US ethanol producer heats up

By Graeme Dickson
Updated: 12:00 EDT, 6 April 2011

If someone mentioned ethanol as a good investment theme during the global credit crisis of 2008/9 then there would have been a good chance the recipients of the advice would have walked out of the room and switched off the lights.

Numerous bankruptcies across the industry during that period were certainly a downside. But in the last eighteen months, rising fuel and corn prices have stabilised commodity margins at a healthier level, leading to better profits for companies that improved production rates in a capacity constrained sector.

Ethanol can be used for several purposes but in its most commonly recognised form, is derived from distilling corn or sugar and converting the pertinent liquids into fuel, which in turn is blended with petrol to provide a greener solution to driving as well as being less reliant on crude oil.

The US is embarking on a substantial renewable fuel programme, designed to reduce its dependence on crude oil, which could see renewable fuel blended into transportation fuel being increased from eight billion gallons in 2008 to 36 billion gallons by 2022, of which corn based ethanol may account for up to 15 billion gallons. A company that is already benefitting from this is AIM-listed GTL Resources (GTL):

GTL produces around 100 million gallons of ethanol from its production facility in Illinois in the US. As can be seen from the stock chart, the shares were on a sharp decline from the beginning of 2007 as the oil price caved in and ethanol producers started to go under. The shares bottomed at 9p in April 2009 but have since, along with the rest of the market staged a good recovery, closing yesterday at 88.5p.

The £28.3 million company last year generated pre-tax profits of £9.55 million which equated to an earnings per share of 22.3p, placing the company on a price to earnings ratio of 3.95. Why is the company so cheap? In a word: debt. It has $92.3million (£56.7 million) of it, double its market capitalisation.

However, the company is paying the debt off quickly (in 2009 it was $115 million (£70.6 million)), and it is forecast that this will be reduced to just $20.5 million (£12.6 million) by 2014 as it reaps the rewards of US legislation, while capacity constraints due to lack of finance for this sector will hugely benefit the incumbents.

The stock should also be supported by the large discount to its net asset value (NAV) and discount to peer group: its NAV currently rests at 149p while its 38 per cent discount to one of its nearest rivals, suggests there is plenty for GTL to catch up on and for new investors to enjoy the potential uplift.

Update

Avanti (AVN) – suggested to buy at 454p, the stock closed at 450p. The shares continue to be swept up by directors with the chief executive and chairman both buying on Monday during this relatively weak patch.

Globo (GBO) – suggested as a buy at 17.25p, the stock closed yesterday at 22p. Continue to hold for now as we await results on 19 April.

Optare (OPE) – Tipped as a buy at 3p, the stock closed yesterday at 3p: hold for now.

Rheochem (RHEP) - tipped as a buy at 15.13p the stock closed at 15.75p. The company yesterday announced it gave a 40 per cent stake in six North Sea blocks in exchange for 3D seismic data and interpretation over these blocks with PGS Exploration Limited. Keep holding.

Evolution Group (EVO) – tipped as a buy at 78.5p the stock closed yesterday at 75p. Keep the stop based on a close below 70p.

OMG (OMG) – Tipped as a buy at 43.75p, the stock closed yesterday at 39p: not ideal and like many stocks that have had a good run, has probably been susceptible to profit taking for the end-of-tax-year selling. In the meantime, the company is likely to release a trading statement around 27 April.

ZincOx (ZOX) – tipped as a buy at 60p, the stock closed at 51.5p. Continue to hold as the company trades at the same level of cash it has in the bank and attributes no value towards its flagship South Korean project.

Pendragon (PDG) - tipped as a buy at 23pm it closed at 22.63p. Continue to hold and keep the stop based on a close below 20p.

Cyan Holdings (CYAN) – suggested to buy at 1.325p, the stock closed at 0.975p. The company issued results which looked okay but it really needs to deliver on more order flow to convince the market this stock has really turned the corner. Cut the position if it closes below 0.8p.

GB Group (GBG) – suggested to buy at 36.75p, the stock closed yesterday at 35.75p.The stock seems to finding a base: in the meantime watch out for a trading statement circa 18 April. Keep the stop based on a close below 32p

SocialGo (SGO) – suggested to buy at 3.55p, the shares closed yesterday at 2.4p. I met up with the management last week to see how things were progressing post-results and all seemed quite upbeat, despite the disappointing short-term share price performance. The response to Version Two of its software launch will be crucial to the company's outlook, which should be out by the end of this quarter.

EMED (EMED) – suggested to buy at 12.25p, the stock closed yesterday at 16.375p. Continue to hold as we await mining permits and the company to reinvigorate its copper concentrator before production starts.

Active Energy (AEG) – suggested to buy at 6.13p, the stock closed yesterday at 2.25p. The stock has been the worst performance to date. Although appalled by the performance, at £2.5 million the company looks over-sold but still I am disappointed by the lack of accountability from the company for the fall in its price.

Edenville (EDL) – mentioned as a buy at 1.195p, the stock closed yesterday at 1.54p. Having already suggested to sell one's investment stake out at 2.51p, the shares should at some stage start finding traction given the appeal for investing in coal now that uranium as a commodity is firmly out of favour. Continue to hold.

Weatherly International (WTI) – suggested to buy at 8.1p, the shares closed yesterday at 11.5p. I'm not expecting any significant newsflow from this company during April, albeit I'm sure many would like to hear if it has managed to make bring in its first revenues from the sale of its copper production. Continue to hold and buy on any significant weakness.

Toumaz Holdings (TMZ) – tipped as a buy at 8.625p, the stock closed at 7.63p. Continue to hold as the company addresses some time and cost saving technology as well as making life much easier for patients with wireless nodules contained in the plasters it provides.

Renewable Holdings (REH)– tipped as a buy idea at 16.25p, it closed yesterday at 15.5p. The stock may ultimately benefit from the recent detractions of nuclear energy while its discount to its Net Asset Value will appeal to investors looking for a safer haven. Hold for now.

Bowleven (BLVN)– Tipped as a buy at 177.25p, the stock closed at 376.5p yesterday after it extended an agreement with Vitol regarding its Etinde joint venture.

Tissue Regenix (TRX) – Suggested as a buy at 16p, the stock has picked up from its lows and is now trading at 11.375p. The company has appointed a new chief financial officer as it prepares for the next stage of its development.

The material for this report comes from Sharescope. The writer does not hold any shares or derivatives in the above mentioned companies except EMED, Globo, SocialGo and Weatherly International. Some clients of Optiva Securities may hold shares in the above named mentioned companies.