Renewable Energy a Hot Sector for Australia Stocks

Renewable Energy a Hot Sector for Australia Stocks

Renewable energy has become one of the sexiest sectors on the Australian share market as rising power prices, government legislation, and a growing interest in "clean" industries drive a surge in share prices.

Some stocks jumped sharply in 2000, helped by changes to the law late last year to boost renewable energy use.

And while analysts caution the fledgling sector is not without risk, they say there is good potential in the industry, which generated revenue of about A$8 billion in 1999/00, according to the Sustainable Energy Industry Association.

"Renewable energy is, in our opinion, the new hot growth sector for utility companies," Deutsche Bank said in a recent report.

There are currently only four key listed companies that focus on renewable energy, although there are scores of unlisted companies and major utilities also work in the area.

Deutsche said the Federal Government's Renewable Energy (Electricity) Act, which requires power producers to generate an extra two percent of power from renewable sources by 2010, will prompt new investment.

The bank believes waste-to-energy is potentially the largest area of investment because it can source income from electricity or steam generation as well as from fertiliser sales and recycling revenues.

Waste and Water

Deutsche has a strong buy on Renewable Energy Corp., which has risen 173 percent since the start of 2000, and expects the share price to climb as high as A$2.50 within 12 months from current levels around A$1.64.

Other stocks in the sector include Energy Developments Ltd., which owns power plants fuelled by landfill gas, coal seam methane, natural gas and distillate, and Pacific Hydro Ltd., a wind and water power generator.

Advanced Energy Systems, which provides technology, products and systems for renewable energy generation, is the latest entrant, listing on the Australian Stock Exchange on October 13.

Merrill Lynch is recommending clients accumulate Energy Developments, which posted a net profit of A$17.6 million in the year to June, 2000.

Brian Sheahan, an analyst at ABN Amro Morgans, expects stocks in the sector to continue to perform strongly because of growing community concern about high polluting energy sources.

"Everyone agrees clean energy is a good thing so that means it will stay on our agenda," said Sheahan.

However, he is cautious about current valuations.

"We like the sector and the momentum is still there in the share prices but we think they have had a pretty good run and the valuations are getting a bit pushed," said Sheahan.

Merrill Lynch figures show Energy Developments is trading on a price/earnings ratio of 102 times forecast 2001 earnings, compared with PEs below 20 for established industrial stocks.

David Paradice, portfolio manager at Paradice Investments Management, which specialises in investing in companies outside the top 100 Australian stocks, said two key factors were driving growth in the sector: the realisation that there are more and more people creating more and more rubbish, and a push from government to reward people who get involved in renewable energy.

"Thematically, it is a great area to be in, but whether they make a lot of money over time? I am not yet convinced. I think it will happen, but are the companies listed in Australia at the moment those that will be the winners? I don't know."

Story by Wendy Frew. © 2001 Reuters Limited. All rights reserved.