Spectacular Profit Growth for Environmental Stocks

By Victor Bivell

Eco Investor, September 2008

The current reporting season has shown the environmental sector is continuing its spectacular profit growth despite falls in earnings and losses across major parts of the stock market. Of Australia's 24 leading environmental stocks, 20 reported growth in net profit after tax for 2007-08 and a good number achieved record results. Only four stocks went backwards.

To be conservative, the analysis uses underlying profit which in most cases is less than statutory profit.

Among the four environmental companies in the S&P ASX 100 Index, metals recycler Sims grew net profit after tax by 81 per cent to $433.2 million, a record. Coal seam gas producer Queensland Gas achieved profitability, moving from a loss of $6 million in 2006-07 to an underlying profit of $30.6 million. Its actual profit was $244.6 million thanks to the investment by BG group.

And despite the slowdown in the economy and the downturn in consumer confidence, the two utilities performed well. Origin Energy's underlying profits grew by 19.7 per cent to $443 million, and AGL Energy's grew by 7.6 per cent to $355.5 million. However, Origin's statutory profit was $517 million while AGL's was $229 million.

Six of the seven stocks in the ASX 200 had very impressive gains. Three more than doubled net profit: gas transporter Envestra by 352 per cent to $10.4 million, wind energy producer B&B Wind Partners by 143 per cent to $36.7 million, and coal seam gas producer Arrow Energy by 101 per cent to $37.1 million. A fourth stock, gas transporter and electricity producer DUET Group, almost doubled profit, achieving a 92 per cent gain to $74.5 million.

In 2006-07 Envestra moved into profitability after many years of making accounting losses. B&B Wind Partner's profit was a new high - some good news for the beleaguered Babcock & Brown parent, and Arrow Energy also reached a new high by building on the previous year's maiden profit.

Waste management company Transpacific saw its profit rise 70 per cent to $175 million, its third year of consecutive record growth. The company has now also booked three consecutive years of growth in revenue and earnings per share since listing.

Gas pipeline stock APA saw a very respectable 27 per cent rise in underlying profit to $82 million.

The only ASX 200 stock to report a loss was Hastings Diversified Utilities Fund - a half year loss of $6.89 million, reversing a profit of $$9.3 million for the corresponding 2006-07 half. Although its operating cash flows were comparable, the Fund was hit by an unrealized movement in the underlying capital value of its South East Water utility due to a stronger Australian dollar.

Four of the five environmental companies in the S&P ASX 300 index grew their profit. The biggest percentage gainer was Transfield Services Infrastructure Fund with a 1,580 per cent gain from $1.5 million to $25.7 million. Aquaculture group Tassal grew profit by 32.6 per cent to a new high of $21.2 million.

Clean energy developer Energy Developments moved from minus $16.6 million in 2006-07 to $21.3 million in 2007-08, although the result before specific items was down from $27.1 million to $18 million. Coal seam gas producer Sunshine Gas moved into profit from minus $11.4 million to $7.3 million.

The ASX 300 environmental company that made a loss was Geodynamics, which is still proving up its geothermal energy capability and does not yet have commercial sales.

Six of eight emerging companies also grew their profit over the year. Metals recycler CMA Corporation nearly doubled its profit with a 177 per cent increase from $6.5 million to $18 million. Purification technology company Clean TeQ grew profit by 53 per cent to $2.9 million.

The two emerging plantation companies did well with a 28.9 per cent lift for Forest Enterprises to $48.1 million and a 1.8 per cent lift for Willmott Forests to $8.2 million. Willmott's profit before non-recurring items was a more impressive $11.3 million.

Two hazardous waste businesses recorded growth. Hydromet had a 13.2 per cent step up to $2.45 million and Tox Free Solutions had a 2.9 per cent profit nudge to just over $6 million.

Gas utility and LNG developer Energy World Corporation made a US$20.7 million profit, but this was less than its US$53.9 million profit in 2006-07, which was significantly boosted by a US$49 million gain on acquisition of controlled entities and reversal of impairments on exploration expenditure. In 2007-08 the company grew sales revenue and is in expansion mode with several capital intensive projects underway.

The only loss maker was Viridis Clean Energy Group, which saw its 2006-07 loss of minus $2.7 million fall to minus $20.1 million due to depreciation and amortization charges of $32.8 million. Operationally the company said its business is performing well and earnings (EBITDA) were a positive $27.6 million.

The results for the environmental stocks indicate that the sector retains some strong drivers of growth despite the current economic conditions. It shows that as an investment theme the environment may have a worthwhile diversification role alongside better established themes such as banking, insurance, property trusts and infrastructure that have been most susceptible to the current economic slowdown.

This article was also published in The Australian newspaper