Eco Investor April 2014

Core Securities

Earn Income from Top Clean-techs

By Victor Bivell

The 80 or so cleantech stocks on the ASX can be divided into two neat sections. It is generally known than the speculative end of the sector is fraught with high risk and suits only professional investors and punters. But it is less well known that the top end of about 17 stocks can offer stable income and that some of the dividends are fully franked.

These top end stocks are a good place for conservative investors to start looking if they want to have a few environmental investments in their portfolio but also need them to be relatively safe and provide income.

When I say environmental, I mean environmentally positive, not sustainable. The difference is that environmentally positive companies provide solutions to environmental problems, while sustainable companies are consumers of those solutions.

For example, Tox Free Solutions provides a wide range of waste management services and offers these to its many industrial and resource company clients, helping them to be more sustainable.

Recent research by Eco Investor, which tracks all ASX-listed environmental stocks, showed that waste management and pollution control is by far the biggest environmental theme on the ASX. The 80 stocks have a combined market capitalization of around $27 billion, and almost all of these are in some way related to pollution and waste, particularly if clean energy is seen as a way of managing carbon pollution.

In recent years two trends have emerged among the top environmental stocks - their environmental credentials have improved, and some have matured along the development curve from small speculative stocks into much larger, profitable companies that pay regular dividends.

Two Recent Floats Fit the Bill

Two recent floats that combine excellent environmental credentials with a history of regular dividends are the New Zealand utilities Meridian Energy and Mighty River Power.

Meridian Energy is New Zealand's largest utility, producing 30 per cent of the country's electricity. All of it is from renewable sources - over 90 per cent from hydro energy and the rest from wind. Among its assets are two wind farms in Australia.

Mighty River Power generates about 17 per cent of New Zealand's electricity - around 58 per cent from hydro, 40 per cent from geothermal, and about 2 per cent from gas as a back up.

Not only do Meridian Energy and Mighty River Power offer dividend paying investments in hydro and geothermal power, they also let us see what the clean utilities of the future will look like.

The closest we have to these in Australia are Snowy Hydro and Hydro Tasmania, but both are unlisted. Of our largest listed utilities, Origin Energy owns a black coal power station and AGL Energy owns a brown coal power station.

Meridian and Mighty River also look good financially.

Mighty River is part of the S&P/ ASX 300 Index and has a market capitalization of $2.5 billion.

Meridian Energy has a current market cap of $1.3 billion but its securities are partly paid instalment receipts with the final instalment of NZ 50 cents due in May 2015. When that happens its market cap will be around $2 billion. But as the New Zealand Government owns 51 per cent of the shares, its true size is around $4 billion.

Importantly for investors, both companies pay regular dividends.

Mighty River paid a final dividend of 6.24 cents last September and is paying an upcoming interim dividend of about 6 cents. With the current exchange rate, and with the share price at around $1.90, the yield is about 6.4 per cent before tax.

Meridian Energy is paying an interim dividend of NZ 4.19 cents and forecast a full year dividend of NZ 10.5 cents per instalment receipt. The interim dividend is imputed to 90 per cent, so assuming this carries through to the full year dividend, the yield for Australian investors on the current instalment price of 95 cents and the current exchange rate could be around 11.5 per cent before tax. Yes, there is a bonus here from the partly paid instalment receipts, and the yield will fall when the second (50 cent) instalment is due in 2015. On current numbers the yield would around be 7.3 per cent.

Two Growth Stories

Two companies that illustrate how local cleantechs can grow their way into the top ranks of ASX listings and start to look like income stocks are salmon farmer Tassal and the previously mentioned Tox Free Solutions. Both are in the S&P/ ASX 300 Index.

Although Tassal is seen as an agricultural play, it is also environmentally positive because overfishing is a major international issue, and fish farming provides an alternative supply that takes pressure off wild and endangered fish stocks.

Five years ago Tassal had a market cap of $330 million and today this has grown to $525 million. Annual net profit has grown from $20 million to $33 million last June, and earnings per share from 16.4 cent to 22.8 cents. The latest half year results strongly continue this trend with profit at $22 million and earnings per share at 15.3 cents.

Dividends have done even better. In 2007-08 Tassal paid 6.5 cents per share unfranked. The latest running 12 month dividend is 10.5 cents. This is made up of 5 cents last September and 5.5 cents this March. This latest interim dividend is also, for the first time, 50 per cent franked, and the company said it expects the dividend to continue to grow.

Tassal's share price has doubled in the last year from $1.85 to around $3.60. This gives a current yield of about 2.9 per cent before the partial franking, perhaps suggesting the market thinks the company has more growth to come.

Six years ago Tox Free Solutions was a WA based company with plans to expand into the eastern states. Revenue was $20 million, net profit was $6 million, and earnings per share were 9 cents. It did not pay a dividend.

The company has expanded dramatically through a combination of acquisitions and organic growth. By last year it had facilities in every state and territory except the ACT, revenue of $285 million, net profit of $13.6 million, and earnings per share of 11.5 cents.

Importantly for investors, it has begun paying a regular and rising final dividend and, with this reporting season, an interim dividend. The rolling 12 month dividend is 8 cents per share fully franked. Over five years the share price has risen from $1.20 to $3.20. At this level the yield before franking is 2.5 per cent, which suggests the market still sees Tox as a growth stock.

I am not recommending the four stocks mentioned above, but pointing them out as good places where the more conservative and income-focused investors can start their research into cleantechs.

The stocks illustrate that the cleantech sector has been growing and maturing with some strong positive developments even if these are sometimes overshadowed by the volatility at the speculative end of the sector. At present, Eco Investor follows 17 listed securities and four unlisted securities that pay regular dividends.

Victor Bivell has been a magazine editor for 27 years. He is the founder and editor of Eco Investor magazine.

This article was published in the ASX Investor Update, March 2014.

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