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Camco International (CAO)

Created:
4 September 2008
Written by:
Graeme Davies

BULL POINTS:

• Recent carbon credit sales prove business strategy

• Excellent project development record

• Carbon market fundamentals are strong

BEAR POINTS:

• Uncertainty over post-2012 market

• UN project verification risk

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Recent developments suggest a growing maturity in the carbon trading market. The UN Clean Development Mechanism, which rubber stamps clean energy projects in developing countries, is gathering momentum after being initially slow to certify projects. The system had been further complicated by poor communication between the UN and EU carbon credit registries, which meant UN-certified credits could not be sold into the EU. But last month the EU announced that it would link the two markets by December.

This is great news for Camco International , which offers consultancy and venture capital services to developing world clean energy producers in return for a cut of their certified emissions reduction certificates (CERs). Camco aggregates these in a portfolio which it sells to companies that have overshot their emissions allocations, and first sales were at prices well ahead of the cost of acquisition.

Camco recently sold 151,288 credits in the spot market, and a portfolio of 5.8m CERs was sold at auction for more than €15 a credit, against an average purchase price of around €7.5. The company has a portfolio of around 140m tonnes, or credits, for delivery over several years. Although this is at differing stages of maturity, Camco's track record of delivery, and of pushing projects through the UN system, is excellent.

Carbon market fundamentals are also moving in Camco's favour. The global market is expected to grow by 50 per cent to €64.5bn this year. CER pricing has remained firmly above the €20 level and is forecast to strengthen during the run up to 2012. The biggest uncertainty is what happens thereafter, when the current Kyoto protocol period expires. It is widely accepted that a new mechanism will be brought in, though, which will encompass China and the US.

CAMCO INTERNATIONAL (CAO)
ORD PRICE: 59p MARKET VALUE: £98.8m
TOUCH: 57-61p 12-MONTH HIGH/LOW: 76p 35p
DIVIDEND YIELD: nil PE RATIO: 6
NET ASSET VALUE: 34.7¢* NET CASH:  €19.0m

Year to 31 Dec Turnover (€m) Pre-tax profit (€m) Earnings per share (¢) Dividend per share (¢)
2006 0.8 -4.0 -3.42 nil
2007 10.5 -12.2 -8.19 nil
2008** 42.0 8.0 4.0 nil
2009** 79.8 24.6 13.0 nil
% change +90 +208 +225 -

Normal market size: 3,000

Market makers: 6

Beta: 0.12

*Includes intangible assets of €15.9m or 9¢ a share

**KBC Peel Hunt estimates/NAV 28p and Net Cash £15.8m

£1 = €1.24

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SHARE TIP SUMMARY:

Buy

KBC Peel Hunt believes the company will hit profitability this year before trebling its profits in 2009, and the recent sale of credits underpins these expectations. That would see Camco's shares trade on a PE ratio of 6 times forward earnings, which undervalues its potential. Buy.

Last IC view: Good value, 44p, 7 August 2008.

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