FREYR Battery: Undiscovered Battery Player Rising Above The Rest

Summary

• FREYR is seeing strong traction with 130 GWh of off-take agreements, both conditional and firm, with a focus on converting conditional off-take agreements to firm off-take agreements.
• The management continues to work towards and is in advanced discussions to potentially bring in an off-take agreement for the electric mobility segment.
• FREYR is boosting its supply chain, which has the necessary material almost until 2028, and the company is positioning itself for new opportunities along the battery value chain.
• Giga America brings new geographical diversification and resilience as FREYR demonstrates it is able to replicate its business model in both Europe and the United States.
• My price target for FREY stock is $31.70, which implies an upside potential of 108% from current levels.

Petmal

Investment thesis

I have written an earlier article on FREYR (NYSE:FREY), and I continue to see FREYR as an attractive investment opportunity with huge upside. My investment case for FREYR is as follows:

• FREYR is able to use 24M technology to develop and manufacture its batteries, bringing a technological edge for the manufacturing of batteries, as highlighted in my previous articles.
• The rapid rise and increasing need for lithium-ion batteries has created an environment where demand outpaces supply. Furthermore, many of FREYR's customers want geographical resilience and diversification away from the dominant Asian battery players, which bodes well for FREYR.
• Customers are increasingly focused on ESG and this focus applies to lithium-ion batteries as well. Given that FREYR brings to market the cleanest batteries as well as supply chains that are localized and focus on sustainability, there is a strong value proposition for FREYR's batteries.
• Lastly, FREYR currently has many commercial off-take agreements that it can convert to sales agreements, and this list of companies continue to grow.

Customer off-take agreements

Since the multiple off-take agreements announced from listing till today, the company has more than 130 GWh of off-take agreements that are both conditional and firm.

Recently, FREYR announced that they executed with Nidec (OTCPK:NJDCY), a joint venture agreement that provided more complete terms for a follow-on sales agreement for 38 GWh supply of LFP Lithium-ion battery cells from 2025 to 2030. Within the agreement is an option to increase volumes up to 50 GWh and potentially extends the contract beyond 2030. As a leader in the ESS business segment, I think that Nidec can bring its expertise in this segment and combined with FREYR's clean and next generation battery cells, they will provide integrated downstream ESS solutions for both industrial and utility grade customers.

In addition, while attending the recent quarter earnings call, I appreciate that management is focused on the conversion of these conditional off-take agreements into firm off-take agreements as well as expanding these current conditional off-take agreements. This is then in line with matching the requirements for project financing. As a result, FREYR is targeting 60% firm off-take capacity through to 2032 for both Giga Arctic and Giga America.

Lastly, I like that management continues to give updates on their electric mobility segment. While FREYR has amassed a strong list of ESS customers to date, the company still remains confident in having new electric mobility customers. FREYR remains in advanced discussions to obtain a conditional off-take agreement with an electric mobility player and the management continues to advance in talks with tier 1 OEMs to build a long-term, strategic partnership with them and potentially to supply them with battery cells that are decarbonized.

All in all, the company's customer agreements look solid as the management continues to convert key conditional sales agreements into firm long-term sales agreements and also potentially bring in new incremental conditional sales agreement to the business. With more than 130 GWh of off-take agreements today, FREYR certainly continues to see strong demand for its batteries today.

Supply chain ready for the future

FREYR is boosting its supply chain network, which will be key to their production ramp up in the future. In the earnings call for the quarter management mentioned about the material progress as the supply chain continues to develop. The Customer Qualification Plant Materials ("CQP") raw materials for 2023 and 2024 has already been secured and the company has even gone a step further to securing the materials needed until 2028. In addition, the company also has secured about two-thirds of the materials needed for the Giga Artica until 2028. In my view, FREYR is demonstrating to the market their seriousness in execution as they have bolstered their defenses and made sure that their supply chain is almost 6 years ahead of its time to ensure no execution slippage on the supply chain front.

Earlier in October, FREYR announced that they entered a supply chain partnership with ITOCHU Corporation (OTCPK:ITOCF). ITOCHU Corporation is a leading Japanese company involved global trading as well as importing and exporting. Both FREYR and ITOCHU are investors in 24M Technologies, adding an additional layer of alignment for the two companies in partnership. In addition, the two companies plan to develop supply chains that are decarbonized and localized as FREYR expands and grows into a Giga scale producer of clean batteries. This will certainly add to the ESG profile and competitive advantage that FREYR has over competitors in the market as it becomes increasingly clear that FREYR incorporates sustainability into each business and operational process.

Another agreement that FREYR announced is a license and services agreement with Aleees. Aleees is a lithium-iron phosphate ("LFP") cathode battery material manufacturer, and outside of China, it is the leader in the space. As part of the agreement, FREYR is provided with the license to use Aleees technology to produce and sell LFP cathode material. In addition, FREYR will be able to leverage on the industrial expertise of Aleees.

I think that this agreement is a steppingstone and a game changer as it shows that FREYR has the intentions and ability to expand across the battery value chain. In addition, by producing LFP cathode materials in-house, given the large volumes in the upcoming Giga Arctic battery production facility in Norway, this could lead to cost savings and more competitively priced batteries as FREYR is able to control its own supply chain and operate across the battery value chain. Eventually, I will not be surprised if the LFP cathode battery materials are deployed to the Giga America project in the United States as well.

New Giga America announced brings geographical diversification

FREYR announced that it has selected and purchased the site for the company's Giga America project in Coweta County, Georgia. The site was chosen using a rigorous selection process out of 130 sites across 25 states. The phase 1 of Giga America will have a nameplate capacity of 34 GWh and the project capital expenditures needed for it currently stands at $1.7 billion.

FREYR expects to initiate the development of this project by replicating the key elements and learnings from the Giga Arctic project and has also secured $410 million in financial incentives from the State of Georgia and Coweta County. The phase 1 of the Giga America project will be the production of 34 GWh of battery cells while there are other phases that are expected further down the road with plans to included highly value accretive upstream and downstream parts of the battery value chain or even potentially for additional battery cell production. Giga America, like Giga Arctic, will utilize 24M's next generation SemiSolid platform that enables FREYR to produce lithium-ion batteries at capital and in a capital efficient manner.

All in all, I view Giga America as a geographical diversification strategy for FREYR and this actually adds value to its customers. Its large customers demand that FREYR is able to demonstrate geographical resilience, especially in these more uncertain times. The new Giga America demonstrates that FREYR is able to replicate its business model in Europe and the United States and with that, brings confidence to customers that it has the necessary diversification and resilience it needs to convert conditional off-take agreements to long-term firm sales agreements. In addition, Giga America is poised to take advantage of the strong growing demand for ESS solutions in the US and FREYR can also be eligible for Production Tax Credits under the Inflation Reduction Act.

Operational progress on CQP and Giga Arctic

The CQP is set to target its first sample cell production by 1Q23, and it has recently just completed its first Site Acceptance Test and Hana Technology personnel has been on the site performing installation and testing of equipment. With the deliveries of equipment expected to finish by the year end, the start of sample call production in the CQP is a key milestone for FREYR.

This new milestone will further validate the 24M manufacturing process technically and better position FREYR to bring conversions of its conditional off-take agreement into firm sales agreements. Lastly, the sample cell production satisfies a key condition for project financing and eventually, will lead to better acceptance of the product.

The construction of the Giga Arctic is underway as the FREYR's board has recently approved the capital spending of $70 million for the project to ensure that the essential items are delivered and received on time and on schedule.

FREYR Battery financials and financing

FREYR continues to have strong liquidity and a strong balance sheet. The company currently has $419 million in cash and used $147 million of net cash in 2022 year to date.

The team is progressing well on the projecting financing for Giga Arctic as it sounds that there are ample credit facilities available to FREYR and they are currently working through the due diligence at the moment, with projections to receive conditional credit approvals by 1Q23.Furthermore, there are other interest from strategic, industrial and financial partners, with discussions on going at the moment. FREYR aims to diversify its sources of funding as well as its funding partners and eventually build long-term relationships and grow together as an ecosystem.

FREY stock valuation

FREYR is currently trading at 61x 2023F EV/Sales and 1.6x 2024F EV/Sales. This, however, should be put into context given that we expect rapid production ramp of Giga Arctic from 2024 onwards.

I would value FREYR using an equal weight of EV/Sales method and a DCF method. This is because FREYR is an early-stage company that will be seeing rapid growth in the near-term. For my assumptions, I am applying a 2.5x multiple to 2025 sales and I use a WACC of 17%. The WACC has an implied assumption reflecting the higher risk profile of FREYR given its need for funding and execution. In addition, the sales multiple is in line with global pure-play battery peers.

Taking both valuation models together, my price target for FREYR is $31.70, which implies an upside potential of 108% from current levels. In my opinion, this price target is achievable if the company executes well and the Giga Arctic ramp up goes according to plan, although there are risks involved highlighted below.

Risks

Conversion of off-take agreements

As a substantial number of off-take agreements are conditional currently, there is a risk that management is unable to convert these conditional off-take agreements into long-term firm sales agreement for certain reasons. As such, this is crucial as management needs to demonstrate the ability to convert these agreements and to do so, the company needs to execute well in the future as it ramps up production.

Inflationary pressures

As FREYR currently is in the phase of constructing the Giga Arctic and has secured most of its materials needed, there is still a risk that inflationary pressures may hit FREYR, and this might lead to higher unit costs or even higher capital expenditures for the materials and equipment not yet acquired by the company.

Execution risks

This is a big one for the company as it needs to execute and ramp up well for its customers to gain confidence in the rather early-stage company. If it is unable to execute well, it may face challenges in converting the conditional off-take agreements into firm agreements or even have challenges for project financing in the future.

Policy and regulatory risks

The current policy and regulatory environment are favorable for the company but there is the risk that this may change as the political and regulatory environment changes. This might lead to lower incentives and slower growth as policies that support spending on the green transition moderates.

Conclusion

FREYR's large conditional off-take agreements today positions it for success as its next step is to convert these into sales agreement. Furthermore, management continues to pursue opportunities in electric mobility, outside of its traditional ESS markets. The company is moving ahead by bolstering its supply chain network and preparing well in advance, securing materials until 2028. FREYR continues to execute well as it makes progress on Giga America and is on track with its CQP and Giga Arctic plans. Lastly, the company continues to have sufficient liquidity and financing is progressing well as the company continues to execute. My price target for FREYR is $31.70, which implies an upside potential of 108% from current levels. This is an emerging battery player about to be a global contender as the demand for lithium-ion batteries soar.

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Disclosure: I/we have a beneficial long position in the shares of FREY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.