The Significant Upside Of Clean Energy

This story features SILEX SYSTEMS LIMITED. For more info SHARE ANALYSIS: SLX

– JP Morgan initiates SLX with Overweight
– clean energy technology offers significant upside
– Consensus target supports the view 

By Greg Peel

RBS Australia has been covering Silex Systems ((SLX)) for over two years now but over the period has remained the only FNArena database broker to do so. That is at least until now, as JP Morgan has initiated coverage of Silex with an Overweight recommendation and a target price of $7.00, suggesting around 90% upside in twelve months.

RBS last updated its view on Silex post its half-year result in February, at which point it upgraded to Buy. The analysts had been sitting on Neutral beforehand waiting for the achievement of a specific milestone, and achieved it was. In the interim, SLX shares have dropped from around $5.00 to around $3.70. When you are a technology developer with only sporadic news to tell in a lengthy process, it's hard to maintain the excitement.

In February RBS maintained a target price of $9.02 which then suggested 80% upside. It suggests 140% upside today but RBS may yet pull its target back a bit based on the subsequent stock price drift. Suffice to say, there are now two brokers in the database who are very keen on what Silex is all about. So what is Silex all about?

Well predominantly, it's about the separation of isotopes using laser excitation, or SILEX. To you and me, this represents the only “third generation” uranium enrichment technology under development in the world at present. Uranium enrichment clearly increases the efficiency of nuclear reactors, which provides Silex with a “clean energy” tag.

As Elizabeth Bennett once said, “It is a truth (almost) universally acknowledged that technologies based on low-carbon emissions have a crucial role to play in the development of long-term global energy sustainability”. Or perhaps this was something the JP Morgan analysts offered in their initiation report. “We believe an investment in Silex Systems,”they continue, “provides exposure to the significant upside potential of the company's highly advanced 'clean energy' technology platforms”.

Note JPM is referring to “platforms” plural, because Silex is not just about SILEX. In June 2009, Silex Systems acquired Silex Solar from BP Solar when BP decided to exit the space. The company has since continued the development of highly efficient solar power for use at the scale of the electricity utility as well as for photovoltaic cells and panels.

Silex Solar already generates revenue from its solar panel business in Australia, but the numbers fell short of expectations in the half-year accounts given both the federal and NSW state governments backed away from solar energy subsidies in the period and reduced feed-in tariffs. This explains subsequent share price weakness. The new NSW government has also caused controversy this week by reducing solar power tariffs, but clearly both RBS and JPM see an investment in SLX as a thematic well beyond the simple notion of regulated green energy kick-backs in Australia.

Indeed, the uranium enrichment project is funded by a company called Global Laser Enrichment, the shareholders of which are nuclear reactor builder General Electric, its Japanese nuclear partner Hitachi, and Canada's leading uranium producer Cameco. Investment from GLE includes the current establishment of an engineering and manufacturing facility in Tennessee. GLE is funding the capex to bring SILEX technology to commercialisation which thus alleviates the need, one assumes, for SLX to be rushing back to the market for new capital in order to progress along the development curve.

Furthermore, SLX's current solar projects include a 2MW pilot plant in Mildura, Victoria, and a plant of up to 5MW in the US and these are being paid for out of the company's cash reserves. GLE pays SLX milestone royalties during the uranium enrichment development phase and SLX will receive a share of future GLE revenues.

GLE will proceed with construction of the first commercial SILEX facility subject to the receipt of US Nuclear Regulatory Commission approval which is expected early in 2012. Royalty income will then flow from FY14.

So aside from SLX's existing solar panel business, the stock offers early investment in wider scale clean energy technologies which will take some time to reach full commercial status. Clearly there are at least two brokers, nevertheless, who are very keen on the idea.
 

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