Sell-off leaves value

By Andrew Shepherd-Barron, 02 September 2010

The alternative energy sector has been de-rated to such an extent that it now prices in high risk. For example, solar companies are now on enterprise value to earnings multiples of half that of their peak. Some of this is deserved, in that project finance remains tight, there is limited new capacity discipline and government support is variable.

But we think this has been over-stated; proposed cuts in solar feed-in-tariffs still leave attractive rates of return, declining market shares for dominant incumbents are signs of a healthy industry and attrition means we are left with the stronger earlier stage technology companies.

In this environment it’s all about balancing the value against the risk. We single out solar wafer manufacturer ReneSola as a buy with a target price of 340p. It is practically sold out through 2011, generates substantial free cash and is globally best value in class, while trading at an EV/Ebitda multiple (4.3x 2011E) 25 per cent below the sector average. The share will de-list from Aim towards the end of the year but will continue to trade on Nasdaq

Gas to liquid fuel converter Oxford Catalysts announced $48m (£31m) of third party funding earlier in the year and has now achieved technical success at its demonstration plant in Austria, with first revenues now likely by the year-end. OCG has established a list of high quality partners including oil major Petrobras which together have committed or spent $190m on OCG’s technology to date. Our 215p target price reflects the capturing of a small 1-5 per cent share of the large stranded and flare gas markets.

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