Eco Investor December 2016

Feature

Trends in Cleantech, and Companies that Look Interesting

By Victor Bivell

This is an edited version of a talk given to the Ethical Advisers Co-operative Conference in Melbourne on 25 November, 2016.

Thank you for the opportunity to talk about Trends in Cleantech, and Some Companies that Look Interesting. The initial brief said ‘New Trends" but I am sure that all of you here are professionals who like to keep up-to-date so I'm not sure I can to point to ‘new' trends. That sounds a bit hard for a Friday afternoon. I will get onto listed cleantechs and what I think are some interesting developing trends; but I thought I'd start by highlighting a few observations about trends in this sector, and hopefully that way we can perhaps get a better understanding of them and maybe pick up something new that way. So to keep it relevant I'm happy to take questions and comments as we go.

The first thing I want to do is take the long view. And on the long view I'm very positive that most trends are heading in the right direction and cleantech has a great future, including for investors.

Back in 1992 when I quit my day job, the first publication I authored and published was the Environmental Investment Directory of Australia 1992. So if you like, that gave a little bit of impetus to the then new trend of environmental investment. It's interesting now to have a look at a few entries to see which trends were around and how they've traveled.

Who here remembers a company called Directed Financial Management Ltd? It was of course the early name of Australian Ethical Investment Ltd well before it listed. And who remembers the August Investments Managed Trust? It was the early name for what is now Australian Ethical Investments' Balanced Fund. In those days it only had one fund. If I dip into my book I can see that as at 31 December 1991 the Fund had 226 unit holders and total assets of $1,902,621. Nowadays, nearly 25 years later, Australian Ethical has about 27,000 investors and $1.7 billion under management. But 1991 wasn't the start of the trend. A year earlier the Fund had total assets of $815,791. So it more than doubled in one year. The ethical investment trend has been strong for 25 years, but I, for one, and maybe some of you, still think it is early days for ethical investment. I think the trend still has a long way to go.

Australian Ethical isn't the only long view success story in the Directory. Energy Developments was around then. It was an unlisted company 20 per cent owned by venture capital, and developing and selling the newish trends of remote energy and renewable energy. It had one 16 megawatt gas fired power station near Alice Springs that displaced diesel power, and it was developing two landfill gas projects in Sydney and Melbourne which the Directory says "are among the first power systems based on methane gas from landfill rubbish tips". Remote energy, diesel displacement and landfill gas have come a huge way since 1992, and so has Energy Developments. It later listed and last year was taken over for an enterprise value of $1.9 billion.

Simsmetal was in the Directory as Australia's largest metal recycler with branches in New Zealand and the US west coast. Now it's the world's biggest metal recycler. It then had total assets of $195 million. Now it's $2.5 billion, and it has been higher.

My final example is not so happy. A listed company called Cape Range had a 15 per cent interest in a US company called Exergy Inc which was commercializing a heat and waste heat to energy technology called the Kalina Cycle. It's a very long and expensive story but 24 years later an ASX listed company called Kalina Power has just raised over $5 million in the latest attempt to commercialize the technology. The point here for investors is that the trend is one thing, but joining the trend and making money out of it is another.

The Directory also shows that these days there are many more environmentally positive investment options for investors, and many more higher quality options.

Taking the long view on trends helps investors and their advisers to not be part of the herd. It can help them to look at how a trend may unfold, when might be the best times to climb on board, and which investments to climb into.

The second thing I want to do is take the wide view. This chart is very busy. Sorry about that. All I've done is create a matrix with seven key sectors across the top and side. I could add more such as waste, education, but I ran out of room. The point here is to show just how many trends there are out there in the economy and life. At every intersection there are trends unfolding, even when we just look at the environmental angles. I've tried to give one or two examples at each intersection but believe me at some intersections there are many many more.

To illustrate this, I've broken out one sector. I was going to do energy but I didn't want to work that hard, so I did food. As you can see, I still had to work pretty hard and the list is not complete.

Large

What it also shows is that what we often see as a trend is usually a trend with a larger trend, which may be part of an even bigger trend, in this case sustainable food.

There are some very exciting trends here, land efficiency, water efficiency, energy efficiency, chemical efficiency, free range food, organic food, soil remediation and many others.

I've also had a go at speculating on a couple of possible future trends. Who knows? Renewable energy powered electric tractors? Farmers have enough room for the PV panels. And renewable energy powered agricultural water from air technology, even though so far distributed water from air technology hasn't gone far in our drought-prone land.

The next chart looks at how much of all this environmental busy-ness is finding its way into the different asset classes and financial products, and perhaps relevant to many of your clients, whether these can be accessed by retail investors.

I've put the asset classes in order of environmental friendliness. Unlisted equities have always had environmental options, although they are mostly for venture capitalists and not for everyone. When they list they become available to retail investors and there is a good range of choices on the ASX.

Direct property has always been available and these days there are so many technologies available to make a property environmentally friendly that investors are only limited by what they can afford.

At this stage direct infrastructure is for wholesale investors.

Green bonds are now picking up as an asset class around the world and they include infrastructure and property, but so far they are mostly for institutional investors.

I'm sad to say that there is little available in environmentally positive term deposits and cash for retail investors. 10 years ago Westpac had a term deposit linked to land care, but I haven't heard of anything since. So there is room for new products.

Again, all the trends here are positive.

I'll now focus on the ASX, and as it is an at risk asset class, we can start by looking at a few failed trends just to remind us that not all trends lead to riches.

Here are four that you might remember: Biofuels, Coal Seam Gas, Geothermal Energy and Solar Installations. Each failed for a specific reason or combination of reasons.

Biofuels had a huge boom and the bust was due mainly to feedstock prices and Federal government policy changes. They also had the food for fuel debate and lost some of their social licence. The biofuels trend on the ASX is a very sad one.

Coal seam gas had an even stronger social licence issue and Eco Investor stopped following most gas companies including coal seam gas a few years ago.

Geothermal energy had technology risk, market risk, plus it was a victim of the Government's failure to pass the Carbon Pollution Reduction Scheme and investors lost confidence and the capital dried up. It has also been overtaken by the rise of wind and rooftop solar.

There was a brief trend in ASX companies turning to the installation of solar PV systems, but changes to government feed-in tariffs meant most didn't take off and they left the sector to unlisted installers.

There are two main ways to spot a developing trend on the ASX: one is IPOs, and the other, which I find quite amusing, is the way that speculative resource stocks will almost en masse change their business activity to what they think is a new sure-fire way to make a buck. Most of these stocks have little more than an ASX listing, opportunistic directors and an eagerness to put out a prospectus with a trendy story.

These resource stocks moved into biofuels, and moved out again, they moved into geothermal energy and solar energy and moved out, they moved into coal seam gas and some are still there.

The latest wave has moved into anything and everything to do with batteries and energy storage: lithium, rare earths, vanadium, cobalt and high purity alumina. I even read an interesting piece recently from the copper industry arguing that copper should also be seen as a renewable and storage-friendly metal.

Most of these resource stocks are still explorers and a small handful have recently become producers.

There are many other companies outside of this list but for various reasons they don't pass our environmental screen.

There is also movement with battery makers and suppliers such as RedFlow, Tag Pacific and Australian Vanadium, and with pumped hydro grid scale energy storage through Genex Power.

Batteries have been around for along time so they are not a new trend. What's new are the technological developments in new materials, their increasing energy density, their application for new markets in the residential, commercial and grid scale sectors and how they can be coupled with distributed renewable energy generation, which is also a growing trend.

So it looks like the battery and storage trend still has a long way to go. Certainly the industry and many investors see it that way.

But at this stage all of these companies are speculative and many are quite early stage and high risk - so they are only for those retail investors who are up for a small punt.

Another trend on the ASX is the hybridization of energy. The utilities have been that way for some years, as we can see with the three New Zealand utilities we follow which use a combination of hydro, geothermal, wind and a declining amount of gas. Infigen Energy is also into it with some projects to add solar and possibly storage to its wind energy generation.

More recently, the small and micro caps have joined the party. Remote energy developer Pacific Energy started with gas, duel fuel, and hydro and has developed a waste heat to energy technology and most recently entered a joint venture with a German company that can offer solar and storage to its clients.

Commercial project developer Tag Pacific can now do gas, diesel, waste heat, wind, solar and storage and recently became the distributor for the TrinaBest lithium batteries.

Carnegie Wave Energy is about to become Carnegie Clean Energy. The name change tells you everything you need to know about this trend. Carnegie started with wave energy, but as it gets to the business end of commercializing its technology it has made an acquisition that adds solar, wind and storage to its capabilities.

Its younger colleague, Protean Wave Energy has joined the trend and just days ago voted to become Protean Energy.

Geodynamics is now ReNu Energy, a more inclusive name that covers its new biogas business and its desire to add other clean energies to its mix.

One technology is not enough. The trend is clear - to win business companies need to offer a range of technologies - a so called ‘solution' to the client's energy needs.

The CSIRO's new Centre for Hybrid Energy Systems is more evidence for this growing trend.

Genex Power started with a project for pumped hydro storage but has added an adjacent solar farm project so it will be a generator and storer of solar energy as well as a storer of coal based energy.

Some other ASX trends are in sustainable food and water management.

The pool of aquaculture companies has grown to five with the recent IPOs of Huon Aquaculture and New Zealand King Salmon. Some variety comes from Clean Seas' kingfish and Seafarms' prawns. Historically there have been a few speculative aquaculture floats that have failed, but Australia has a growing unlisted aquaculture sector so there is scope for more quality IPOs if they move that way.

The group of water management companies has also grown with the recent IPOs of plumbing supplier Reliance Worldwide Corporation, water rights trader Duxton Water, and wastewater technology systems maker Emefcy Group. Like sustainable food, the water trend has been around for a long time.

My last slide is possibly the most relevant for the "some interesting companies" part of the presentation. For retail investors this is a key trend - that the listed cleantech companies are growing in both quantity and quality.

You can see the growth through Eco Investors' list of Core Securities. We classify companies into pre-revenue, pre-profit, pre-dividend and core securities. Core securities is not a recommendation but signifies that they pay a dividend. Investors get a financial return and not just a chance to punt on something.

In the past five years, since 2011, the number of stocks we classify a core has more than doubled - from 13 to 27.

The environmental quality has also improved. We can see that in the utilities. I had to boot out AGL Energy as it got into more coal fired power. I put up with its brown coal power plant on the basis that its use of coal was declining but buying a black coal power plant was suddenly heading in the wrong direction. Origin Energy had been bumped out a little earlier for buying a black coal power station. In their place we have three New Zealand utilities with hydro, geothermal and wind power. Much better.

The gas pipeline companies - APA, Envestra and Hastings - are out. I kept DUET for its non coal seam gas in WA and its remote energy and acquisition of Energy Developments.

The 2016 list has new themes and trends that were not there in 2011 - more sustainable housing through manufactured homes, nature friendly tourism, energy efficiency, organic food, chemical replacements, double glazing and insulating glass, rail freight, and a tree farmer, among others.

These are great trends. I am a journalist, not a financial adviser, but I know enough about risk and return to say that if your clients are not speculators, the most ‘interesting looking companies' are in this group.

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