UBS Maintains Buy Rating on HMC Capital as Energy Transition Assets Benefit from Rising Power Volatility

Overview

Based on HMC Capital's site visits to the 470MWh Victorian Big Battery (VBB) and the planned 1,200MWh Moorabool BESS (VBB2), along with the investor briefing, UBS believes the Australian energy market is creating a favorable backdrop for battery storage assets. In the short term, LNG price increases triggered by Middle East conflict may push up peak-period gas-fired generation bids and widen intraday electricity spreads; over the longer term, coal baseload retirements, higher renewable penetration, and growing data center power demand should increase power-system volatility and battery arbitrage opportunities.

Core views

The core view is to maintain a Buy rating on HMC Capital. The report believes VBB/VBB2 can generate diversified revenue through power arbitrage, power purchase agreements, and SIPS availability payments, with the SIPS contract having an insurance-like function for the grid. UBS believes HMC's current share price is only about A$0.28/share above the mark-to-market NTA, implying the fund management business is valued at less than 2.0x FY27E EBITDA, which is relatively attractive.

Analysis framework

The report combines site-visit feedback, management briefings, changes in supply and demand in the Australian power market, storage revenue mechanisms, MTM NTA estimates, implied fund management business multiples, and DCF and SOTP valuation methods to assess investment value.

Methodology notes

• Valuation methodsSOTP/DCF blended valuation

  Blended DCF and SOTP valuation

  The A$3.70 target price is the rounded midpoint between a DCF valuation of A$3.49 and a SOTP valuation of A$3.85; DCF assumptions include beta of 1.43, discount rate of 13.1%, and long-term growth rate of 3.0%, while the SOTP applies a 10x multiple to fund management earnings.

• Valuation methodsmark-to-market NTA

  Mark-to-market net tangible assets

  UBS revalues HMC's co-investments in DGT, HCW, and HDN at the latest share prices, estimates MTM NTA at A$850m or A$2.06 per share, and derives the implied value of the fund management business by subtracting that NTA from market capitalization.

• business_modelbattery revenue stack

  Battery storage revenue stack

  VBB revenue comes from power arbitrage, a 40MW power purchase agreement with Engie, and AEMO's SIPS availability payments; under SIPS, 250MW of capacity is allocated each year from November to March, with the contract running from 2021 to 2031.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• HMC Capital

  The research coverage subject and listed equity security

  Strengths

  A diversified alternative asset management platform with more than A$15bn in AUM and exposure to energy transition and digital infrastructure.

  Weaknesses

  The share price and valuation are affected by mark-to-market movements in co-investment assets, capital market conditions, and the realization of fund management business growth.

  Comparison

  UBS estimates the implied valuation of its fund management business at only about 1.9x FY27E EBITDA, indicating the market is pricing it conservatively.

  Risks

  Conditions in real estate investment management, regulation and planning approvals, financing capacity, valuation multiples, capitalization rates, and risk-free rates.

• Victorian Big Battery (VBB)

  Core battery storage asset in HMC's energy transition portfolio

  Strengths

  Located near Moorabool Terminal Station outside Geelong, at the intersection of multiple transmission corridors in Victoria, giving it a hard-to-replicate location advantage; revenue sources include arbitrage, a power purchase agreement, and SIPS.

  Weaknesses

  Arbitrage returns depend on power price volatility, with pronounced seasonality and sensitivity to market conditions.

  Comparison

  SIPS is a relatively scarce contract type in the NEM, and VBB is one of the few assets with this revenue stream.

  Risks

  Power market volatility below expectations, contract expiration, or changes to dispatch rules or grid service mechanisms.

• Moorabool BESS / VBB2

  Planned energy transition growth project

  Strengths

  Planned capacity of 1,200MWh, ROIC target of about 10%, and expected to benefit from coal retirements and power demand growth.

  Weaknesses

  As a development-stage project, final returns depend on construction execution, financing, and asset sale strategy.

  Comparison

  Larger than VBB and may expand HMC's exposure to the Victorian storage market.

  Risks

  Higher development costs, approval or grid connection delays, or asset sale prices below expectations.

Key data

• 12-month ratingBuyUBS maintains a Buy rating.
• Target priceA$3.70Rounded midpoint of DCF and SOTP valuations.
• VBB size300MW / 470MWhAbout 90 minutes of storage, completed in December 2021.
• VBB2 planned size1,200MWhMoorabool BESS development project.
• Recent average daily arbitrage spread for VBBAbout A$100/MWhThe spread varies with power market volatility.
• SIPS contract capacity250MWUsed from November to March each year to prevent grid outages during network stress events.
• Yallourn retirement impactAbout 1.5GW / roughly 16% of Victoria's electricityPlanned retirement in 2028 may increase market volatility.
• Victoria data center electricity demandFY26 254MW to FY31 671MW, up 164%Based on AER forecasts and supportive of long-term power demand growth.
• MTM NTAA$850m / A$2.06 per share36% below book NTA of A$1,324m.
• Implied fund management business valueA$111m / about 1.9x FY27E FM EBITDAFY27E FM EBITDA is A$60m.

Impact & implications

If power-price volatility widens, coal retirements proceed as planned, and data center demand growth materializes, HMC's energy transition platform may gain stronger arbitrage income and asset upside. At the same time, the relatively low implied multiple assigned by the current share price to the fund management business provides valuation support for the Buy rating.

Risks

• Power price volatility and intraday arbitrage spreads may fall short of expectations, weakening battery storage revenue.
• VBB2 development, grid connection, financing, or asset sale progress may be slower than expected, affecting target returns.
• Changes in the real estate investment management, regulatory, planning, or capital raising environment could affect HMC's overall platform.
• Changes in valuation multiples, capitalization rates, and CAPM risk-free rates could lead to target price cuts.
• Middle East conflict, LNG prices, and Australian power market disruptions remain uncertain, and the associated tailwinds could weaken.

What to watch

• The pace of Yallourn's 2028 coal-plant retirement and its actual impact on Victoria's power volatility.
• VBB/VBB2 intraday arbitrage spreads, SIPS contract performance, and power purchase agreement contributions.
• VBB2 project construction, achievement of ROIC targets, and stable asset sale arrangements.
• Whether Victoria data center power demand growth comes close to AER forecasts.
• HMC fund management business FY27E/FY28E EBITDA growth and changes in the market-implied multiple.