As 2008 looms, and brings with it the second phase of the Kyoto Protocol, the carbon markets are becoming increasingly mature, which means companies with early mover advantage such as Climate Exchange are well positioned.
Climate Exchange runs the European and Chicago Climate Exchanges - platforms on which corporations and individuals can trade in carbon and, in the US, other gases such as sulphur. But Climate Exchange is no woolly liberal, tree-hugging operation - it's a hard nosed business chaired by Richard Sandor, former chief economist of the Chicago Board of Trade and the man credited with creating the interest rate futures market in the 1970s. Chief executive Neil Eckert is steeped in the insurance industry, having previously run Lloyd's underwriter Brit Insurance.
Both men recognised that operating trading exchanges was probably the lowest risk method of tapping into the growing carbon trading market. The EU is committed to carbon trading through the EU ETS, while increasing numbers of state-level initiatives in the US are likely to be followed by a federal initiative shortly after the next president moves into the White House.
The Chicago Climate Exchange has already attracted a wide range of US corporations trading voluntary emissions as well as public bodies including the House of Representatives. Elsewhere, Australia ratified the Kyoto Protocol this week at a global conference in Bali to discuss the post-Kyoto future of the global environmental policy.
The group also has plans to trade additional noxious gases and entirely new products, such as the recently launched Catastrophe Event Linked futures, which are traded in Chicago. Mr Eckert believes this market could eventually exceed the carbon market if it catches the imagination of the insurance industry. And initiatives are planned in the emerging economies of India and China.
Climate Exchange's shares have been volatile and have slumped since the recent market turmoil began - although carbon trading is unlikely to be affected by the credit crunch. Moreover, while Climate Exchange is a market leader, its market remains in its infancy. That's reflected by forecasts for the company - broker Morgan Stanley expects a loss this year followed by modest profitability in 2008. Despite that, Climate Exchange's long-term potential no longer looks reflected in the share price. Buy.
Bull Points
A market leader in carbon trading
Volumes are rising sharply
US adoption of carbon trading appears likely
Bear Points
Share price has been volatile
Set to make losses this year
Climate Exchange (CLE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,121p | MARKET VALUE: | £487.1m | |
| TOUCH: | 1,110-1,129p | 12-MONTH HIGH/LOW: | 1,970 p | 427.5 p |
| DIVIDEND YIELD: | NIL | PE RATIO: | 362 | |
| NET ASSET VALUE: | 138p** | NET CASH: | £12.5m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2005 | nil | 1.50 | 4.85 | nil |
| 2006 | 1.09 | -10.5 | -31.7 | nil |
| 2007* | 11.2 | -2.50 | -6.00 | nil |
| 2008* | 18.0 | 1.90 | 3.10 | nil |
| % change | +61 | - | - | - |
Normal market size: 500 Market makers: Matched bargain facility Beta: 1.89 *Morgan Stanley estimates **Includes intangible assets of £48.3m, or 117p a share | ||||
