Join our community of smart investors
OPINION

Smallworld: Ukraine approaching a ‘chipping’ point

Smallworld: Ukraine approaching a ‘chipping’ point
July 21, 2014
Smallworld: Ukraine approaching a ‘chipping’ point
2.5p

"We're going bigger," says its British chief executive, Richard Spinks, who has worked in eastern Europe on and off since the 1980s and currently lives in western Ukraine with his family.

Active Energy is ramping up production four-fold this year at its wood chipping operation near the Black Sea port of Yuzhny. There, local suppliers are paid to bring raw timber to the port from dozens of forests across Ukraine. Active Energy feeds the wood into industrial wood-chipping equipment, pushes it into a large pile, and then loads it straight onto a shipping vessel to nearby Turkey, where customers are willing to pay a small premium for the key MDF ingredient because it's so fresh (ie, not soggy or smelly from excessive moisture enroute from further abroad).

It's a low-margin business that's "all about volume", says Mr Spinks, a former communications officer with the RAF who seems quite happy to do business in places others perceive as too dangerous or politically difficult. It's also all about connections. Or, as Mr Spinks calls it, "the three phone calls rule": apparently, if you want to do business with someone in Ukraine, they will always call three people who know you to check out your credentials.

Mr Spinks told us he always passes the test. Not only is Active Energy backed by several wealthy Ukrainian businessmen, but everyone already knows him from his days at Landkom International.

Mr Spinks co-founded Landkom in the mid-2000s, raising over £50m and listing the company on Aim. His plan was to snap up cheap, underutilised agricultural land in Ukraine and then grow huge amounts of rape seed and wheat using western equipment and modern farming techniques. At first, the company delivered on its promises, signing up many tens of thousands of Ukrainian landowners to the scheme and planting huge amounts of crops. But the company soon ran into logistical problems given the lack of infrastructure at the time in Ukraine. Each lengthy contract had to be signed in quadruplicate, which meant printing a heck of a lot of paper contracts. Mr Spinks had a creative solution to that particular problem: he bought up all the home printers he could find in Ukraine and hired his maid to constantly feed paper and ink to them for several months.

Unfortunately, the credit crunch quickly killed Landkom's expansion plans, before crop prices softened and inclement weather badly hit yields. Mr Spinks had announced his intention to resign in May 2009, eventually stepping down from the board with immediate effect on the same day in August that the company revealed problems with previous land purchases. The company was eventually sold for a song in 2012 with the shares down more than 90 per cent from their peak.

Alas, Landkom is not the only failed company Mr Spinks has co-founded. In the midst of the dot-com boom he started Vavo.com, an all-purpose website for the over-45 crowd. Having left his role as business development director at the now defunct Lycos Europe, he raised over £10m for the ill-fated Vavo venture, enjoying significant initial success before its demise a few years later.

At Active Energy, Mr Spinks has set his sights much higher. In addition to the wood-chip operation, he has acquired rights to commercialise a very early-stage but "unique biomass fuel granulating technology [which] has the potential to be game-changing", according to analyst Ian Berry at house broker WH Ireland. Last week, Active Energy took steps to secure feedstock by acquiring a 45 per cent interest in a forestry joint venture with three Metis settlements in Alberta, Canada, for which it paid an undisclosed nominal fee. Helping broker the deal was Grand Chief Ronald Derrickson, of British Columbia, who Mr Spinks met in Ukraine many years ago when both parties were doing land deals there. The Grand Chief, who has a colourful business history in Canada, will reportedly receive a 10 per cent interest in the newly formed company for free.

While the Canadian transaction is undoubtedly a longer-term endeavour, WH Ireland forecasts Active Energy will quadruple wood-chipping revenues this year to £20.3m, generating pre-tax profits of £1.1m and EPS of 0.19p, rising to £28m, £3.2m and 0.51p in 2015. That puts the shares, at 2.5p, on less than five times forecast earnings for next year. At that level, they might be worth trading based on Mr Spinks' promotional prowess, but the long-term track records of his businesses is cause for caution.