This renewable energy tiddler may yet offer investor excitement.
Renewable energy has fallen out of favour with investors in recent times. In many cases, this is justified. Yesterday's flavour-of-the-month stocks are no longer fashionable and there isn't the underlying fundamental value that private investors would like to see.
The receding tide, though, has left a number of value opportunities exposed. I believe one of these could be Renewable Energy Holdings (LSE: REH) whose share price tells a very sorry tale over the last couple of years, declining steadily from almost 60p early in 2008 to its current nadir of 18.5p. This values the renewable energy specialist at a little under £13m, so bear in mind that this is a very small outfit with all the inherent risks that go along with anything of this size.
The flipside, of course, is the potential excitement -- and there's a fair degree of that with what would appear to be a great deal of useful downside protection given the asset base.
Underwater power
The company does what it says on the tin, concentrating on wind assets in the UK and Europe. The possible excitement comes mainly from Renewable Energy's retained stake in its "CETO" underwater wave technology -- which is capable of producing zero-emission power as well as desalinated water.
The system is anchored to the ocean floor, so is out of sight. Submerged buoys are tethered to seabed pumps which in turn pressurise water that is delivered ashore via a pipeline to drive hydroelectric turbines, generating zero-emission electricity. The high-pressure water can also be used to supply a desalination plant.
This was sold off last September, to Australia's ASX-listed Carnegie Wave Energy in return for 33% of that company, which is currently worth £15.5m (22.27p per share) at the bid price. And for what it's worth, this stake was twice its current value just four months ago.
Asset rich
The boss reckons this to be the best way forward for his company, allowing Renewable Energy's shareholders to enjoy a decent share of the future revenues generated by CETO's world-wide roll-out whilst strengthening their own company's balance sheet; spreading the risk in other words.
Nevertheless, since the deal was first announced in May, the company has lost close to two-thirds of its value despite the balance sheet looking stronger -- albeit vicariously so.
In fact, at the halfway stage, the company had net assets of twice the company's current valuation, including over £4m in cash, since when it has sold a Welsh landfill gas asset for at least £2.25m -- which may rise to £2.75m depending on the purchaser's revenue from the site.
Putting CETO aside for a moment, the company has 40MW of operating wind turbines in Germany with a further 100MW under development, a Polish wind farm permitted for 30MW, and a Welsh wind farm in development.
Helpful German wind
Believe it or not, German winds helped bolster the second half. With January's trading update the company said wind conditions in Germany improved -- assisted by one of the windiest Novembers on record.
On the downside, this small company may lack the power to compete in power generation, its existing operations are loss-making and who really knows if and when the CETO technology will pay back -- or whether this interest will be sold off?
That said, there's a lot of pessimism in the price for some valuable and potentially interesting assets. If the CEO Mike Proffitt can harness enough wind to live up to his surname, his company's shares could look startlingly cheap.
The company reports its final results for 2009 on Monday. Clearly, it's more prudent to have a look at these in detail before deciding whether to invest. The beauty of such small companies in today's investing environment is that you usually get the time to do so without the price racing away -- thus avoiding the risk of investing in advance of bad news. Renewable Energy Holdings certainly merits closer inspection.
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David owns shares in Renewable Energy Holdings.
