Australia Losing Investment Opportunities in Clean Tech

Australia might have the best technology and scientists in the world, but the joint managing director of Arkx Investment Management, Tim Buckley, says the Australian market is the worst for clean energy stocks. We need a price on carbon.” This and more in a full report on the clean tech market from David Potts in the Sydney Morning Herald.

David Potts in Sydney Morning Herald (6 September 2010):

Renewables seem to be on the nose yet there are many reasons why adding them to a portfolio is a good strategy, writes David Potts.

Since the Copenhagen climate change fiasco triggered a sequence of events that deposed Kevin Rudd and led to wherever we are now, green-chip share prices have slumped.

Some of the smallest green chips are debt-free, profitable and paying dividends yet have been punished the most.

Sustainability is what they’re about, except, apparently, for their share prices.

Green chips had a brief rally in July when the Australian CleanTech Index climbed 7.5 per cent, compared with the the ASX200′s 4.1 per cent, but it’s been downhill since even though the only clear-cut message from the recent poll is that the Greens will control the senate.

Not to mention the fact that both sides support the renewable energy target for 2020.

By then the power companies must be supplying 20 per cent of their electricity output from renewable energy sources such as wind farms and solar panels.

With share prices of green chips near their lowest in three years is that a bargain or what? More what I’m afraid or, rather, watt.

The biggest and most promising green chip, despite its former life as a satellite of the collapsed Babcock & Brown, wind farm operator Infigen has reported a loss.

The US, where it has its biggest operation, wasn’t windy enough.

It’s an ill wind that doesn’t blow.

There was also less wind than usual in the west and South Australia, which, mimicking El Nino, was more than made up for where I live.

But the wind not blowing or the sun not shining seem to be the least of the problems of renewable energy stocks. They will remain a more expensive and less reliable form of energy than coal or gas until there’s a tax on carbon or some form of emissions trading scheme.

Even so, the market seems to be overlooking the critical fact that from January 1 the renewable energy targets for power generators progressively increase and, as a handy chart in Infigen’s result presentation shows, they will have to buy large-scale renewable energy certificates (LRECs) to make the target. And guess who’s selling them? Infigen and all the other wind, solar and hydro producers.

Infigen predicts LRECs will come into their own from 2014. The big electricity retailers will need to more than treble their holdings by 2020 and “only a few will build to meet their needs.”

So it’s no surprise that Infigen – despite a high debt load, which it’s running down and making a loss – features high on the list of green chips worth having.

It even pays a 2¢ a year dividend and has a $227 million cash balance.

Like most renewable energy stocks Infigen isn’t trading much higher than its low point of 53¢ a share.

“This isn’t a bad time at all to be buying these stocks,” says the managing director of Ethinvest, Trevor Thomas. Ethinvest is Australia’s oldest financial planning company specialising in green chips.

“They don’t build unless they have a supply contract so there aren’t development risks and technology is improving all the time,” he says.

Ethinvest recommendations are tailor-made but some stocks keep recurring, including Infigen and its rival Origin, which has both solar and wind farms.

But top of the list is Sims Metal. “It’s the largest recycler,” Thomas says. “It does what BHP does except uranium and oil, making it a good proxy for the resources sector.”

Another is CBD Energy, “a great little company.” It has a foot in just about every renewable camp: wind, solar and storage using a graphite battery.

The stock has very low gearing, has just moved into profit and the two brokers following it value it at 30¢ or 40¢, more than twice its current price. But, like all fast-growing stocks, it is capital hungry: there have been two raisings so far this year.

AGL, with both wind and solar farms, is also a well-regarded green chip that has outperformed the sharemarket during the past 10 years.

One of the smaller stocks Ethinvest favours is solar panel and pump supplier Solco, which has just posted its third consecutive and so far biggest profit, is debt-free as well as paying a tiny dividend.

The other is Dyesol, which is also debt free but loses money. It’s the only solar energy company that doesn’t need much sun to generate electricity. It has adapted photosynthesis from the plant world and using its special dye can generate power more cheaply than traditional silicon-based solar cells, working in low light and not even having to face the sun.

Although Sydney-based Arkx Investment Management is loath to invest in Australia until a carbon tax is put in place, some green chips are on its watch list including Infigen, Dyesol and CBD Energy.

Another is Geodynamics, which plans to use hot rocks in the Cooper Basin to generate power. But it’s strictly long term – we’re talking 2019 at the earliest.

“It has breakthrough technology but it’s yet to be proven,” says the joint managing director of Arkx, Tim Buckley.

Others are Carnegie Wave Energy, using one of the two world-leading ocean wave technologies (“the question in our view is what is the generating and capital cost to bring it online”) and Ceramic Fuel Cells, which has a unit the size of a dishwasher that generates electricity on site from natural gas and has “a client list of who’s who of world utilities”.

Dollars help the planet

It has to be clean, green and keen for veteran fund manger Laurence Freedman — who these days runs his charitable Freedman Foundation — to put his money into it. Oh and debt free.

One of his biggest forays is into Phoslock, which has a product that prevents toxic algae by turning phosphate pollutants in water into mud that drops to the bottom.

“I’ve been using it in my fish pond for five years and the three carp, Huey, Dewey and Louie, are getting fatter,” he says.

“The problem is not the product but dealing with government water authorities,” although it has already made sales in Europe.

Another stock he likes is AERIS Environmental, which has an environmentally friendly way of removing bacteria and mould that builds up in airconditioning and cold storage systems.

Lately he has taken a shine to Nanosonics, a stock that is about as clean as you can get.

It has invented a disinfectant machine, or transducer, that cleans surgical instruments, replacing the more expensive steam-pressurised or chemical-using autoclaves usually employed.

Freedman says you need a portfolio of stocks for green investing. Suitable stocks should have some cash on hand or at least some large shareholders who can be tapped for future finance.

And “nibble away” rather than put your money in all at once.

“Dollar-cost average so you’re putting money in slowly,” he says.

“My final advice is don’t look at the price every week.”

Ethical investment is a moral minefield

An ethical fund has thrashed its mainstream rivals in the past year, posting a 29.5 per cent return, three times better than the overall share market, according to Morningstar.

While it’s reassuring that investing with a conscience doesn’t have to be a mug’s game, there’s a fine line between what’s ethical and what’s mainstream.

The Perpetual Wholesale Ethical SRI Fund eschews alcohol, gambling and tobacco stocks but was the best performer because it has a big holding in the banks.

Which just goes to show that ethics are in the eye of the beholder.

A bank might tick all the boxes for its relations with staff and shareholders or efforts at promoting renewable energy — Westpac has won awards for being Australia’s most socially responsible company — but you don’t know to whom it has been lending.

And what about uranium mining? Nuclear power might be clean and green but many consider uranium mining to be one of the most unethical activities of all.

Perpetual’s ethical fund, for example, leaves out BHP Billiton, which owns the world’s biggest uranium mine.

The problem for ethical funds is that having excluded many stocks from what is a relatively small and certainly not diversified market, they have to pile more into what’s left.

That’s why ethical funds are also a victim of market cycles, such as a run in bank stocks or a mining boom, if not more so.

By the same token, if you feel good about them at least there’s comfort in knowing you’re not being silly with your money.

During the past three years both types lost about the same amount — about 6.5 per cent annually — if that’s any consolation.

The fact is a deeply green fund has to look offshore for stocks.

One fund is so frustrated by the lack of progress on achieving a price for carbon that it has invested its whole portfolio on offshore green chips — and reaped the results.

“Australia has the best technology and scientists in the world. We’d love to invest in Australian clean tech stocks,” the joint managing director of Arkx Investment Management, Tim Buckley, says.”The Australian sharemarket as a whole is the best performer globally but the worst for clean energy stocks. We need a price on carbon.”

The wholesale Arkx Clean Energy Fund returned 20 per cent last financial year.

Keep an eye on its website at arkx.com as the partly Westpac-owned investment manager is planning a fund for mum and dad investors.

Source: www.smh.com.au