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GTL Resources (GTL)

Created:
15 May 2008
Written by:
Graeme Davies

BEAR POINTS:

• Profits have been squeezed by input cost rises

• Sentiment has turned against sector

• Debt increased for expansion

BULL POINTS:

• GTL one of better quoted operators

• Politically important industry in US

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Biofuels producers have suffered a severe backlash in recent months, taking the rap for soaring food prices, and things could get significantly worse before they get better. This means that even the better operators in the sector, such as GTL Resources, are dragged down by association.

The change in mood towards biofuels has been so dramatic that there have been calls in both Europe and the US for mandatory biofuel levels in fuels to be scrapped. In the US, traditionally one of the strongest proponents of corn-based ethanol as a means of securing the future of its huge agri-industry in the Mid-West, the about-turn is staggering. Even US Presidential hopeful, Senator John McCain, has joined 24 other senators urging the scrapping of impending mandates in the US.

For GTL the timing of this about turn could not have been worse. One of the few UK-traded biofuel businesses to have successfully built production capacity and get it running efficiently, it should be enjoying the fruits of such development. But rising input costs and a glut of new ethanol production are driving sales prices down, breaking the previous correlation with the oil price. This has squeezed profit margins - a factor acknowledged by GTL in a recent trading update.

This situation could be exacerbated by news this week that the maize harvest in the US could shrink this year. Farmers had already scheduled an 8 per cent reduction in maize production this year, but poor weather in recent weeks could hit planting even harder, driving input costs higher for the likes of GTL.

GTL Resources (GTL)
ORD PRICE: 33.5p MARKET VALUE: £10.7m
TOUCH: 32-35p 12-MONTH HIGH/LOW: 162.5 p 33.5 p
DIVIDEND YIELD: nil PE RATIO: 3
NET ASSET VALUE: 116p NET DEBT: 45%

Year to 31 Mar Turnover ($m) Pre-tax profit ($m) Earnings per share ($) Dividend per share ($)
2006 0.0 -12.9 -0.9 nil
2007 24.2 -1.6 -0.1 nil
2008* 136.4 10.6 23.9 nil
2009* 176.2 4.5 9.6 nil
% change +29 -58 -60 -

Normal market size:1,000

Market makers:Matched bargain facility

Beta:1.0

*Ambrian forecasts

£1=$1.95

Click here for a guide to the terms used in IC tip and results tables

GTL is doubling its capacity by 2009 with capital committed and work already under way, which has increased its debt. Expanding production heavily at such a time is bold. In the short term, broker Ambrian is forecasting a significant drop in profitability for GTL next year as margins are squeezed.

SHARE TIP SUMMARY:

Sell

With sentiment in what should be the world's biggest ethanol market having turned quite dramatically, it will take some time for the share prices of even the best operators to recover. GTL's risks remain on the downside in the short term. Sell.

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