The news concerns the company's Brazilian biodiesel investment, Bionasa, which according to senior management "is experiencing severe financial difficulties". Trading Emissions invested, through its subsidiary, R$125m (£37.9m) to acquire 25 per cent of the equity of Bionasa in the form of preferred shares in 2007. The conversion of its preferred shares into a controlling 99.4 per cent equity interest in Bionasa has been the subject of an arbitration process under the auspices of BOVESPA, the stock exchange of São Paulo, since 2010. Bionasa's plant was commissioned and became operational over two years ago, but it has not produced or delivered biodiesel since December 2012 and "has been experiencing increasing liquidity difficulties during 2013". Senior management of the Brazilian subsidiary are currently working with all parties to explore financing options for Bionasa to enable the business to recommence operations.
Although Trading Emissions' board has not given any guidance on the size of the anticipated writedown on the investment, and still hope to realise some value from Bionasa, it's best to take a worse- case scenario.
According to analysts at Liberum, Bionas had "a carrying value at 31 December 2012 of R$100m (£30m) and the maximum impact on Trading Emissions' net asset value is 12p per share". Analysts at the broking house estimate that Trading Emissions' pro-forma net asset value is currently 38p a share after adjusting for dividends paid and for the current carbon liability. In my article yesterday I estimated pro-forma book value at 37p a share, so we are pretty close in our analysis ('Exploiting financial anomalies', 19 September 2013).
Moreover, in a note to clients this morning, Liberum advises that "at a minimum we would expect the holding in Bionasa to be written down by 50 per cent. Our estimated net asset value range based on a 50 per cent to 100 per cent writedown in Bionasa is 26p-32p".
Implications on investment portfolio
Assuming the worst-case scenario and the book value of Bionasa is written off in its entirety, this would reduce the value of Trading Emissions' private equity portfolio from £105m at the end of December to £75m, or the equivalent of 30p a share. Factor in the drawdown five months ago of a €31m (£26m) loan by Trading Emissions' wholly owned subsidiaries, TEP Solar Holdings and Solar Energy Italia, of which €26m (£21.7m) was paid in cash to Trading Emissions, and in the worse-case scenario the private equity portfolio is now worth £53m, or 21p a share.
Adjusting for the £21.7m cash payment to Trading Emissions in April, and the £37.5m (15p a share) cash return made to shareholders in the summer - and factoring in the release of £4m of funds held as security under a Letter of Credit to the World Bank earlier this month - I calculate that Trading Emissions now has pro-forma net cash of £27.5m, or 11p a share. This sum easily covers the carbon credit portfolio, which had a negative liability of £14m, or 5.7p a share.
Therefore, by my calculations, the worst-case scenario is that Trading Emissions' book value per share is now around 26.3p, assuming a 100 per cent write-off of the investment in Bionasa.
In the circumstances, it's not surprising that some investors have bailed out of the shares this morning - the current bid-offer spread of 15.5p to 16p represents a decline of 22 per cent on the day. It also means that my advice in yesterday's article - to reinvest the 15p capital return in the shares when they were offered in the market at 19.25p - could have been better timed to say the least!
However, after the sharp markdown in the shares, they are now trading at a massive 40 per cent discount to book value and that assumes that the investment in Bionasa is completely written off. And even if this proves to be the case it also means that Trading Emissions' private equity portfolio is being attributed a value of only 10p a share, or £25m. That's less than half my worst-case scenario pro-forma book value of £53m, or 21p a share. True, some discount is in order, but investors seem to be ignoring the fact that Trading Emissions' investment adviser has been making good headway in realising decent prices for companies in the private equity portfolio.
In the circumstances, I am not bailing out of the shares and would recommend that you await news on the size of the Bionasa writedown when Trading Emissions releases its financial results for the year to end-June. These are scheduled to be released before the end of October, so we don't have long to wait. I also believe that, irrespective of the problems at Bionasa, if the company continues to make progress with its asset sales, as it has been doing, then as soon as the Bionasa situation becomes clearer next month, the board will be in a position to clarify the likely level of future distributions to shareholders. Moreover, having already paid out 21p a share of cash distributions this year, the current market price completely ignores the upside potential from future cash distributions. I am not bailing out.
