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Gains in Australian clean technology (cleantech) stocks are continuing as Sims Metal Management lithium stocks rally. But service providers that are not well known as renewables companies look the most attractive portfolio opportunities. 
The Australian CleanTech index, a barometer of 62 ASX-listed cleantech stocks, has returned 30.4 per cent over 12 months to December 2016 – or about three times more than the S&P/ASX Small Ordinaries index during this period. The quarterly performance report index was released this week.
Chart 1: ASX-listed cleantech stocksSource: ACT Australian CleanTech Index.
The CleanTech index’s cumulative return over three years is 40 per cent. Granted, returns in the market-weighted index can be skewed by the performance of a few big stocks, but there have been several impressive gains from index members over 12 months.
NZ privatisations Mercury NZ (previously Mighty River Power) and Meridan Energy stand out with total returns (including dividends) of 25 per cent and 27 per cent respectively over one year. Sims Metal Group is up 89 per cent.
Wind-power provider Infigen Energy has a 90 per cent total return over one year and energy storage group Redflow is up 40 per cent, Morningstar data shows. Cleanaway Waste Management has delivered 60 per cent and energy-efficiency play Bluglass tripled. Gains in many companies are off low bases after years of share-price falls.
Although recent gains impress, it is wrong to suggest investors are diving into cleantech stocks and that the sector’s moment has finally arrived. The diversity of this sector – if it can even be called a sector – means investing is entirely about company-specific factors.
But after several years of dreadful performance, when the sector was battered by regulatory change under the former Abbott Government, the outlook for listed cleantech companies is clearly improving. The sector’s outlook – and company quality – is the best in years.
The key issue, of course, is valuation. Sims Metal Management, for example, has soared over 12 months because the scrap-metal price is highly correlated to the rising iron-ore price (scrap is a competing feedstock to iron ore in steel production). 
I doubt the sustainability in recent iron-ore price gains. A forecast FY17 Price Earnings (PE) multiple of 30 for Sims, using consensus analyst estimates, looks overdone given the company is a price taker in an intensely competitive, low-margin market. 
Nor can I get excited about lithium stocks at current prices. Yes, lithium has tremendous prospects as demand for electric vehicles soars. But I have seen too many resource booms over the years where a rising price unleashes prospective producers that get to market just as excessive supply emerges and the commodity’s price falls. 
Mining services group RCR Tomlinson seems an unlikely way to play the cleantech theme. RCR is better known for resource projects and is not a member of the ACT CleanTech index, even though solar-farm contracts are boosting the company’s work pipeline and growth.
RCR this week announced $100 million in contract wins, adding to its recent $155 million solar-farm contract in Townsville. It is also working on a Victorian wind farm.
RCR has rallied from $1.13 in February 2016 at the nadir of the resource sector to $2.85, but remains well down on prices achieved in late 2014. 
Chart 2: RCR TomlinsonSource: The Bull
RCR’s order book of $900 million is slightly down over the quarter, but that looks like a timing issue. The company’s recent contract wins suggest the order book should expand over the next few quarters. 
I like how RCR is increasing its focus on rail, transport and power infrastructure and rapidly growing its presence in renewable energy, wind and water projects. 
RCR has a strong balance sheet with low net debt relative to equity, good cash-flow conversion and less leverage to the resource sector than other mining-services providers. The company is one of the higher-quality small caps in its sector. 
Macquarie Equities Research has a $2.90 12-month share-price target on RCR, suggesting it trades at fair value. Share-valuation service Skaffold values RCR at $2.74 in 2017, rising to $3.38 in 2018 and $3.65 in 2019. RCR can beat market expectation.
Still, I am always wary of identifying stocks for The Bull after they have rallied hard. But RCR was coming off a low base because of the mining investment downturn. Contract wins and the company’s exposure to rising demand for solar farms and other renewables projects justifies the current valuation.
The stock is due for a pullback after recent gains, but remains one of the better ways to play the services side of cleantech and infrastructure projects over the next five years. 

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Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at January 18, 2017.