Australia | Nov 02 2006
By Chris Shaw
A combination of high oil prices and concerns over global warming were enough earlier in the year to generate renewed interest in clean and renewable energy alternatives and this interest has shown no signs of dying down even as oil prices have returned to lower price levels.
Companies targeting this sector have also generated increased interest in the market, this trend continuing with Austock Securities initiating coverage on Viridis Clean Energy Group (VIR). The broker rates the energy infrastructure fund as Buy with a price target of $1.09, noting it also offers an attractive dividend yield for investors.
Viridis has a business model of investing in operating assets, which the broker notes is a lower risk approach than attempting to develop assets itself. This strategy requires the company to team up with developers, the broker noting this external fee structure is a more efficient one for the company than having its own development and management team in-house.
The fund’s assets are spread throughout Europe and the US and currently comprise wind farms in the UK and Germany, a process gas operation in Italy and landfill gas projects in the UK and the US, the broker noting this provides both a geographical and operational spread. Another positive is the offtake agreements in place mean there is price certainty for around 70% of the group’s revenues for the next five years and around 40% from years six to ten, limiting the downside in terms of future revenue flows.
The broker estimates the fund’s assets are worth in the order of $1.10 per share on a discounted cash flow (DCF) basis, a valuation supported by a dividend discount model (DDM) valuation of $1.21.
In the broker’s view the current share price is below this valuation due to concerns over a potential equity raising by the company as it looks to accelerate repayment of the debt facility put in place to acquire the Norgen landfill gas asset in the UK.
While this may have a short-term impact on the share price the broker sees some positives from any such move as apart from strengthening the balance sheet it should also result in the company’s market capitalisation increasing to around $175m, which it estimates will help bring it closer to inclusion in the S&P/ASX300 index.
The broker expects operating income will increase to around $85m this year from $32m in FY06, though in net profit terms the company is expected to continue posting losses through to FY09 at least. Despite this the broker regards the dividends as attractive, noting the stock is priced on a yield of nearly 11% (largely tax deferred) at current levels.
With the broker also holding the management team in high regard, it sees the shares as attractive at current levels. ABN Amro is the only broker in the FN Arena database to cover the stock and also rates it as Buy, though its price target is a little lower than Austock’s at $1.03.
Viridis shares have traded in a range of 84.5c to $1.10 over the past year and as at 11.00am today were 1c higher at $0.92.