Investors turn green with energy

The Australian Financial Review, Page: 27
Wednesday, 31 May 2006

Melting ice caps, the rising incidence of natural disasters and soaring oil prices are pointing some savvy investors in the direction of green energy. Uranium stocks have been among the biggest beneficiaries of the drive to find alternative sources of energy, buoyed by Prime Minister John Howard signing a deal to sell the mineral to China, and a potential agreement with India. But not everyone is buying in to that story. Some fund managers won't touch the industry with a barge pole on the grounds that it is highly speculative.

Luckily, uranium is not the only alternative to coal, gas and oil. Governments around the world are promoting renewable energy from sources such as wind and water as a means of reducing greenhouse emissions. Furthermore, they are setting targets for renewable energy. China has set a 15 per cent target for renewable energy by 2020. In Australia, Victoria is expected to pass laws setting a 10 per cent target for renewable energy.

South Australia has a 15 per cent target, while nearly half the US states, including California, have imposed mandatory targets. All of a sudden, water, wind arid sun are looking like attractive investments. In Victoria the government's plans have encouraged energy companies such as Lakes Oil to tender for 31 exploration permits to find Victoria's geothermal hot spots. According to the Total Environment Centre, 12 per cent of Australia's electricity comes from renewable sources such as wind, solar, biomass, wave and tidal power.

Australian Wind Energy Association (Auswind) president Andrew Richards, thinks wind power is leading the way. "Most low-emission solutions being contemplated require technological breakthroughs and are still many years away from commercial deployment," he says. "In contrast, wind energy does not need to be invented, nor is there any need to wait for a magical technological breakthrough. It is already being deployed on a global scale.

"There is certainly room for growth in the sector. According to Auswind, total installed wind energy capacity in Australia was 572 megawatts at the end of last year, compared with 6750MW in the US, 3000MW in India, 991MW in Japan, 769MW in China and 71MW in South Korea. Australia's biggest fund manager, Colonial First State, has invested in the $850 million Babcock & Brown Wind Partners Group, which has stakes in 16 wind farms in North America, Europe and Australia. The listed group's market value increased $180 million between October and December, prompting a hefty $33 million payment in performance fees to its parent company, Babcock & Brown.

Trading at 38 times forecast earnings for 2007, BBWG's share price closed at $1.585 on Monday. Investment banks JP Morgan and UBS have both set a target price of $1.90.Their recommendations are "overweight" and "neutral" respectively.

CFS's head of Australian equities, Simon Shields, says, "We're not Ethical Investors. We look for businesses that are sustainable and on these merits we invest." Despite the potential for green energy, not all companies in the sector are having a good time. Tasmanian company Roaring 40s recently halted development of its $180 million Waterloo Wind Farm, 30 kilometres south-east of Clare.

The company, a joint venture between Asian power developer CLP Group and government business enterprise Hydro Tasmania, blamed the federal government's mandatory renewable energy target scheme. The scheme offers financial incentives for establishing clean and green energy but the targets - which require suppliers to source 2 per cent of their power from renewable sources - have almost been met. The executive director of the Australian Business Council for Continued Sustainable Energy, Ric Brazzale, last week called on the government to reset the targets." The missing link in getting private sector investment into developing and deploying clean energy technologies has been an incentive for companies to do so.

Clearly, something more than 'business as usual' needs to be done if Australia is to play its part in tackling climate change," he said. Until the sector gets more subsidies, investors should take Shields's advice and pick a potentially sustainable business. For investors who prefer wind power, two listed companies to note are Jackgreen and Viridis Clean Energy Group. Sydney-based Jackgreen sells electricity in NSW, Victoria and South Australia entirely sourced from wind farms and hydro generators.

Despite a slow start after a backdoor listing in December 2004, it finally received its financial services licence in March last year. While it has had to draw on the support of its institutional investor, Babcock & Brown, and raise a further S2.09 million, Jackgreen has a unique selling point: its renewable energy costs the consumer no more than its coal-based cousins. Since March last year, Jackgreen has signed up 10,000 households for three years and hopes to provide electricity for 100,000 homes by June next year.

The shares, which listed at 20c before falling to 7c last year, closed on Monday at 40c. A fund manager who did not wish to be named says: "Jackgreen's equal [pricing] strategy has been expensive but it gives people what they want." In 2004, Jackgreen surveyed 3000 households and more than 90 per cent said they would sign up to green energy if it cost them no more than other energy. The analyst says: "The issue is that Origin and others have to generate green energy anyway to meet the government's 2 per cent target and they then charge the customer more for it.

"Jackgreen forecasts a net profit after tax in the vicinity of $5 million for 2006-07. One analyst says it's difficult to project the company's price-earnings ratio. The wind is blowing in the right direction for Viridis, which floated in September at $1 per share after raising $126 million. The group, which is 8 percent owned by Investors Mutual, has a strong following because of the high yields it generates from its wind farms, landfill gas and other renewable energy projects in the US and Europe.

Undeterred by its $ 1.2 million first half net loss, Viridis plans to accumulate $100 million in clean energy investments over the next 12 months. Its shareholders are also buoyed by the company's maiden distribution of 2.5$ a share on March 31 and promises of a 7.1$ dividend in 2005-06 and 9.5$ in 2006-07. Trading on a high forecast multiple of 78 times, Viridis closed at 90c on Monday.

ABN Amro analyst Nicholas Burgess recommends buying the shares at $1.17. There are also opportunities elsewhere. The official sales process for the $2.5 billion float of Snowy Hydro is under way.

The company, which recently appointed Sydney Futures Exchange chair Rick Holliday-Smithas its chairman, hopes to raise more than $2.5 billion. The Snowy Mountains hydroelectric scheme generates clean and renewable energy through 31 hydro and six gas-fired units and has a licence to store and divert water from the Snowy River catchmentuntil 2079. One analyst says: "We expect there will be strong demand for the shares."

NSW Finance Minister John Delia Bosca has said the float has been timed to coincide with Snowy Hydro's plans for capital expansion into the national electricity market. The NSW government, which owns 58 per cent of Snowy Hydro, stands to pocket at least $1.5 billion from the sale. The Victorian government owns a 29 per cent stake and the federal government 13 per cent.

Meanwhile, New Zealand electricity generator and retailer Trust-Power has enjoyed a 34 per cent increase in its share price over the last year. It recently posted fullyear net profits of SNZ81.4 million ($68.2 million) to end-March against SNZ73.2 million a year ago.

TrustPower has 18 hydro schemes and two wind farms located on the North and South islands. Total annual output is about 2000 gigawatt-hours, compared to a retail load of 4700 GWh. About 55 per cent of this load is fixed-tariff customers, with the rest on variable rates, where TrustPower manages the load for mainly industrial customers. UBS analyst Wade Gardiner says the "strong fourth quarter was due to high wholesale price exposure".

Gardiner says in a research note: "In our view, the company's key risk is fluctuations in wholesale electricity prices at times when it is inadequately hedged." TrustPower, which is trading at 22 times forecast earnings, closed at SNZ6.90 on Monday. Infratil and Alliant have effective control, with a combined share of 59 per cent.

Gardiner recommends investors "reduce" their shareholdings and his target price is SNZ6.50. Other listed renewable energy companies that have been on the radar of investors include Geodynamics, which develops renewable geothermal energy from hot dry rocks, and Environmental Solutions International, which treats water and waste water. Biodiesel fuel companies Australian Biodiesel Group, Australian Renewable Fuels and Mission Biofuels have also caught the attention of investors.

Mission Biofuels listed in May and has a 100,000 tonne per annum biodiesel refinery in Kuantan Port, Malaysia. It recently received permission to establish a 200,000 tonne per annum facility adjacent to its present site. "We expect there will be strong demand for the Snowy Hydro shares."