First published in Quoted Cleantech, july 2011. Copyright Cleantech Investor 2011
by Andrew Hore
Ethanol producer GTL Resources is outperforming its peers. The business, which is generating large amounts of cash, is well placed to move into new markets for its products as well as to acquire additional plants.
Although its profits were hit by higher raw material costs last year, GTL is still highly cash generative. Revenues grew from $216.6 million to $261.4 million in the year to March 2011, while production rose 9% to 111 million gallons and the ethanol yield improved.
Pre-tax profit dipped from $14.5 million to $12 million mainly due to a 26% rise in corn costs. However, GTLs buying abilities managed to reduce the effect of the local market corn price increase, which was even higher, and enabled the company to make a commodity margin of 58 cents/gallon. Although this was down from the 62 cents/gallon of the previous year, it was well above the 52 cents/gallon achieved by local competitors.
The margin is the average for the year: in reality it is seasonal, with, for example, margins tending to improve during the summer driving season.
Net debt fell by $14.4 million to $83.4 million at the end of March 2011.
House broker Cenkos forecasts further falls to $63 million this year and to $42 million by the end of March 2013. Edison Investment Research expects an even faster reduction in debt, which is with the main operating subsidiary Illinois River Energy and is non-recourse to GTL.
Demand for ethanol should continue to grow as the US government increases the percentage that can be blended with gasoline from 10% (E10) to 15%(E15). This move still requires state approvals, but some E15 blending is expected to commence late in 2011, although volumes may not reach significant levels until 2013. The blenders credit, designed to encourage ethanol use in fuel, is likely to be reduced, although it does not appear that it will disappear completely. The credit, currently 45 cents a gallon, will probably be reduced gradually over time.
Further legislation is expected in the US, meaning that car manufacturers will have to produce more vehicles able to cope with higher ethanol blends as well as other alternative fuels.
GTL argues that corn yields are improving and there is plenty of supply for the needs of the ethanol sector. The company expects to pass on any additional costs caused by an increase in the price of corn. The oil price is expected to rise over the next decade, giving corn-based ethanol a growing cost advantage.
Fuel is not the only potential use for the ethanol produced by GTL. The companys plan is to diversify into food and biochemical products, two areas where GTL could achieve better prices than from the fuel sector. Although these areas are likely to be increasingly important in the longer term, GTL still has to show that it can produce these products on a commercial scale.
One example of diversification is zein protein, a biodegradable water and grease resistant material which is used in confectionery, pharmaceuticals and packaging. Ethanol and water can be used to extract zein protein from corn flour: this currently goes into cattle feed.
A pilot plant is making samples of zein protein, which is shipped in powder form, and can be used to replace coatings made using fossil fuels,; to flavour and sweeten encapsulants for gum and beverages; to coat pharmaceuticals and food; and in biodegradable plastics and films.
GTL is collaborating on the zein protein production plant with Prairie Gold Inc., which has membrane separation technology.
The reduction in GTLs debt will help the company to pursue its strategy of acquiring other ethanol production facilities.
With approximately 200 plants in the US, it makes financial sense to acquire rather than invest in a new plant, since replacement costs are equivalent to $2 a gallon whereas existing plants are changing hands for nearer $1 a gallon. GTL will seek acquisitions that will enhance earnings per share as well as help it to diversify into other sectors.
Ethanol supply in the US is unlikely to rise significantly in the near term. Since it is uneconomic to build new plants, there is little additional capacity being created. This means that capacity utilisation is set to increase over the coming years, which will push up margins.
GTL also intends to invest in improving the efficiency and processes at its existing plant. The company has started a $3.6 million combined heat and power project, due for completion by the end of 2011, which should save around $600,000 a year.
Cenkos forecasts a profit of $13.3 million this year, which puts the shares on less than six times 2011-12 earnings. A rise to $14.1 million is forecast for 2012-13. No tax is likely to be paid for three or four years, although earnings per share assume a tax charge.
Most of GTLs growth in profit is derived from a decline in interest charges as debt falls. The profit performance of the existing plant is not expected to change substantially; however, the addition of a new plant could significantly enhance profit - if the right deal is made.
Market: AIM
Symbol: GTL
Price: 73.5p
Market cap: £23.5m
High/low: 89.5p/55p
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