This small company is making excellent progress; its share price isn't.
Successful investing takes patience and a long headedness. And the need for a little investor forbearance has been all-too amply demonstrated by the performance of shares in Alkane Energy (LSE: ALK) over the last few years. But this isn't the company's fault, so much as "Mr Market's".
In fact, the UK's leading coal mine methane (CMM) "gas to power" producer has made excellent progress as today's final results for 2009 confirm. The results are very upbeat, showing adjusted pre-tax profits of £2.4m (up from £1.4m in 2008), on revenue up 21% to £6.3m.
EBITDA came in at £3.7m, a 42% increase, whilst underlying earnings of 2.6p place the shares on a price-to-earnings ratio (P/E) for 2009 of just 7 times at today's (increased...) share price of 18.5p.
A step change
The real excitement, though, comes in the improvements in capacity and other developments. If today's price doesn't fully reflect historical performance, it most certainly doesn't reflect the long-term potential.
The company started last year with 17MW of CMM capacity at six sites, but finished the year with 30MW installed capacity at nine sites covering both CMM and conventional gas tolling contracts -- during a year the boss described as witnessing a "step change" in performance as Alkane delivered record electricity output as new sites came into production.
"The opportunities for growth, both in our core business and related conventional gas and biogas sectors, leave us well placed to significantly develop our business," he said.
This maybe so -- but there's been no great step change in the share price since I last wrote about the company in September. In fact, the share price is at exactly the same level of 18.5p, valuing the clean energy producer at £17m (though it went over 25p last May). This looks too low given the net asset value of £15.8m, the low historic P/E and the potential for increased earnings.
Two steps forward, one step back
The problem may be that investors' horizons are too limited. Alkane's profitability is, of course, affected by electricity selling prices. And on that score, the short-term outlook isn't great.
Prices this year are expected to be weaker as current wholesale prices are lower than in 2009. But the company expects prices to rise thereafter, and has 75% of its 2010 output already covered at an average selling price of £40/MWh -- compared to the average price achieved in 2009 of £56/MWh.
Quite what this will mean for earnings going forward is as yet unclear. But this kind of short-termism presents opportunities for investors with patience.
The company's near doubling of capacity and its collaboration agreement with TEG Group (LSE: TEG) announced in December, to jointly bid for a range of anaerobic digestion facilities -- where TEG will provide waste contract and management services and Alkane will provide gas to power capabilities -- should bear more fruit given time.
The tortoise or the hare?
Alkane strikes me as one of those sensible, "Foolish" companies that makes steady progress, gradually building value for its shareholders -- a value which isn't reflected in the share price. It ticks a lot of boxes for investors in different ways. There's clear value here, but there's also strong growth in an interesting sector; green energy. Unfortunately, there's no dividend yet, as one might expect from a developing company, though it "continues to review" the possibility. If and when that comes, it'll be the icing on the cake.
Until then, for my money, Alkane remains patently undervalued and would make an obvious add-on for a larger energy company wishing to emphasis its green credentials.
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David owns shares in Alkane.
