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Tuesday, July 19, 2005

Forbes.com - Green Shoots

Forbes.com - Magazine ArticleEnergy
Green Shoots
Kerry A. Dolan, 07.18.05, 7:00 PM ET

Environmentalists have preached the benefits of green business and technology for decades. In the last few months, some big names in business and investing have jumped on the bandwagon with real money.

In May, two dozen investing institutions from Europe and the U.S, including the London Pensions Fund Authority, the U.K.'s Universities Superannuation Scheme and the largest U.S. pension fund, the California Public Employees' Retirement System, promised to invest $1 billion within a year in clean-tech companies. Just the day before, General Electric (nyse: GE - news - people ) Chief Executive Jeffrey Immelt had pledged to double GE's research and investment budget for cleaner technologies to $1.5 billion a year by 2010.

Global revenues from clean tech businesses--including air and water purification, advanced materials, distributed power generation, renewable energy, and process controls, such as sensors to monitor air and water--now surpass 85 billion pounds, according to the Cleantech Venture Network, a for-profit membership group that connects venture and institutional investors with entrepreneurs.

Installed wind-generating capacity around the world grew 20% last year to 47 gigawatts (measured by peak output). Solar electric sales grew 62% to a cumulative 3.8 gigawatts (again, measured by peak output). A gigawatt of average capacity is about right for a city of 500,000.

This year two U.K. banks, HSBC (nyse: HBC - news - people ) and Barclays (nyse: BCS - news - people ), followed telecoms giant BT Group's (nyse: BT - news - people ) lead last year in committing to increase its use of renewable or environmentally sound energy. Even in the U.S., which lags Europe in its adoption of clean technologies, the mood is staring to change. Starbucks (nasdaq: SBUX - news - people ) says that renewable energy will supply 5% of its energy needs.

Neither solar nor wind power is competitive on its own with electricity from fossil fuel plants. So Europe's renewable-fuels companies can thank government subsidies for some of their growth.

The European Union has set a target of 12% of primary energy from renewable sources by 2010; today it's around 6%. Germany has decided to phase out use of nuclear power plants. "As a result, the market for solar in Germany is exploding," says Philippe Cases, a partner at venture capital firm Partech International who invests in clean tech companies. Germany is now one of the two largest markets for solar installations. (Japan is the other.)

Regulations restricting use of landfills as well as the carbon emission reductions under the Kyoto Protocol have spurred further innovation and investment in Europe, particularly in the U.K., which is one of the most mature markets for renewable energy.

Investment in clean technology in Britain is growing at 30% a year, according to the Carbon Trust, a government-funded organization that helps businesses cut carbon emissions. The trust forecasts that investment in clean technology in the U.K. will top 2 billion pounds a year by 2015, accounting for 4% of investment in clean technologies worldwide.

For individual investors who want to stake their money on environmentalism, there are several green funds that trade in London. Bruce Jenkyn-Jones and Ian Simm at Impax Asset Management run the three-year-old Impax Environmental Markets fund, a closed-end fund with 41 million pounds in assets. It trades at a 5% discount to net asset value and has a 1% expense ratio. Jenkyn-Jones runs an almost identical open-ended fund with the same name and 17.5 million pounds of assets on the Irish stock exchange. Since its launch in December last year, that fund is down 3.8%.

Also in London, Robin Batchelor runs the Merrill Lynch (nyse: MER - news - people ) New Energy Technology fund, with 58.1 million pounds in assets. Another closed-end fund, it trades at a 13% discount to net asset value and has an expense ratio of 1.7%.

Green Companies Listed On The AIM
Company Business Market Cap (£mil) Recent Share Price (p)* 52-Week High (p)
D1 Oils Biofuels 107 342 540
ITM Power Fuel Cells 88 95.5 105
Climate Exchange Emissions Market 79 262.5 270
Ceres Power Holdings Fuel Cells 52 95 138
Biofuels Corp. Biofuels 79 175.75 325
Ocean Power Technologies Wave Power 41 78.5 133
Source: Forbes.com
*Closing price July 15, 2005


You can avoid the management fees of these funds and have your broker buy individual stocks for you. Many of the London-listed pure-play clean-tech companies are small and listed on the AIM (see table above), reflecting the fact that this is a relatively young field.

One of the most successful solar companies is German outfit Solarworld, which earned 18.1 million euros on 200 million euros in sales last year. Solarworld makes solar wafers out of silicon, makes photovoltaic cells and builds and runs solar power stations. Its share price has tripled since last October, but Batchelor believes the continued growth projections justify a price of 29 times expected earnings for this year. The price is too steep for Jenkyn-Jones, who worries the firm cannot maintain its margins; he doesn't own the stock now.

But Jenkyn-Jones likes the two biggest European manufactures of wind turbines, Vestas Wind Systems of Denmark and Gamesa Corporación Tecnológica of Spain. He says Gamesa is a safer bet because it has long-term contracts with the large Spanish utilities. Gamesa earned 222 million euros last year on 1.75 billion euros in sales. Jenkyn-Jones expects 20% to 25% sales growth this year. The company has a contract to build a wind park in Mexico and to supply wind turbines to China. Gamesa also has an aeronautics unit that builds portions of aircrafts.

Invest in the North, Buy in the South
Three Canadian investment companies contributed to this list of picks.
Company Country Recent Price ($) 52-Week High ($) 2005 Estimated P/E
Abengoa Spain 11.86 12.40 14
Azure Dynamics Canada 0.79 1.01 NA
Domnick Hunter Group UK 6.87 8.91 15
Gamesa Corporacion Tecnologica Spain 13.75 15.25 13
Solarworld Germany 88.95 88.95 29
Vestas Wind Systems Denmark 18.30 18.75 35
All figures are in U.S. dollars. Prices as of June 17. All companies except Abengoa and Domnick Hunter trade in the U.S. as ADRs. NA: Not available. Sources: Exshare, FT Interactive Data, Thomson First Call and Worldscope via FactSet Research Systems.


Jenkyn-Jones likes another Spanish company, Abengoa, a conglomerate that produces biofuels, recycles metal in Europe and sells utilities data-management. The rising cost of petrol is driving interest in biofuels, of which Abengoa is a leading producer. At 14 times this year's earnings, Abengoa is relatively cheap for a growth stock, says Jenkyn-Jones. "It's got a conglomerate discount, but there's lots of value hidden in the company."

Batchelor's pick for a company benefiting from high fuel prices is Azure Dynamics, which produces hybrid electric power trains for commercial vehicles. The Canadian company, which is listed on the London Stock Exchange, lost $8.2 million on revenue of $207,852 last year. But Batchelor thinks there's potential growth. A year ago Azure helped launch the first hybrid taxi in London. The U.S. Postal Service is testing a delivery truck powered with Azure technology.

Pure water is an important component for a wide range of businesses. Jenkyn-Jones likes Domnick Hunter, a County Durham-based group that produces a variety of high-tech filters for industries ranging from textiles to biotech. The company has recurring income from replacement cartridges that customers need for its filters. Domnick Hunter earned 13.7 million pounds on sales of 158 million pounds last year and trades at 15 times this year's expected profits.

That's cheap compared to multiples paid for rival filtration companies. GE paid 45 times expected 2005 earnings for money-losing Ionics in February, and 3M (nyse: MMM - news - people ) bought CUNO in May for 37 times earnings.

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