Clean, green and left behind

PORTFOLIO POINT: As the sharemarket has lifted in the past six months, some green stocks have failed to keep in step.

Despite the stockmarket recovery over the past six months, a number of emerging cleantech companies are trading at historically low share prices, posing the question of whether they represent a buying opportunity or a capital risk?

Seven such companies are cheaper than they were when the ASX hit its low in March last year. Yet many are still revenue-generating businesses that are or have been profitable. and five are or have been dividend payers.

So why are their share prices down; can they recover; and how long will it take?

Some have debt issues, some fell out of the All Ordinaries index in the March rebalance, and some have cut their dividend. But some have good stories, and some have falls that do not appear to be connected to company-specific issues.

Analysing the stocks on a share value basis (see chart) shows that the most promising looking of these stocks is Willmott Forests (WFL).

The company has mostly good news. Its interim profit more than doubled to $9.5 million, and its interim dividend was maintained at 2¢ per share. This was despite a relatively small 9% fall in revenue to $40.1 million. The company has a net asset backing of $1.13 per share, yet is trading at only 36.5¢.

Likewise, its half year net profit of 10.2¢ per share, if annualised, gives it a low forward price/earnings (P/E) multiple of 1.2 times. Total liabilities also fell over the 12 months, from $252 million to $183 million, and net assets rose by $46 million to $161 million.

The numbers look promising and the company has shareholder support with a $20.5 million fully underwritten capital raising last November at 45¢ and 40¢ per share, which had a 91% take up rate.

One recent broker note put a buy recommendation on Willmott and says it is “the standout in the Forestry MIS sector '¦ our land valuation component is carried at historical cost, which we believe is significantly below replacement value. Our target price remains at 60¢.”

So where is the problem? Is there a problem? The ASX asked this question back in March, but Willmott replied it didn’t know why its share price had fallen so low.

An obvious place to look is sentiment about the plantation timber sector, where Willmott has been the outstanding performer to date but has done so in the shadow of the Great Southern and Timbercorp disasters. Poor results from Gunns and the placement of Forest Enterprises Australia into administration certainly hasn’t helped.

The fall in Willmott’s revenue is partly based on a fall in woodlot sales and this may have created some doubt about future revenues. Even if sentiment explains Willmott’s share price fall, a recovery may to some extent depend on how quickly Willmott can distinguish itself from the other companies in the sector.

Debt is behind the security price troubles at Viridis Clean Energy Group (VIR). Viridis has been working for some time to reduce debt, simplify its structure and internalise its management, but these have not been enough to end its security price woes.

In early March Viridis lost its position in the All Ordinaries, and sales by index funds may explain some of the fall. The stock made a December-half loss and its once-generous distribution is still suspended as it pays down debt. Ongoing foreign exchange losses and a complicated looking balance sheet have also not helped matters.

On the positive side, at about 12.5¢ the securities are still trading below net asset value of 24¢. But the group needs to lower debt and restore distributions or otherwise restore shareholder confidence for the security price to move substantially.

Debt is also behind the share price troubles of recycling group CMA Corporation (CMV). At 8.3¢ the shares are well below their net asset backing of 20.2¢ and their 2007 high of 80¢.

The global financial crisis and volatility in metals prices saw CMA suffer a huge loss in revenues. The company has taken on a cornerstone investor, raised additional capital, taken on a new bank facility, and cut costs, but these have not been enough and it is currently undertaking a capital review.

The half-year report also makes it clear the company is still stuck in uncertainty, particularly due to the economic environment and its effect on cash flows and trading results. There looks to be little prospect of a decent bounce in the company’s share price until the uncertainty is removed.

And it is always a worry when directors talk about a “going concern”. If the company breaches its financial covenants and if this leads to the banks requiring repayment immediately, “there will be significant uncertainty regarding the ability of the Group to continue as a going concern and pay its debts as and when they become due and payable”, they say.

Managing director Doug Rowe says CMA has a sound underlying business that is well positioned to capture market share and improved margins as the economic recovery continues, particularly in the Asia Pacific region.

CMA’s low share price could bounce back one day but any possible capital gain comes with high short-term risk.

Environmental Group’s (EGL) share price is at a low, but it has been moving sideways in this band for more than a year. The company provides air and water engineering products and services to industry, and says it needs the general economy to pick up for orders and revenue to pick up.

However, directors and associated investors seem to have confidence in the company. CVC Sustainable Investments has increased its holding from 32.7% to 34.4%, and chairman John Read indirectly participated in the dividend reinvestment plan for another 245,000 shares.

EGL intends to buy back up to 22.5 million shares or nearly 10% of its stock, over the next 12 months. Carbon sink grower CO2 Group (COZ) is trading at 16.5¢, which is close to its all-time low of 13¢.

The bad news includes a December-half loss of $700,000 (reversing a December 2008 half profit of $600,000), a steep rise in plantation costs, and falling out of the All Ordinaries in early March.

But there is also good news. The December-half revenue jumped $2.4 million to $6.8 million, and a good outlook for the second half “should result in a strong performance for the full year both in EBIT and profit”, the company says.

Backing this up was the recent tripling in value of a project for Newmont Mining Corporation. Despite its low range, the share price is still showing some optimism as at 16.5¢ it is more than double its net asset backing of 6.3¢.

However, CO2 has 156 million listed options and these have a 12¢ exercise price. If exercised they may increase the net asset backing but lower the share price if sold. CO2 also has 30 million convertible preference shares that can be converted at 6.5¢ each. Although this is neutral for net asset backing it may dilute the share price if sold soon after conversion.

Geodynamics (GDY) is a little different from the other six stocks as it is the only one in the S&P/ASX 300 index and the only one without ongoing revenue.

At 57.9¢ the shares are trading well below their 92¢ price a year earlier in the depths of the global financial crisis. They are also well below their net asset backing of 95.5¢.

However $101 million, or just over a third of the company’s not inconsiderable assets, are deferred exploration, evaluation and development phase costs.

This means, “the ultimate recoupment of costs carried forward for exploration and evaluation phases is dependent on the successful development and commercial exploitation or sale of the respective geothermal exploration tenements”.

In other words, Geodynamics’ value is in its ability to deliver geothermal energy at some point in the future. The company needs to be judged on its business plan and how it meets its milestones.

The company has come a long way and has some serious supporters, so why has its share price fallen?

The ASX asked this question in mid March and Geodynamics said it didn’t know, apart perhaps from floods, which have slowed things down by a month. All in all, not much has really changed at Geodynamics but the share price. So if you have the patience and still like the story, there is no reason to abandon it just yet.

Victor Bivell is the editor Eco Investor.