Top Gainer: Energy World (EWC)
It was all about carbon on Monday, after the Gillard Government announced its carbon policy on the weekend. Although it was all entirely expected with few surprises, the market still reacted stongly – green energy surged while steelmakers and aviators plummeted as investors dumped polluters for environmentally conscious companies. This could well mean that the near future will be greener; astute investors should take note.
On a day when the broader market fell 1.6% LNG producer Energy World was the day’s biggest gainer, rising a healthy 8.7%, beating out another “green” play in wind farm owner Infigen, which was up 5.4%. Carbon tax aside, the stock’s gain was on the back of news that the company agreed to sell 173 million new shares to a new major shareholder – Orchid Fund, which is owned by an investment organisation started by New Zealand-born Richard Chandler. As a result Orchid Fund will become a 14.9 per cent shareholder in Energy World.
The funds are slated to be used for gas developments and its modular liquid natural gas project in Sengkan in Indonesia.
EWC shares have been on a rollercoaster ride over the past 12 months. Although a far cry from its peak of $1.60 hit in 2008, EWC has still posted solid gains this year, rising from 44 cents last June to 56.5 cents as at close of trade yesterday – a gain of 28% for the year. It had hit a 12-month high in December of 59 cents only to fall away to 38 cents in March, then again rise to 54.5 cents in June. All this after being as low as 26 cents in February 2010. It seems this stock is not for the faint-hearted.
EWC is an integrated energy company based in Hong Kong and listed in both Australia and New Zealand. It has gas and power operations located at Sengkang, South Sulawesi in Indonesia; and also produces gas, power and LNG in Australia.
EWC describes itself as “an independent, integrated energy company primarily engaged in the production and sale of power and natural gas.” It owns and operates gas-fired power plants in Indonesia and in Alice Springs. It also has gas interests in South Sulawesi, Indonesia and in various gas fields in Queensland.
EWC says that the focus of its future development is on the expansion of LNG business. “Natural gas transported to end markets in Asia in the form of LNG, is likely to be an increasingly important energy source given Asia’s growing energy requirements and the environmental advantages of natural gas as a comparatively lean’s fossil fuel,” it says on its website.
Based on Thomson Reuters data, there is only one analyst covering EWC, who has an “OUTPERFORM” rating on the stock.
Chart: Share price over the year to 11/07/2011 versus ASX200 (XJO)
Stock code: EWC
Charts: Energy World Limited
More news: Energy World Limited
Investor Centre: Energy World Limited
Biggest Loser: Bluescope Steel (BSL)
As one of Australia’s biggest polluters, Bluescope Steel (BSL) is set to be hit by the new carbon tax. Despite welcoming the government’s $300 million, four-year transitional support package for the emissions-heavy industry, investors ran for the door, sending BSL plunging 6.7%.
BlueScope said the Government dealt with the sector’s concerns in a significant way for the first four years “if implemented as explained to us” and views the carbon tax as a big improvement on the previously proposed version, the Carbon Pollution Reduction Scheme (CPRS). Previously, BlueScope said the CPRS would could cost it $500 million by 2020.
Opposition Leader Tony Abbott dismissed the $300 million assistance package for steel makers as merely a “stay of execution” and flagged opposition to the measure if it needs parliamentary approval. Ben Le Brun, market analyst for CMC Markets, said the carbon tax would dent steel makers’ bottom line and could even force the closure of operations. “At least now the uncertainty has been taken out,” he said.
All this meant was that for the second day running Bluescope Steel was the day’s biggest loser, plummeting 6.7% to $1.26 on the back of Friday’s 3.6% fall – giving it the title of the biggest loser for two days running.
BlueScope Steel was formerly a business group of BHP Billiton which was separated at the time of the merger between BHP Limited and Billiton in 2001. BSL was subsequently listed on ASX on Monday, 15 July 2002, at a float price of $2.80 and opened at a healthy $2.90 on day 1. However almost 9 years later early investors have been hammered, with the share price languishing at a 50% discount to the listing price. Shares in BSL closed at just $1.35 on Friday 8th June 2011, after having bounced off its post-float lows of $1.11 experienced less than two weeks ago.
Management at the newly merged behemoth that was BHP Billiton were spot on in deciding to spin off (read: rid themselves of) the business – in the time that BSL shares have halved, the BHP Billiton stock price has more than quadrupled. While things looked rosy for the first few years post-listing and even hit a post-float high of $10 in mid-2007, the share price has been decimated since mid-2008, losing more than 80% of its value.
Many analysts pinpoint this as a stock to avoid at all costs, with a soft outlook and risk around earnings. No less than nine brokers on TheBull’s broking panel have a sell on BSL.
John Rawicki of State One Stockbroking has a sell on BSL given the company expects to post a net loss for the second half of 2011. “The company operates a capital intensive business with volatile margins,” says Rawicki. “The strong Australian dollar makes steel imports an attractive alternative, placing further pressure on domestic steel producers, such as BlueScope.”
Macquarie Private Wealth’s Sean Conlan sees a challenging outlook for BSL in the medium term. “While many longer-term valuation metrics appear compelling at current levels, there’s likely to be significant volatility and, hence, risk around earnings,” he says.
Mike Bigwood, Patersons Securities says that the stronger Australian dollar has increased competition from cheaper imports and he believest that high raw material costs will continue to impact margins. “I calculate the return on equity for BSL of between 2 and 5 per cent over the next two years, with a resulting valuation well below $2,” says Bigwood. James Georges, also of Patersons, says that steelmakers face strong headwinds in terms of excess capacity, the strong Australian dollar and hostile government policy. “We’re not sure how these headwinds will ease, or why they will,” says Georges. “In February, BSL expected breakeven NPAT (net profit after tax) in the 2011 second half after a first half loss. It now forecasts another loss, citing weak steel prices, high raw materials costs and a rising Australian dollar.”
Shawn Uldridge of William Shaw Securities says that BSL is caught between a rock and a hard place. “Higher commodity prices have left it out of pocket on the input-cost side of the ledger, while a higher Australian dollar is hurting sales. Its already high debt is mounting and we believe BSL will conduct another capital raising.”
Les Szancer, Alpha Broking is yet another broker that has a firm sell on the steelmaker, saying that it has been a misery to be hold BSL lately. “So they produce steel, but no one seems to care much.”
Austock’s Michael Heffernan agrees with the other brokers, saying that Australia’s major steel stocks are continuing to face heavy weather through heightened import competition, a difficult export market due to a stronger Australian dollar and problems associated with the prospect of a carbon tax. “While the share price has fallen significantly, any sustained recovery still looks some time off,” says Heffernan.
Given BSL is affected by a strong Australian dollar, cheap imports and the prospect of a carbon tax, Cleo Nanni of Novus Capital believes that investors should run for the door on any rallies. “Investors have deserted this company and, in this environment, we expect this trend to continue.”
In the half-year results announced in February earnings came in below expectations and to make matters worse the outlook for BSL was also downgraded. As is to be expected, investors left in droves, sending BSL shares tumbling further. Today it sits at a paltry $1.26, despite rallying off a post-float low of $1.11 hit at the end of June. Whether BSL can pull itself out of the current dire sitution is anyone’s guess, however no investor wants to be the last one off a sinking ship.
Chart: Share price over the year to 11/07/2011 versus ASX200 (XJO)
Stock code: BSL
Charts: Bluescope Steel Limited
More news: Bluescope Steel Limited
Investor Centre: Bluescope Steel Limited
Each trading day we will look at the top gainer and biggest loser for the day. Note that these are not recommendations to buy or sell, although we do include broker views on these stocks in the article.
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