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Background: For background on the ethanol market see here and here.

Story: Aventine Renewable Energy (AVR), unlike the two ethanol players we highlighted earlier, already produces corn based ethanol, and like Pacific Ethanol, has as their principal business the marketing and distribution of ethanol. They own a 100M gal/year wet-mill ethanol production facility in Pekin, IL, and have a 78.4% interest in a 50M gal/year dry-mill ethanol production facility in Aurora, NE. The IL facility is undergoing a dry-mill expansion of 56.5M gal/year capacity, with completion expected for early 2007. With the dry mill process they get about 2.8 gal ethanol/bushel corn, and recapture 37% of their corn cost through selling the secondary products, versus 2.5 gal ethanol/bushel using the wet-mill process, and a 55% corn cost recapture. The secondary products differ for the two processes.

Company: From their prospectus, using FY 2005 numbers, they had $192M in revenue from ethanol production, which represents 20% of their overall revenue of $935M, the remainder coming from the marketing and distribution business. However, almost all of their $66M in operating income came from the ethanol production business, confirming the low-to-no margin nature of the ethanol distribution business we saw with Pacific Ethanol. They generated $60M in revenue from ethanol production co-products (distillers grain, etc).

It's nice to finally have some concrete numbers. The ethanol marketing and distribution business is financially a wash, and we'll ignore it, although functionally it is an enabler of their production profits since producing ethanol doesn't do any good if you can't sell it. For ethanol production, they generated $192M revenue with 139.2M (100M+0.784x50M) gal/year capacity. That gives them $1.38 revenue/gal of ethanol capacity. Similarly, their $66M in operating income from ethanol production implies an OP margin of 34% ($66M/$192M) and $0.47 of operating income/gal of ethanol capacity.

They have a corn-usage capacity of 54M bushels/year (100M/2.5 + 0.784x50M/2.8), expanding to 78M bushels/year (+56.5/2.8). That implies that they offset their corn costs by $1.11/bushel capacity ($60M/54M) through the selling of co-production products, which is substantial. That represents something like half the price of corn (in line with their numbers given in the Story section above), so we estimate that reduces their corn cost to something like 15-20% of ethanol revenue. But their actual OP margin is still 34%, meaning production costs eat up 2/3 of the ethanol sales price, so even with the co-product sales they are only performing at expectation, not better. It also implies that they generate $3.56 revenue/bushel corn ($192M/54M).

They seem to have a perfectly fine model. Their profit expansion depends on their ability to expand their ethanol production capacity, which with their new plant should expand something like 40% (56.5M/139.2M) in early 2007. And they are obviously subject to the vagaries of ethanol pricing and market demand. They seem Solid, but the commodities pricing ambiguity gives them a higher uncertainty than we usually allow in that category, so we'll hedge our rating by saying that they will probably trade like a Spectacular Story.

On 30 Dec 2005 they completed a private placement (to some former Morgan Stanley partners who formed Metalmark) of 21M shares at $13 for net proceeds of the company of $256M. They also have $160M in long-term debt. The IPO is a sale of those shares by the private investors, and not the company. No IPO proceeds will go to the company. That says that if you pay substantially more than $13/share, you're getting ripped off. It's not usually that easy to figure fair price, but they already did all the work for us. We'll have to wait to see how many shares they offer, and at what price, to know whether this deal is attractive long-term or not, but almost regardless, given the hoopla in the market recently, the IPO will probably pop. (BTW, they will trade under the symbol AVR).

Source: Ethanol Stock IPO Analysis: Aventine Renewable Energy (AVR)