Go Green And Maybe Make Money

By David Holding | 21 December 2006

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Going green maybe good for the soul, but may be good for your pocket, too. Alkane Energy (LSE: ALK) could be a good bargain it's certainly good for the environment.

Alkane is a renewable energy company specialising in two main areas:

• the design, build, operation and servicing of methane treatment plants (the Pro2 subsidiary in Germany), and
  
  
• electricity generation facilities that use biogas, landfill gas, coal mine methane and sewage gas as fuel (Alkane Minegas mainly in the UK & Alkane Biogas).

The company's website gives further details. You can even use the carbon emissions calculator to decide how many shares you need to buy to assuage your carbon guilt! I'm well covered thankfully.

Twelve months ago, Alkane welcomed in the 2006 New Year at over twice its current value and with high hopes for the future. But a March profits warning &operational problems at a number of sites sent the shares plummeting. Today, at 16.75p, the company is valued at £15.38m.

Great expectations

The interims to the end of June showed a post-tax loss of £520,000 on a rapidly rising turnover of £8.4m:

'[We...] look forward with confidence to the year-end results, and, we are currently trading in line with market expectations.'

The expectations referred to are for earnings of £500,000, as Pro2's business is very weighted towards the second half.

But the big question is about sustainability of bigger profits longer term. On this score, the brokers are their usual bullish selves, one forecasting £4.6m and another a mere £2.5m pre-tax profit for 2007. We shall see. Even the most conservative of these projections makes the current share price look extremely low. But prediction is one thing and delivery quite another.

New life for old mines

In November, Alkane announced three new mine gas projects at disused mines in Nottinghamshire which brought the company's total mine gas capacity in the UK to 15.5MW in electricity equivalent. With last year's final results, the company told us:

'The gas quality from boreholes is considerably higher than from mine shafts. Electricity prices at these sites are contracted for 12 to 20 months at above £50/MWh, including income from climate change levy exemption certificates.'

So as a pure hypothesis, if the UK plants ran 24 hours a day with no problems at these prices, the gross income would be £6.8m, a decent proportion of which could drop to the bottom line.

But bear in mind that mine-gas is only one part of the business. In fact, 78% of first half turnover came from Pro2, the equipment side of the business. And at the end of August, Pro2's order book stood at £27m. As the UK business has not yet enjoyed an uninterrupted year of continuous operation, and the company is bullish about Pro2's prospects, the broker forecasts begin to look achievable.

Meanwhile, the balance sheet looks very reasonable with £8.8m in tangible assets (£5.4m of which is gas properties) net current assets of £4.43m and £3.3m in longer term debt.

Silver lining

This is one of those shares that suffered a few disappointments following the initial hype & excitement, but which is now far cheaper than it was when everyone was talking about it -- just at a time when it looks set to actually deliver.

With the ever-increasing demand for all things green and a potentially very low forward price-to-earnings ratio, Alkane looks to be a sound long term investment -- particularly for those with an environmental awareness.

David owns shares in Alkane.