Meet LGI, Alternative Clean Energy Producer

This story features LGI LIMITED. For more info SHARE ANALYSIS: LGI

The company is included in ALL-ORDS

LGI produces electricity from landfill gas and boasts a significant growth trajectory set to generate material revenues and earnings.

-LGI’s first half solid; earnings miss on development costs
-Landfill gas important to net zero targets
-Development pipeline to 32MW capacity

By Greg Peel

LGI Ltd ((LGI)) is a well-established operator in the landfill gas sector, generating renewable energy from the biomethane emitted as waste products decompose. The business is currently producing power on only a fraction of its contracted capacity, which Canaccord Genuity models to be built out over the next five years, generating material revenue and earnings growth.

LGI is an important operator of landfill gas sites in Australia, with 25 sites, comprising eight biogas power stations and 17 carbon credit sites, which capture an environmental benefit by flaring methane to carbon dioxide, generating carbon credits in the process. On a further nine sites, LGI operates biogas flares on behalf of local councils. LGI commissioned its first power station in 2012 and has steadily built its portfolio since.

The company’s first half FY25 result, released in February, detailed a solid operational performance, Bell Potter declared, with growth in all key metrics. Bottom-line earnings were nonetheless a miss to forecasts.

The miss was due to increased costs. Analysts are not at all concerned as they reflect LGI’s growth phase. Management indicated costs associated with the development of Mugga Lane (ACT) and Bingo (Eastern Creek, Sydney) sites –such as increased headcount, site preparation, and civil works– impacted margins. Employee expenses in the half rose to $3.5m, exceeding expectations of $3.2m, despite no significant headcount additions, contributing to half of the earnings shortfall.

Bell Potter, Shaw and Partners and Morgans all went into LGI’s result with Buy or equivalent ratings, and post the ‘miss’, none have wavered.

Deserving Credit

Landfill gas is an important contributor to Australia’s Net Zero emissions plans and while new large landfill openings are uncommon, the sector is supported by the Renewable Energy Target through which large greenhouse gas emitters in the electricity sector are required to surrender large-scale generation certificates (LGC) offsetting their emissions, Canaccord notes, by the Safeguard Mechanism by which Australia’s largest greenhouse gas emitters must maintain emissions below certain levels and which they can achieve by acquiring a tradeable product, Australian Carbon Credit Units (ACCU) to meet their obligation.

LGI recorded landfill gas flows up 5% year on year in the first half, renewable energy generation up 7% and ACCU creation up 7%.

Development Pipeline

LGI’s development pipeline comprises 32MW of capacity which, at the company’s internal target of 95% availability, would add a significant amount of incremental electricity generation, Canaccord notes. Batteries play a key role in LGI’s growth plans, taking advantage of fluctuating prices through the day to arbitrage the market as well as store electricity from the landfill when prices are low.

The upgrade of Mugga Lane and construction at Eastern Creek are both progressing to budget and on schedule, with Mugga Lane to drive substantial revenue growth in the second half FY25 and Eastern Creek expected to contribute annual earnings of $3-$3.5m from FY26.

Further, LGI announced new contracts with Lithgow Council and Midcoast Council in NSW and Southern Downs Council and Western Downs Council in Queensland.

The company’s capex to sales of 56% in the first half was lower than the second half FY24 (77%) and in line with expectations to remain elevated through the completion of the contracted development pipeline. Morgans expects LGI to have sufficient funding (combination of debt/ACCU generation) to meet the needs of the current development pipeline.

Canaccord believes there are opportunities for LGI to further increase its pipeline both in greenfield settings and also brownfield where tenders emerge periodically.

LGI’s 14MW Tesla battery investment is set to arrive in the first half FY26, with management expecting a lower relative landed cost compared to its previous purchase.

The batteries are expected to be more cost-effective than LGI’s Bunya pilot in Queensland. Manufactured in the US, the batteries are scheduled to arrive between July and August. A decline in lithium prices has lowered costs, and management expects the reduced price per MW, compared to the previous purchase, to remain even if tariffs imposed by the Trump administration impact manufacturing costs.

Broker Views

Bell Potter updated its forecasts in February, including increased operating and D&A expenses throughout the forecast period to reflect the increasing workforce and scale of the projects. The broker views an earnings decline in FY25 as a temporary fall as work progresses to upgrade Mugga Lane and Eastern Creek, with these projects to drive material earnings growth from FY26 onwards.

Bell Potter retained a Buy recommendation, trimming its price target to $3.50 from $3.55.

Shaw and Partners rates LGI a Buy with a $3.60 target. Shaw highlights earnings are driven by a disciplined focus on expanding biogas flows, labour productivity, and due diligence in selecting landfill sites.

This broker sees upside risks to consensus earnings from electricity price realisation post battery deployment and metro tender wins.

Canaccord’s modelling for the build-out of the existing 47MW contracted capacity sees revenue increase by a 16% compound annual growth rate to FY30, with free cash flow following a similar trajectory. The model does not include any further capacity additions LGI may make.

Canaccord expects LGI’s revenue and cash flows to grow materially over the next five years as it builds out its contracted capacity. This broker has this month initiated coverage of LGI with a Buy rating and $3.50 target, which does not account for any further additions to its development pipeline which LGI might make in the interim.

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