Shares digital

Carbon credit manufacturer’s shares looks cheap amid serious potential for growth

by Timon Day

Camco International, (CAO:AIM) 61p, Stop loss 48.8p

Shares summary

If analysts are right Camco is dirt cheap. High risk but could be a ten-bagger.

Business:

One of world’s largest carbon credit holders and managers of carbon reduction projects

Vital stats:

Market value: £102 million

Historic PE 2007: n/a

Prospective PE 2008: 16.5

Prospective PE 2009: 5.8

Sector PE: 12.7

1-month relative strength: 37.8%

1-year relative strength: -5.7%

Yield for 2008: n/a

Spread: 3.2%

This is a risky play for those who are not afraid of a roller-coaster ride. Any company entirely dependent on inter-Governmental regulations to make a profit is automatically suspect. Yet if analysts are right, Camco is dirt cheap and capable of rising in value many times over since global concern about climate change means companies in this sector have huge growth and profit potential.

Camco was founded 20 years ago but only joined Aim in Spring 2006. Its shares have subsequently slipped from 95p to 34.5p but now appear to be on an upward path once more.

The good news is the critical carbon credit market is maturing rapidly. This enables companies such Camco and Trading Emissions to put a more realistic value on their carbon projects.

Broker Landsbanki says: ‘The carbon market is beginning to show signs of life and the carbon development companies are starting to create value from their carbon portfolios. While some uncertainty about the delivery of credits remains, there are increasing signs that credits do have a ready market when delivered.’

This statement followed Camco’s first auction of certified emission reductions (CERs) from nine projects. The sale of 5.8 million CERs last month was four times over-subscribed and the price around a fifth higher than forecast two years ago. It is understood each credit was sold for more than €20 a tonne meaning Camco and its partners will pocket £93 million, including £12 million upfront.

Camco is committed to delivering 127 million tonnes of credits in the First Kyoto Commitment Period which ends in 2012. At the above price these credits will fetch almost £2 billion. Camco will not make anything like this amount in profit as much of the tonnage is shared with its clients and some is voluntary market offsets which will generate maybe €2 per tonne profit.

Even so, the potential is mouth-watering if CER prices, which have fluctuated wildly, stay above the €20 mark – and they stood at around €24 as Shares went to press.

Bringing in the bacon

Camco also has a thriving consultancy business which brings in the CER bacon. It is strong in Japan and also the USA, which is finally expected to back carbon trading after years of denial under the Bush regime. It is also big in China where many companies are taking advantage of European Union largesse to fund carbon reduction projects such as the Yangquan methane-to- power project. Camco recently bought a leading Chinese consultancy ClearWorld Energy Ventures for a nominal sum upfront but for a potential earn-out of around £12 million.

The consensus is for Camco to make profits of just over £6 million this year trebling to £18 million in 2009 and doubling again in 2010. With £14 million cash Camco is not short of money or ambition and it is interesting to note directors have been topping up their holdings recently, while staff are taking bonuses in shares not cash.