ENE 0.00% 14.0¢ enevis limited

ENE in Shares Sept issue

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    Shares magazine seem to think its a stock that will go higher. The charts look good to as does their business and the sector they operate in. As soon as we start to get cyclones and hurricanes develop, people start to talk about greenhouse gasses and ENE existing business alone reduces greenhouse gases by 6 million tonnes per year not to mention what SWERF will do when it becomes commercial. One to watch for sure. Here's the article:


    ENE regains its spark



    By Tim Knapton

    It's perhaps ironic that throughout the latest phase of recovering crude oil and coal prices, the share price of Australia's largest alternative energy play has languished. Over the last year, Energy Developments (ENE) has fallen from $14 to less than $4, a capitalisation loss of more than $1 billion.

    Before analysing the fundamentals, it's worth reviewing the big picture.


    Interest in power generation from hydro, solar, geothermal or biomass waste sources was catalysed by the last major oil price crisis in 1979 and, after waxing and waning for two decades, it seems as though the technical and financial gestation period is now all but over. Multitudes of significant commercialisations are occurring, assisted by gradual advances in collection, photovoltaic, incineration and separation, turbine and materials-handling technologies. The international Kyoto protocol to limit carbon emissions and the development of a sophisticated carbon credit market have added significant impetus. Last year's serious electricity shortages in California were a classic indication of the need to adopt alternative generation sources.

    Furthermore, in December 2001, the Australian Government passed an Act to ensure that an additional 2 per cent of national electricity production (in addition to the current level of just under 11 per cent) is derived from renewable energy by 2010.

    Energy Developments evolved from humble beginnings as a conventional power station operator at Pine Creek in the late 1980s into a multi-technology electricity supplier that embraces sourcing from landfill gas, waste mine gas (coal seam methane) and natural gas/distillate across markets as diverse as the US, Britain, France, Taiwan, Greece and, of course, Australia. The group's existing plants are effectively reducing greenhouse gas emissions by the equivalent of six million tonnes of carbon dioxide per annum.

    ENE's most extravagant asset is undoubtedly the 5.4 megawatt (MW) Solid Waste and Energy Recycling Facility (SWERF) at Whytes Gully in NSW, which is now entering its final stages of operational refinement before commercial production starts. SWERF processes raw waste material using heat and steam, then separates it into organic pulp, recyclable materials and inorganic residue.

    In the gasification process, the organic pulp is subjected to high temperatures and is "gasified" to produce synthetic gas that feeds the final power generation stage, utilising gas turbines to produce electricity. The stock has been subject to mounting concerns about the real efficacy of the SWERF process and there have been delays at both ends of the commercial-isation process; supply negotiations and technical testing.

    The interim result to December 2001 also caused selling pressure because profit margins were lower than expected from the group's numerous existing business streams. Most of those businesses are power plants in Australia driven by landfill gas, coal seam methane or natural gas. Total sales revenue for the six-month period rose by 21 per cent from the previous corresponding period to almost $57 million, but the earnings before interest and tax (EBIT) margin slipped slightly. Also of some concern was that the Australian operations produced a flat revenue result and the only growth came from a near doubling of overseas landfill income. In a sense, though, that reflects the wisdom of ENE making the decision to build a global business.

    The stock is not short of attributes, though. Energy Developments has assembled a portfolio of green energy facilities across four continents and managed to grow revenues and earnings for each of the last five years. At December 31, 2001, there were over 26 plants in Aust-ralia, five in Asia, nine in Britain and Europe, and four in the US. A South Korean plant is now operating and the group has just won a tender to build a new high-tech plant at one of the largest landfill operations in the US.

    Altogether, the group now operates total electricity generating capacity of more than 370M. Although the interim number was disappointing, the business produces relatively high profit margins (averaging about 35 per cent), and despite an intensive and continuing capital expenditure program, interest cover is close to three times.

    So far, in excess of $135 million has been spent on SWERF, but the problems associated with it have been partially mitigated from a financial perspective by the Wollongong City Council's decision to allow the project to operate commercially without a major scale upgrade. That will hasten cashflows and allow the operator to resolve teething problems with the equipment train.

    In turn, that process should lead to the granting of an expanded EPA licence. SWERF is about two years behind schedule, and with extra steps in the process, the market has taken the view that it will not prove as efficient a power generation system as was originally hoped.

    The savage price correction means that ENE's price earnings ratio has now been trimmed to only a slight premium to the All Industrials average and that makes the stock a bargain investment for the long term. SWERF may remain an expensive enigma, but with over 40 plants in total, the risk profile is shrinking and the stock is likely to enjoy more energetic performance in the not too distant future.


    skippa
 
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