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Will Turnbull Boost Renewable Stocks?

Will Turnbull Boost Renewable Stocks?

By Bob Kohut 19.10.2015


Changes in national political leadership sometimes lead to more favourable conditions for certain business sectors and worsening conditions for others.  Such was the case when Tony Abbott came to power with his Coalition government.  The financial news quickly filled with gloomy prospects for the Renewable Energy Sector in Australia.

With the arrival of a new Prime Minister that situation has reversed.  We are now seeing opinions on sectors that could benefit from the change in leadership, with Renewable Energy key among them.  A re-energised focus on promoting innovation is another potential tail wind for the sector.  Long-time followers of renewable energy developments are aware of innovations coming from within Australia that end up being commercialised elsewhere. 

Solahart began developing solar hot water heating systems as early as 1953 but was taken out by Paloma, a Japanese company in 2001. Crystalline Silicon on Glass (CSG) technology was created here but later the Australian company with the rights, Pacific Solar, sold its interests to a German company.

A business climate that encourages innovation and promotes conditions favorable to innovative solutions staying at home can only boost the overall sector.  However, the most significant tailwind for solar and wind companies within the renewable sector may be cost.

Historically renewable energy sceptics have been able to claim solar and wind have not been cost effective without government subsidies.  Contemporary forecasts say otherwise.

Deutsche Bank has released several research reports in 2015, reaching the overall conclusion that cost effective solar power energy storage is “just around the corner.” DB analysts point to the possibility that total solar energy revenues around the world will reach $5 trillion dollars within 20 years.  Perhaps of greatest importance is the prediction that energy storage batteries for large-scale use will be ready and cost-effective within five years. 

The ability to store energy produced on favorable days – windy and sunny – and retrieve the energy when needed during low producing periods has been a missing piece of the renewable energy puzzle, plaguing both solar and wind producers.  Deutsche bank calls this development a “killer app” while others talk of the disruptive power of efficient battery storage coupled with wind and solar producers.

The latest positive predictions come from Bloomberg New Energy Finance (BNEF).  Their research shows the levelized cost of electricity (LCOE) for solar and onshore wind power technologies is now actually cheaper than coal and gas in both the UK and Europe and is rapidly approaching parity in other markets.  LCOE represents the total cost of generating electricity from financing to designing and building to operating and maintaining a power generating plant over the course of its lifetime.

It would appear even without a boost from the new leadership, wind and especially solar power have solid growth prospects.  The ASX has one major wind producer and a smattering of small players in the solar space.  The following table includes four stocks to consider.  All have been around for some time but have yet to show consistent profit and not all have generated revenue, leaving Price to Book as the lone valuation measure to consider.  These are high risk stocks, regardless of the positive sector tailwinds. 

 

Infigen Energy (IFN) is in the top five of the ASX Clean Tech Index by market cap and has been disappointing its investors since its first day of trading on the ASX back in 2005.  The share price opened the day at $1.40 and closed at $1.09.  Here is a price chart for IFN since it came to the ASX.

 

Investors were buoyed by the news of each new wind farm coming into operation.  By March 2015 the company was operating six wind farms in Australia and 18 in the US, with more developments in the pipeline.  That kind of expansion accounts for the company’s massive gearing, but also the low P/B, due to the scope of its asset base.

Infigen generated close to $300 million in revenue in FY 2013, falling to some $140 million by FY 2015.  Plagued by the cost of interest payments on the debts incurred to expand, the company sold its US interests at a discount in July 2015. The stated reason was obvious – the proceeds went to pay down its debt.  Earlier Infigen had sold its development pipeline in the US.  Management expressed confidence in the future of the company’s Australian operations, helped by the final agreement on cuts to the RET (Renewable Energy Target.)  That might sound contradictory, but certainty trumps not knowing “how much” and “when.”

The share price has risen close to 17% since Turnbull took office.  The company may get an additional boost from the proposed Queensland Kennedy Energy Park wind and solar farm, a project from privately held renewable energy company Windlab.  The Kennedy Park is in direct competition with plans to build a new coal-fired generating plant.

The solar stock generating the highest investor interest is the only Australian company with plans for large-scale electricity generation using solar power.   EnviroMission Limited (EVM) has been looking to construct a large scale solar tower since 2001.  The initial site was in Australia but the company is now readying a site in the state of Arizona in the US.  The technology appears revolutionary.  The power plant looks like a giant Solar Chimney with solar collectors around the base.  Hot air is trapped by a canopy around the tower and as the heated air circulates it turns turbines inside the tower to generate electricity.   This may sound like the stuff of science fiction but the company claims a successful prototype was successfully operated in Spain. 

The company has made multiple funding announcements over the past three years as well as announcements about its global prospects, but it appears that as yet not one shovel full of dirt has been turned in Arizona.  The latest funding announcement is its most ambitious – about $110 million over time from a Japanese fund.

Investors may not be taking the permitting issues with this project to heart as they drive up the price on this highly speculative stock.  The size of the tower would be enormous – almost three times the height of the Empire State Building in the US with close to 2,500 acres needed for collectors around the base.  On 13 October the company issued yet another positive press release; this one about a joint venture with a company in Qatar for solar tower development in the Middle East and North Africa.  Prudent investors may wish to watch this stock until some progress towards the actual beginning of construction is announced.

Quantum Energy (QTM) manufactures and distributes solar powered cooling and heating systems for residential and commercial customers.  After four straight years of profit losses and negative earnings per share, for FY 2015 the company showed a profit of $827 thousand dollars and EPS of $0.04.  This is a very thinly traded stock, which has a three month average daily trading volume of around 11,000 shares.  In response to the positive report the share price rose from $0.01 to $0.02 before falling back to the current $0.016.  The company has a subsidiary, Quantum Health Group, which sells high technology medical imaging equipment throughout Asia.

Dyesol Limited (DYE) boasts a highly disruptive technology that has as yet failed to deliver.  The technology here is incredibly complex for those of us who lack an advanced degree in chemistry.  Suffice it to say this company is in the forefront of research and development of third generation photovoltaic (solar) cells.  If you have the time you can read up on Dye-Sensitized Solar Cells (DSSC) and Perovskite Solar Cell (PSC).  If not, here is a lay person’s understanding of what they do.

They transform the cells into coatings to be applied to a variety of materials typically used in residential and commercial construction – steel roofs, cement, exterior ceramic tile, paint, and glass.  Through the magic of photosynthesis, sunlight striking the coated product is transformed into energy.

Dyesol has an impressive list of partners and funders.  On 1 October the company announced it had secured $449 thousand dollars in funding for its PSC development from the Australian Renewable Energy Agency (ARENA).  The FY 2015 Annual Report released on 28 August came with positive pronouncements about the future of solar energy.  This may prove true, but DYE investors have been there before.  In 2013 the company announced a major breakthrough in the energy efficiency of its solar cells along with its intention to move rapidly into the commercialization phase.  The share price shot up over 100% and investors are still waiting for significant revenue and profit from commercial operations.  Here is a five year chart for DYE.

  

In a May 2015 interview with the Finance News Network, the Dyesol CEO stated the company expects to spend between $7 and $8 million dollars this year on development costs, with a possible commercialisation demonstration project in 2016.  The company relies on government help and could benefit if the new leadership goes ahead with increased funding for the Renewable Energy Sector.  Imagine a world where a building roof produces electricity.  This one is definitely one to keep watching.

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week's newsletter

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.



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