scandinavian countries are really easy to file and you get your money relatively quickly. Rule of thumb is the more southern you get, the longer it takes. Last time I did Norway I think it was done within a year.
Also, even if it takes two or three years, the withheld amount is often relatively tiny compared to the total expected proceeds and the delay doesn’t impact the IRR that much.
Norway is quick. Denmark is 2 years (literally, 4 months ago I got refund for 2022 dividend).
As expected, this week ACC announced an extraordinary special dividend of 5.8 NOK/share, payable in two installments: 4.82 NOK/share on March 7 and 0.98 NOK/share on April 29.
ACC’s share price jumped by 14% after the announcement and is now up 23% from write-up levels. The company is now trading at only a very slight 3% discount to net cash, however, the JV value is still priced at zero. My previous low-end target for ACC was 8.78 NOK/share – implying another 20% upside from here. But with uncertainty around withholding taxes on the upcoming distribution and no clear timeline for the market to acknowledge the JV’s value, I’m calling this one played out.
https://newsweb.oslobors.no/message/638428
After the two dividends are paid and uncertainty is gone regarding the withholding tax, it will immediately become interesting again, right?
Don’t you think the RemainCo (a subscale public company, the only asset being 20% minority stake in a JV) will very likely become a target for privatization in the short term?
Is ACC interesting again as a target for privatization, now that dividends have been paid?
Already played out. Will pay a new dividend at mid June, and liquidation proceeds after that
Trading was suspended on 13 Oct after a liquidation dividend.
According to the press release, ACC seems to have done very well for its long-term shareholders. Or are they spinning the story? On average, historically, has the Røkke family created attractive value for shareholders?
“The Company started as a spin-off from Aker Solutions in 2020 with a market capitalisation of approximately NOK 1 billion and a share price of NOK 1.7 per share. It has since delivered substantial shareholder value through development of the carbon capture business and the subsequent transactions with SLB and Aker. Since its inception, the Company has distributed approximately NOK 5.2 billion, NOK 8.66 per share, in cash to its Company’s shareholders, representing a remarkable capital return that exceeded five times the original IPO share price, fundamentally rewarding shareholders despite share price volatility throughout the period.”