David Holding thinks this small green company is slowly building a sound business. And it just might be a takeover target.
Investors in Alkane Energy (LSE: ALK) have had their patience tested in recent times. But it looks like the company is steadily building a sound business.
When I last wrote about Alkane in March last year, the shares were 20p. Today, they’re down a ha’penny to 18.5p despite posting generally upbeat interim results for the first half of 2008.
Alkane recovers emissions of methane from disused coal mines and uses them to generate electricity. During the first half of the year, the company made a pre-tax profit of £543k on revenues of £2.6m -- and generated cash of £1.25m from operating activities. At the current mid price of 18.5p, Alkane is valued at a little over £17m.
Buoyant markets for gas and electricity
High electricity prices mean that revenues should improve going forward. The average price received in the first half of the year was £46/MWh (megawatt hour) set by earlier contracts – but recent forward contracts have been signed at prices between £73/MWh and £81/MWh for around 50% of Alkane’s output.
The company’s power plants generated 43 million kilowatt hours of electricity during the first half. Last year, the company made an underlying profit before tax of £1.34m at an average price of £41.73/MWh.
It looks like the profitability should gradually rise as long as gas and electricity prices remain high. The broker predicts pre-tax profits of £2.3m and earnings per share of 2.33p for next year, which puts the shares on a forward price-to-earnings ratio of less than eight.
Cash is king
Meanwhile, the company’s net asset value is a healthy £12.36m, whilst increased cash flow from new sites and the availability of lease financing, have increased cash and cash equivalents to £2.48m. This is vital in the current climate where cash for expansion may be hard to come by.
Unfortunately, it’s not all good news. Overall, investors have been hoping for a bit more excitement, and Pro2, Alkane's 38% owned associate company in Germany, remains a bit of a thorn in ALK’s side. Alkane’s share of Pro2’s losses for the first half was £475k, though the second half is expected to be much improved.
Don’t expect fireworks
Long term shareholders have learned not to expect fireworks from this green outfit -– although it seems the company could make a tasty morsel for a larger energy company wanting to improve its green credentials. In fact, ALK did announce that it was in takeover talks last October, but the deal was called off in March due to failure to reach a price that adequately reflected the value of the company.
Some more confidence in the future via directors putting their money where their mouth is and buying shares would be nice, but all in all, it seems Alkane is going about growing profitability in an environmentally friendly way -- slowly but surely.
David owns shares in Alkane Energy.
> You could buy shares in Alkane via The Motley Fool Sharedealing Service.
