These shares have done nothing much for years. Should investors call it a day?
I've been banging on about the value inherent in Alkane Energy (LSE: ALK) for over three years now, yet still the share price refuses to budge.
By the most basic rule of investment, therefore, I've simply been wrong. But this hasn't stopped the UK's leading coal mine methane (CMM) "gas to power" producer from steadily building value.
The share price briefly touched the giddy heights of 25p in May of last year before realising that was far too racy a valuation and coming back to the range it seems to like best; around the 15-17p mark.
As I write, the shares remain firmly rooted at 15.25p despite encouraging news -- valuing the green energy group at just £14.2m.
Alkane is one of those companies that doesn't fill you with trepidation as you click on the latest news. And Wednesday's interim results for the first half of 2010 are no different, shouting:
- revenue increased by 7.5% to £3.1m;
- EBITDA up 5% to £1.5m;
- production costs per MWh (megawatt hour) down 9%;
- net assets increased to £16.6m; and
- earnings per share of 0.7p are up on the previous year.
The case for investment
And therein lies the basic investment case. Alkane has been increasing its asset value progressively, to a point where its net tangible asset value (NTAV) outstrips the valuation of the company, whilst simultaneously increasing earnings.
Its balance sheet is dominated by the fixed asset figure of £20m invested in sites, grid connections and engines. Fixed assets have increased by £6.5m over the last year as new sites have been commissioned. That's the kind of thing us value-seekers like to hear.
Its debt level, meanwhile, is a very reasonable £2.4m, representing gearing of 15%. The company tells us that the second half will see further generation capacity added to its portfolio in an environment where the pricing outlook appears to be strengthening. It looks forward to reporting strong progress in the second half.
By the end of 2010 Alkane will have 12 operating sites enabling it to increase output next year. It plans to add three more sites during 2011 and has longer term aims to increase generation capacity three-fold from current levels.
The flip-side
On the flip-side, Alkane remains sans-dividend; not even making reference to the potential this time around -- though, to be fair, the company said this would be reviewed annually when it announced its final results back in March.
It isn't screamingly cheap on an earnings basis (though nor is it particularly demanding), with a forward price-to-earnings for this year of around 10 -- but this figure falls to a temptingly low 6.6 for next year.
Also, if the company presents such patently obvious value -- then why hasn't it received a bid approach and why haven't its directors been stuffing their pockets full of shares?
These are two questions I can't answer beyond citing the takeover approach that was made three years ago which failed to reach a price that reflected the inherent value of the company.
The closing price the day before the bid was announced was 18.75p, with a NTAV figure roughly two-thirds of today's; read into that what you will.
Also, the boss did at least buy a few shares (though only around £12,000) in March at 18.75p. Significant director buying would be very encouraging though.
Simply value
I've been wrong about Alkane so far. The share price has languished though I still see it as simply undervalued and something of a tasty morsel for a bigger fish looking to enhance its green credentials.
The fact that the value still isn't reflected in the share price demonstrates the need for continued patience.
More share ideas:
> David owns shares in Alkane.
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