Few sectors are more promising and frustrating for investors than clean energy. The world needs to reduce its reliance on fossil fuels and a “tipping point” for renewables will one day create vast wealth. But it has been a long time coming.
That makes it is easy to overlook Australian clean-tech stocks. Their collective long-term performance has been poor and ASX is not endowed with large, investment-grade clean-tech stocks across the solar, wind, waste, water, biofuels, energy storage, wave and geothermal sub-sectors.
The combined market capitalisation of 62 stocks in the Australian Clean Tech Index, a unique barometer of clean-tech performance, was $16.2 billion in January 2016. Put another way, the sector’s combined worth is about an eighth the size of Commonwealth Bank.
By volume, the sector is littered with micro-cap stocks that are too small and illiquid for most investors. A handful of stocks in the index, such as New Zealand electricity providers Mighty River Power and Meridian Energy, Sims Metal Management and Cleanaway Waste Management (formerly Transpacific Industries Group) suit conservative investors.
I could go on with other reasons to beware the Australian listed clean-tech sector. But the share market has a habit of surprising investors who ignore sectors and base investment decisions on history and generalisations. The listed clean-tech sector has renewed energy.
The Australian Clean Tech Index had a cumulative return of 30.6% over three years to January 2016. The S&P/ASX Small Ords Index lost 13.1% in that period. Over 12 months, the Clean Tech Index lost 1.6% and the Small Ords lost 10%. After years of underperformance, the Clean Tech Index is beating the broader market.
Of course, care is needed with index returns. The performance of the Australian Clean Tech Index, weighted by market capitalisation, can be skewed by a few of its biggest constituents. Also, the index can be volatile and it had several years of heavy losses until about 2013.
But offshore indices also highlight the sector’s improving performance over the past few years. The S&P Global Clean Tech Index, which includes 30 of the world’s largest clean-tech companies, has a three-year annualised return of almost 8% to February 2016.
That’s a decent result, given sector headwinds in the past 12 months. Falling oil and gas prices have made some renewables less competitive and crunched global clean-tech stocks this year. The S&P Clean Tech Index is down almost 20% over 12 months and 7% this calendar year.
Could this be a buying opportunity in global clean-tech stocks? It is hard to see oil prices going much lower from here, as supply cutbacks help restore equilibrium in that market. And the long-term story for renewable energy, particularly in emerging markets, is firmly intact.
Reducing global energy poverty remains one the world’s great challenges. About 1.3 billion people, mostly in sub-Saharan Africa or developing Asia, cannot access electricity and 2.6 billion are without clean-cooking facilities, International Energy Agency (IEA) data shows.
Power helps bring sanitation, education, internet connectivity and commerce – and opportunity for global companies, particularly those in renewable energy, that can build infrastructure or supply power to Third World countries.
It is likely that developing countries, such as India, will quicken their use of renewables as they leapfrog the traditional hub-and-spoke model of energy infrastructure – much like India’s telco sector bypassed expensive infrastructure for mobile telephony.
Another 3.1 billion middle-class consumers by 2030, two thirds of them Asian, on OECD forecasts, will also drive higher demand for renewable energy in the region.
As the market focuses on renewable technologies, the catalyst might come from discoveries of new and advanced materials. In a Sydney briefing I attended this month, the World Economic Forum described advanced materials as one of five technologies that will shape the “fourth industrial revolution”, which is just starting. It builds on the ongoing digital revolution that began in the 1970s. (The other technologies were artificial intelligence, neurotechnology, 3D printing, and precision genome editing).
Lighter, stronger and more energy-efficient materials, such as graphene, will drive a new generation of products that require less power and make renewable energy more viable. Advanced materials, in my view, and the lighter products that result, could be the next greater driver of renewable energies. The two go hand in hand.
Whatever happens, there is a good case to expose portfolios to alternative-energy companies and benefit as one the great investment megatrends unfolds in the coming decade.
Here are five ways to play the trend:
1. Go global, go passive
Investors wanting exposure to large renewable-energy companies that dominate their markets need to look overseas. Solar companies, for example, are well represented on the NASDAQ but only a handful of micro-cap solar providers exist on the ASX.
Using an exchange-traded fund over clean-tech stocks makes sense for investors who want long-term sector exposure. The iShares Global Clean Tech ETF, listed on the NASDAQ, aims to replicate the price and yield performance of the S&P Global Clean Tech Index.
It provides exposure to big names such as First Solar Inc in the US, Gamesa in Spain, and Enel Green Power in Italy. The ETF, in US dollar terms, has a three-year annualised total return of 13.7% to December 2015. Over five years, it has lost 6.4% annually.
Half of the index is invested in large US and Chinese clean-tech companies. It looks a good way to gain exposure to the world’s biggest and best clean-tech stocks, but comes with additional currency risk for Australian investors.
Chart 1: iShares Global Clean Energy ETF
Source: Yahoo!7 Finance. ETF is listed on Nasdaq
2. Go global, go active
Those seeking direct stock exposure should consider US solar companies. Solar has some of the best long-term prospects within the clean-tech space and equipment providers, such as First Solar Inc, SunPower Corporation and JA Solar, are an interesting way to play the trend. Several solar stocks have tumbled this year amid the sector’s broader sell off.
In wind-power equipment, Denmark’s Vesta Wind Systems, Germany’s Nordex and Gamesa stand out. US waste-to-energy provider Covanta Energy is well regarded. Focusing on equipment providers in the clean-tech space, rather than speculative-technology developers, has less risk and more long-term upside.
Chart 2: First Solar, Inc
Source: Yahoo!7 Finance. First Solar, Inc listed on Nasdaq
3. Go local, go active
Few Australian managed funds specialise in listed clean-tech stocks. Arguably, the real action, through clean-tech venture capital funds, is in unlisted clean-tech companies.
Listed fund manager Australian Ethical Investment specialises in environmental and socially responsible investments. Australian Ethical has been a cracking performer: the one-year total return is 48% and over three years it is 51%. Due for share-price consolidation after such strong gains, it has good medium-term prospects.
The micro-cap company is enjoying strong funds inflows after consistent top-quartile investment performance. Assets under management grew 35% in the first half of FY16 to $1.4 billion and underlying profit leapt 55%. Who said ethical investing does not pay?
Australian Ethical’s managed funds have a strong focus on clean energy, but its mandate covers sectors from responsible banking to healthcare, aged care and medical solutions. Its unlisted International Shares Fund focuses on smart energy companies and suits investors seeking clean-tech companies through a well-run local fund.
Chart 3: Australian Ethical Investment
Source: Yahoo!7 Finance
4. New Zealand energy providers
The New Zealand Government privatisation process brought several well-performing electricity companies to the ASX through the Initial Public Offering market. Mighty River Power and Meridian Energy, dual listed on the New Zealand Stock Exchange, are examples.
Mighty River Power, included in the Australian Clean Tech Index, has been one of my preferred mid-cap yield plays in the last few years. After listing on ASX in a $1.3 billion IPO in May 2013, its $2 issued shares peaked at $3.27 last year before falling to $2.40. Downgraded earnings guidance, due to drier weather conditions that affected its hydro-generation, weighed on the outlook.
Mighty River has significant renewable assets, a strong brand in New Zealand, and is the lowest-cost electricity provider in its sector. Macquarie Wealth Management has an outperform recommendation and a NZ$3.27 (A$2.91) 12-month share-price target. It believes retail electricity pricing in New Zealand has bottomed. Mighty River’s expected dividend yield of about 5%, unfranked, is another attraction.
Chart 4: Mighty River Power
Source: Yahoo!7 Finance
5. Speculative stocks
Day traders and active investors looking to capitalise on renewed momentum in clean-tech stocks should focus on the solar and storage and fuel-cell sub-sectors. Australian Clean Tech index analysis, provided to the Switzer Super Report, shows both sub-sectors have starred.
A handful of micro-cap ASX-listed solar companies, notably EnviroMission, Quantum Energy and K2 Energy, have produced strong returns over the past 12 months, albeit off a low share-price base. In energy storage, Eden Energy, Galaxy Resources and Neometals have delivered good gains over 12 months. As speculative stocks, they suit investors comfortable with higher risk.
Those seeking more established industrial companies could consider the well-performing Beacon Lighting Group in energy efficiency, and Cleanaway Waste and Tox Free Solutions in the waste sub-sector.
Chart 5: EnviroMission
Source: Yahoo!7 Finance
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at March 16, 2015.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
