Clean tech stocks continue to outperform market, or why no one is listening to Canberra
Willow Aliento | 7 February 2017
The Australian CleanTech Index continues to outperform the ASX 200 and the ASX Small Ordinaries Indexes, and was the only index to show positive gains over January 2017.
The CleanTech Index – which comprises 62 stocks with a market capitalisation of $32.2 billion – rose 0.4 per cent, while the ASX200 showed a 0.6 per cent loss and the Small All Ordinaries a 2.5 per cent loss.
Sharemarket data compiled by Australian CleanTech also showed that over the 12 months of 2016 the CleanTech index gained 37.7 per cent, putting it more than 20 per cent ahead of the ASX200 in terms of growth in market capitalisation.
The leading performer in the sub-indexes for January 2017 was the Australian Renewable Energy Index. The 3.7 per cent market cap gain was led by Meridian Energy.
The Australian Efficiency and Storage Index recorded a three per cent gain, led by lithium resources firm Galaxy Resources.
The Australian Waste Index, however, did not fare so well, experiencing a loss of 8.9 per cent, with loss-leader recycling firm Sims Metal Management dropping 12.8 per cent.
The volatility of Sims Metal Management is tied not only to the relative price of iron ore and other metals affecting its market, but also because it has substantial business in the US and is therefore affected by exchange rates. Because of its size, its performance also impacts the performance of the index as a whole.
Overall, 14 companies in the index had gains greater than 15 per cent, including Papyrus Australia, which developed a process for using waste banana trunks and converting them into paper, building materials and laminates; waste-heat-to-energy firm Enerji; and Carnegie Clean Energy.
According to AusCleanTech managing director John O’Brien, it is the firms with market capitalisation above around $150 million that couldyattract institutional investors.
There are a growing number of these funds signing up to the international Principles for Responsible Investment, he said, however they are still cautious about small cap firms and there are no strong signs of substantial numbers of new institutional investors putting funds into the sector.
At this stage, Australian Ethical, Hunter Hall and some smaller self-managed superannuation funds are the main players, he said.
However, a greater appetite may be on the horizon, as overseas there is more and more talk about stranded assets driving interest in cleantech investments.
Many of the firms performing well are those that have reached the revenue-generating stage, he said.
“A lot more companies have been generating revenue and there are bigger companies coming through,” Mr O’Brien said.
Another strong performer, Carnegie Clean Energy, recently changed its business model and saw the share price jump.
Mr O’Brien said one of the reasons some firms, such as Meridian, performed so strongly was because they were “big integrated companies that just happen to do renewable energy”.
“The bigger companies might be cleantech, but they are forward-looking and innovative with their business models.”
Being past the capital raising stage is important for ongoing share market performance, Mr O’Brien said.
It is fairly common, he said, for small cap firms once they have issued the initial IPO and listed to see the share price drop unless strong announcements around revenue are issued regularly.
Mr O’Brien said the best strategy for firms is to build the company and business model, start generating revenue and then issue the IPO.
“There are very few pre-revenue IPOs now.”
The underperformance of some firms with sound technology that still suffered market cap losses is “more about the business model than the technology”.
The questions start-ups need to be asking are, “Who will buy this? How will we value it? And how do we get it to market?”
The relative lack of venture capital in Australia is also a challenge for start up firms.
There are, however, “reasonably active” angel investment firms an unlisted start-up can look to. The benefits of this is not just the money, but the networks, business smarts and “wise counsel” such an investor can provide.
Another option is to team up with a large established company, Mr O’Brien said. This has pluses and minuses for any entrepreneur or innovator.
“But if they can get it to work and retain their [intellectual property], the big company has the channels and the back office support already in place and these can be a great boost.”
The market isn’t listening to Canberra
Mr O’Brien said the strength of the index indicated “no one is listening to Canberra”.
This is a shift, as historically solar stocks, for example, would go up and down depending on government policy.
“Now more of these firms are generating revenue,” Mr O’Brien said.
And while renewable do remain somewhat “RET dependant”, other strong performers in terms of revenue generation such as smart water management, battery storage and waste are not dependent on either subsidies or policy.
“They are just decent companies making good money, and become more insulated from policy,” Mr O’Brien said.