Novera Energy: Australia Windpower

IC tip

15 December 2006

NOVERA ENERGY (NVE)



60p - Aim - The government wants renewable energy to account for 20 per cent of the UK's total energy production by 2020. So Novera Energy hopes to profit from this by building up a substantial renewable energy portfolio. It is certainly well-positioned to do so - chief executive David Fitzsimmons held a variety of senior positions at BP, and there are decades of utility and renewable energy experience in the boardroom.

But Novera is not putting all its eggs in one basket. It has already built a substantial landfill gas business, to which it plans to add a wind-farm portfolio, totalling 250MW over the next five years. The first application - for a 24MW wind farm at Lissett Airfield in Yorkshire - is already in the planning process. And at least five more applications are expected in the north of England and Scotland by the end of 2007. Should the sites receive planning approval, Novera can then develop them itself with debt financing and equity, or sell them into the joint venture (see below).

Of course, the major risk to this plan remains the UK planning system and local complaints from residents. However, as the imperative to meet renewables targets grows, government support for planning applications is likely to grow.

Novera has also had plans approved for a flagship waste-to-energy plant in east London, which will provide power to the Ford plant at Dagenham. The ground-breaking plant will take waste from Shanks' facility near Dagenham and, using bespoke Canadian technology, convert it into synthetic gas to generate power for the Ford plant (equivalent to the power required for 14,000 homes). Construction starts next year and, although some costs will be met by government funding, building such a facility for the first time will be a challenge. Generation is expected to commence in 2009.

The plant will cost significantly more per megawatt hour than wind farms, but the economics are underpinned by the offtake agreement from Ford and by gate fees, which Shanks will pay to Novera for taking its waste away. As landfill directives become ever more strict, demand for such facilities should grow.

For now, though, the company's bedrock is currently the Novera Macquarie Renewable Energy joint venture, in which Novera has a 50 per cent stake. Having the backing of Australian infrastructure giant Macquarie has helped build up the portfolio which, at the last count, was producing 128MW of power from landfill gas, wind and hydro.

Many assets in the joint venture are relatively mature. In the first half of the current financial year, it generated 295GWh of power, up 17 per cent on the previous year. What this means for Novera, as it seeks to build out its own projects, is a reliable revenue stream from the joint venture. In the first half, Novera's share of the joint venture contributed £300,000 to profits and it has since contributed a further £1.2m in dividends and proceeds from the sale of wind farms in Germany.

With much of the capital expenditure in the joint venture now complete, house broker Oriel Securities predicts that its gross cash distribution next year will be £4.8m. Much of the joint venture's production is underpinned by power-purchase agreements with Centrica, which include renewables obligations certificates.

Despite this, Novera is still loss-making, and will remain so for the next couple of years, according to house broker Oriel's estimates, as capital expenditure will cancel out the receipts from the Macquarie joint venture. That said, an investment in Novera means backing a team with strong industry experience and a vision of building a significant renewable energy business. In fact, with the backing of Macquarie, Novera is one of the best-placed of the UK's quoted renewables companies. Buy.

Ord price: 60p Market value: £33m
Touch: 58-62p 12-month High: 69p Low: 44.5p
Dividend yield: nil* PE ratio: na*
Net asset value: 30p Net Cash: £2m


Year to Turnover Pre-tax Earnings Dividend
31 Dec (£m) profit (£m) per share (p) per share (p)
2005 1.8 -2.5 -4.5 nil
2006* 3.0 -2.1 -3.9 nil
% change % change - - -
*Oriel Securities estimates
Market makers: 5
Normal market size: 1,000
Beta: 0.05
Last IC view: na

BULL POINTS

* Growing income from joint venture

* Potential upside from wind-farm development

* Well-funded


BEAR POINTS

* Planning risk

* Construction risk at east London facility