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15-Jul-2011
AUSTRALIAN RENEWABLE FUELS
Does 'green' mean 'dollars'?
ASX Code ARW, SOO
Whenever I see businesspeople claiming to be operating businesses that save the environment the sceptic in me says I should turn away and turn away quickly.

As if in confirmation of my suspicions, when I mentioned the renewable fuels sector to fund managers around town in the wake of the federal government's proposed green investment bank with its $10 billion five year budget, the response was lukewarm, to put it mildly.

This is despite the fact that every stockbroker in town is spruiking green investment.

The fundies all said that investment opportunities would emerge but businesses that rely on government subsidies for survival are notoriously unreliable. One cited the $25 million his fund wrote off about five or six years ago after buying 11 per cent of Viridis Clean Energy.

But invariably alongside the government incentives, and an oil price at record levels, there will be investment opportunities in a sector that has consolidated a great deal. In such cases, as the fundies allude to, timing is everything.

Australian Renewable Fuels is still here

One company that has had more lives than your average cat after capital raising upon capital raising, is biodiesel producer Australian Renewable Fuels (ASX: ARW). Its accumulated losses total almost $104 million.

Right now it is bedding down its $21 million debt-funded acquisition of Biodiesel Producers, which operates a 60 million litre a year plant in Victoria.

ARW shares are about 2 cents and its market cap is $37 million. It's a long way from its 8 cents plus level in 2006, but factors are moving in its favour.

The main factor is that it has a cheap source of feed for its 150 million litre a year plant capacity. The company has traditionally relied on tallow, a liquid fat from rendered beef or mutton fat, as 'feedstock' for its processing facilities that convert it into a cleaner form of diesel which emits less carbon, called 'bio-diesel'.

Late last year, the company announced that it had a new source of feedstock, which would come from the waste produced by a food oil refinery in Indonesia. This is now sitting in ponds that are overflowing and polluting the local river system. The agreement will go a long way towards solving this environmental problem, according to the company.

Despite its history of losses, ARW's newly-installed executive chairman Tom Engelsman is adamant that the company will be “cash flow positive” in the current fiscal year:

“We have substantial contracts with oil companies, major mining companies, as well as long-haul transporters such as Toll and Linfox ... The additional focus on the carbon tax or carbon credits is pushing the market,” he said.

But a word of warning came from one energy analyst who said that there had been issues with every feedstock tried so far.

For example, if you were to drive your car into the mountains on a biodiesel produced solely from refined tallow, your car could well seize up because the biodiesel would turn into fat (ARW uses a blended version to prevent this from happening).

One would think that if ARW has survived this long it will overcome any issues relating to its new feedstock. Whether this will cost shareholders more money is the key question.

Interest in Solco heats up

Another company looking to boost its profile beside the government's carbon reduction strategy is Solco (ASX: SOO), a wholesaler of solar kits. Certainly, the 50 per cent rise in its shares since mid-June indicates that its strategy is working.

This business imports solar panels from China and then sells to customers who are putting them on people's roofs. According to proponents, the business is underpinned by the rapidly climbing price of electricity, and who can argue with that?

But it has been well publicised that the solar panel business has been damaged by repeated changes to subsidy programs by state and federal governments. This factor is brushed aside by one supporter of the stock.

“The (industry) is undermined every six months, but demand keeps growing,” says Investorfirst Securities analyst Christ Gibson.

At 11 cents, the company has a market cap of $25 million. Gibson's valuation of 17 cents is based on earnings growth of 12 per cent and 13 per cent for fiscal years 2011 and 2012.

But could this be a little optimistic? Solco estimates its market share is in the region of 6 per cent, which indicates that the industry is very fragmented. Profit margins can turn quickly south in this business because there is no real impediment for anyone to buy these panels from China and sell them in Australia.

As stated above, it may be a while before the real winners emerge - in an investment sense at least - in Australia from the renewables race.


SOURCE: FAIRFAX

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