MaRS Best Practices Series
Special Valuation Series Nov. 12th, 2010
MaRS Best Practices Special Valuation Series
Friday Nov 19th 12:00-1:30pm
Tim Babcock Director, Listed Issuer Services TSX Venture Exchange
Rupert Merer Energy Technology Research Analyst National Bank Financial (NBF)
Speakers:
More information and registration at www.marsdd.com/bestpractices
November 10 3
Required Disclosures
DISCLOSURES: Ratings And What They Mean:�PRIMARY STOCK RATING: NBF has a three-tiered rating system that is relative to the coverage universe of the particular analyst. Here is a brief description of each: Outperform – The
stock is expected to outperform the analyst’s coverage universe over the next 12 months; Sector Perform – The stock is projected to perform in line with the sector over the next 12 months; Underperform – The stock is expected to underperform the sector over the next 12 months.
SECONDARY STOCK RATING: Under Review - Our analyst has withdrawn the rating because of insufficient information and is awaiting more information and/or clarification; Tender - Our analyst is recommending that investors tender to a specific offering for the company’s stock; Restricted - Because of ongoing investment banking transactions or because of other circumstances, NBF policy and/or laws or regulations preclude our analyst from rating a company’s stock.
INDUSTRY RATING: NBF has an Industry Weighting system that reflects the view of our Economics & Strategy Group, using its sector rotation strategy. The three tiered system rates industries as Overweight, Market Weight and Underweight, depending on the sector’s projected performance against broader market averages over the next 12 months.
RISK RATING: NBF utilizes a four-tiered risk rating system, Low, Average, Above Average and Speculative. The system attempts to evaluate risk against the overall market. In addition to sector-specific criteria, analysts also utilize quantitative and qualitative criteria in choosing a rating. The criteria include predictability of financial results, share price volatility, credit ratings, share liquidity and balance sheet quality. �
General National Bank Financial (NBF) is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on Canadian stock exchanges. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based
upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. Research Analysts The Research Analyst(s) who prepare these reports certify that their respective report accurately reflects his or her personal opinion and that no part of his/her compensation was, is, or
will be directly or indirectly related to the specific recommendations or views as to the securities or companies. NBF compensates its Research Analysts from a variety of sources. The Research Department is a cost centre and is funded by the business activities of NBF including, Institutional Equity
Sales and Trading, Retail Sales, the correspondent clearing business, and Corporate and Investment Banking. Since the revenues from these businesses vary, the funds for research compensation vary. No one-business line has a greater influence than any other for Research Analyst compensation.
Canadian Residents In respect of the distribution of this report in Canada, NBF accepts responsibility for its contents. To make further inquiry related to this report, Canadian residents should contact their NBF
professional representative. To effect any transaction, Canadian residents should contact their NBF Investment advisor. U.S. Residents NBF Securities (USA) Corp., an affiliate of NBF, accepts responsibility for the contents of this report, subject to any terms set out above. Any U.S. person wishing to effect transactions in
any security discussed herein should do so only through NBF Securities (USA) Corp. UK Residents In respect of the distribution of this report to UK residents, NBF has approved this financial promotion for the purposes of Section 21(1) of the Financial Services and Markets Act 2000.
NBF and/or its parent and/or any companies within or affiliates of the National Bank of Canada group and/or any of their directors, officers and employees may have or may have had interests or long or short positions in, and may at any time make purchases and/or sales as principal or agent, or may act or may have acted as market maker in the relevant securities or related financial instruments discussed in this report, or may act or have acted as investment and/or commercial banker with respect thereto. The value of investments can go down as well as up. Past performance will not necessarily be repeated in the future. The investments contained in this report are not available to private customers. This report does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for the securities described herein nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever.
This information is only for distribution to non-private customers in the United Kingdom within the meaning of the rules of the Regulated by the Financial Services Authority. Copyright This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions
contained in it be referred to without in each case the prior express written consent of National Bank Financial.
November 10 4
Outline – What investors look for in Cleantech
• What is Cleantech? • Recent Trends • Clean Tech company valuations • Market Opportunities
– Renewable Power �– Transportation
• Investor Trends • Summary
November 10 5
Cleantech - A Canadian Perspective
Canada – small cap, resource heavy • Renewable power equipment
– Solar, wind power, hydro, geothermal, wave power • Renewable power utilities
– Operators of renewable assets • Alternative fuels
– Natural gas, hybrids, electric vehicles, biofuels, fuel cells/H2 • Water
– Water treatment and water utilities • Waste management
– Recycling, waste to energy, environmental remediation • Energy Efficiency
– Smart metering, efficient technology, DSM
November 10 6
Coverage Universe
November 10 7
Investor Trends – VC investment
November 10 8
Renewable Power Continues to Grow
November 10 9
Transportation – a hot sector
• Driven by US focus on reducing foreign oil – About 66% of US oil comes from domestic sources (i.e. North
America), down from 2005 – Target further reduction in consumption to reduce importation
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Transportation – a hot sector
• With 60% of oil in passenger cars and trucks, this is a target sector for government regulation – Increase passenger vehicle and truck efficiency – Biofuels, CNG, LNG, electric vehicles – Switch to urban transport and trains
Non-OECD to soon surpass OECD countries
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• A number of factors could drive interest in any sub sector – Feed-in tariffs / subsidies – Climate change / energy legislation – High oil, natural gas, coal prices – Global conflict – Technology advances
Valuations impacted by external factors
Oil prices can impact some clean tech stocks
November 10 12
• Not a text book of valuation methodologies • Sometimes use multiple methods as a sanity check
Valuation of Cleantech Stocks
November 10 13
Qualitative Valuation Factors
• Early stage companies challenging to value • Investors more focussed on qualitative factors
November 10 14
Multiples generally consistent with market
• Valuations consistent across subsectors. Transportation highest today
November 10 15
Canadian Renewable IPP’s - Comparables
• Canada has great resource potential • IPP’s pay dividends – investor seek yield • Multiples are close to historic highs
November 10 16
• 10-12 GW expected over next 5 yrs – Provincial FIT and RFP for wind, biomass, hydro, solar – >20 year contracts at very high prices – Federal CCA >50% depreciation per year for renewable
assets – Large project investment opportunity ($2-4 mln/MW) – Estimated investment >$30 Billion by 2015
Canadian Renewable IPP’s - Growth
November 10 17
• Industry consolidation – Utility takeovers (TA buys KHD, FCE-PPX)
• Buying growth with cost of capital and tax advantages
– RFP’s running dry after major awards in BC and ON • Most IPP’s looking for shovel ready projects for growth
Canadian Renewable IPP’s - Consolidation
November 10 18
• Project permitting a challenge (NIMBY’s) • Increasingly competitive market • Capital tough to find for early stage companies • Low gas prices and low demand = low power prices • Potential backlash from public over rising cost of power
with renewable energy • Government RFP’s could slow down • Export market is uncertain
Canadian Renewable IPP’s - Risks
November 10 19
Wind in Ontario – A case study
• With growing wind power and reduced coal, the grid will become more challenging to manage
• Anticipate increasing smart grid tech (TOU meters, DSM), improved transmission, more gas fired generation, better weather prediction, higher power prices
December 2009 Wind Production 2009 Generation Mix
MW
Source: Ontario IESO
November 10 20
• Valuations are high – Anticipation of high growth – Competition will be strong – OEM’s are tough to beat (cost driven sector) – Smaller tech companies with OEM channels more likely
to be successful – Sector will remain news driven – US legislation most important factor in near term
Transportation – a hot sector
November 10 21
• Sector has long term growth ahead – Governments will continue to mandate higher efficiency
• Efficiency policy is fuel neutral
– Alternative fuels will increase • Mandates for biofuels • CNG and LNG do not need subsidy to grow
– One of largest area for VC funding right now • More IPO’s coming with focus on efficiency
Transportation – a hot sector
November 10 22
Private Company – Opportunities for new issues • Can be tough to bridge “pre-commercial gap” • Public market investors more conservative today • Less appetite for venture risk • Want to see management with “skin in the game” and
“bootstrapping” • Need to have visibility on market potential for company • Want to see a lead investor close to company • Number of Canadian VC’s in clean tech
Source: SDTC
November 10 23
• Tell your story - consider help of IR firms • Sell and buy side like to be involved early
– A number of sell/ buy side firms follow clean tech – Analysts prefer to follow companies for a long time
before recommending/ buying them – Mutually beneficial relationship w/ street before listing
• Return to street often or call with significant updates
• Never over promise or hype opportunity
Private Companies and “the Street”
November 10 24
Selected Institutional Account Relationships
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NBF Institutional Distribution System
San Francisco
Vancouver
Calgary Montreal
Boston New York Toronto
London
Geneva
Zurich
Paris Frankfurt
Global SRI’s in Cleantech • Dedicated Cleantech Investors in Canada and overseas
– Small caps get more attention in Europe than non-clean tech peers • Typically, SRI’s (socially responsible investor) are less concerned with
liquidity as have limited investment universe – Universe shrinking with consolidation / market pull back. KHD, XTX, PPX,
INE bought, some delist or decline (BLD, P, EF, VRB, TIM, ISE) – Definition of clean tech is expanding
November 10 25
• Cleantech in Canada – Smaller market cap “venture” stocks – Ample resource potential for export to US
• Valuations mostly reasonable today • Renewable Utilities –predictable cash flow
– Government backed growth could slow – Natural gas is a clean and necessary fuel
• Transportation – remain hottest sector – Oil prices and energy security keep at forefront – OEM’s and large companies tough to beat
• Dedicated capital can be found for Cleantech – Though harder to find today
Summary
