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Buy Green Sell High is an independent equity research firm dedicated to covering companies within the relatively underserved "green" industries. The company was formed in 2010 and is currently based in arguably the greenest and cleanest of all U.S. states - Vermont. Buy Green Sell High... More
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  • Amyris: an Unattractive Risk Reward Profile
    Amyris Biotech is an early stage next generation chemical company beginning buildout of capacity to produce chemical molecules from renewable sugars. Amyris uses a patented yeast strain to convert Brazilian sugarcane crush into farnesene, a chemical that can be used as the building block for a wide array of chemical compounds. The company has signed a number of contracts to supply derivatives of its farnesene over the next 5 years.
    The up and coming next generation biofuel companies are nothing more than lottery tickets. The company that is most efficient in sequestering carbon will dominate the industry, leaving the others with little value. At its current levels, Amyris offers an unattractive risk reward profile.
    There is also the risk that Amyris will not be able to sell its Farnasene derivatives in the specialty chemical markets that it wishes to. The guidance reported in the 2010 10-Q offers a subtle but potentially very relevant change in wording. Prior guidance reported 2011 Farnasene production to 6-9 million liters SOLD, while the 10-k guidance reported 6-9 million liters PRODUCED. The first Farnasene derivative Amyris intends to sell is Squalene, a ~$30 per liter cosmetic ingredient. This product is traditionally derived from shark liver oil or heavily refined olive oil. Amyris’s version of Squalene has been called inferior to these traditional sources. This may be the cause of this early, albeit subtle, change in guidance. This immediately throws up red flags to the long-term potential of Amyris’s Farnasene derivatives.     
    The biofuel industry is structurally unattractive. 50-80% of the production cost for next generation biofuel companies comes from feedstock costs, even though this feedstock is derived from waste. There are several companies (Joule Unlimited, Solazyme, Sapphire) in early development of technologies (primarily algal and photosynthetic) that will be able to directly sequester carbon into a biofuel, essentially cutting out the carbon feedstock middle man. If any of these technologies succeed Amyris’s technology will not be able to compete.
    Furthermore the success of all biofuel companies relies on the price of oil. In Amyris’s cases, at a 27% yield (as discussed above) they would not be able to compete with diesel prices less than $4.50 per gallon. Inherent in that assumption, is that they can obtain feedstock at the price they currently do, which is at a 35% discount to the current market price. Amyris needs a deep market of either biodiesel or bio jet fuel for it to profitably disperse its fixed costs.
    The lottery ticket known as the common equity of Amyris is significantly overpriced at $26. Although, without any devastating news I do not feel Amyris is worth less than the investment made by Total SA for ~$15.70 per share. My short-term price target is, conservatively, in the $18 range. In the short-term there will be significant downward pricing pressure as the semi-bubble formed by the second generation biofuel companies becomes diluted by IPOs. In spite of this I would not go naked short this stock.
    My recommendation is the December 22.50 put options. They are currently trading for ~$150.
    Tags: AMRS
    Apr 29 12:15 PM | Link | Comment!
  • CLH Loses Badger Bid - Investors Underreact

    Is anyone paying attention to this?  Badger shot down Clean Harbors CAD $20.50 per share buyout bid on Tuesday.  Badger probably realized that it could be sitting on a goldmine (oil sands), and a ~7.5% premium bid for the company was not in their best interest.  This is a company that was expected to add ~$140 million in annual revenues and ~$40 million in annual EBITDA to a company that earned $1731 million in revenues and $315 million in EBITDA in 2010.

    By those numbers, not that big of a miss, right?  Wrong.  Badger was a key piece to the build-out of its Canadian Oil Sands play, and had a 5000+ strong customer base with plentiful cross-selling opportunities for U.S. customers.  The company also had a very impressive 29% EBITDA margin compared to CLH's five-year average EBITDA margin of 15.4%.  Let's review CLH's careful construction of its position in Canada:
     

    • 2008: Acquired Eveready - a Canadian-based company that provides industrial/energy-related services to oil, gas, and manufacturing industries.  Eveready provides lodging for workers in the oil sands regions - unique play on oil growth.  The deal was valued at $56 million in cash plus $118 million in CLH stock, and the assumption of $235 million in net debt.  Status: Complete
    • 2011: Badger Daylighting Purchase.  Badger is North America's largest provider of hydrovac services, which are used for safe digging in the utility and petroleum industries.  The deal was valued around CAD $247 million - all cash. Status: Rejected
    • 2011: Peak Energy Services Acquisition.  Peak provides drilling/production equipment and services to oil and natural gas customers in the U.S. and Canada.  The deal is valued at ~$196 million - with CLH paying $161 million in cash and the assumption of $35 million in net debt.  Status: Pending Approval
    The Badger rejection was not just a kink in the chain of building out their Industrial and Energy services segments , as management implied in their recent press release.  Badger was the acquisition CLH needed - with solid margin potential and a widespread customer base - to take the company away from its incredibly cyclical business model and add growth to its Industrial and Exploration Services segments.  CLH may look for further acquisitions in the oil sands regions, but its going to have to offer more than a 7.5% premium for companies with strong oil exposure.

    With its recent acquisitive behavior, Clean Harbor's thought it was playing a game of chess, but with Badger off the table, the company is looking like the loser in a game of kindergarten dominoes - or perhaps worse - Jenga.  With this loss, I expect EBITDA to be at the low end of management's 2011 guidance, maybe even treading below the $262 million low-end estimate and revenues reflecting lower esimates as well.  Revising estimates may not be necessary, however, considering that management's 2011 guidance excluded Badger revenues/synergies.  Alas, still a loss for a company that probably saw some uptick in share price from investors that assumed this deal would go through.
    Apr 28 3:29 PM | Link | 1 Comment
  • U.S. Ecology: Is a 4.3% Dividend Yield Sustainable?
    U.S. Ecology (Nasdaq: ECOL) is small cap waste management company providing radioactive and hazard waste disposal/treatment services in the United States and Canada.   While a waste management company with a $317 million market cap and a 4.3% annual dividend yield might seem like an enticing high-yield investment, ECOL’s focus on acquisitive growth, its low propensity for debt, and future cash flow uncertainty make dividend yields at this level unsustainable.
    ECOL is hamstrung between paying dividends and making acquisitions, and management is having a difficult time deciding which choice will offer shareholders the best return. In accordance with their 2011 guidance, I believe ECOL will look for acquisition targets, but will strive to keep their debt levels low and maintain a healthy balance sheet. So where will funding for acquisitions come from? Answer: Excess revolver capacity and dividend cuts to preserve cash balances.
    ECOL acquired Stablex – a Montreal-based contaminated soil/inorganic industrial waste treatment company – for $77.4 million in 2010. ECOL used $57.8 million of its revolver capacity to fund the acquisition, and now has $63 million of borrowings outstanding on its credit facility. The interest payments on this bank line are very low (2.7% interest rate), but what causes concern for me is the revolver principal repayment obligations due starting in 2012. In 2012 and 2013, total revolver obligations due are $15.8 million. In 2014 and 2015, total revolver commitments increase to $47.2 million. For some companies, these obligations might not be difficult to meet. But for a company in search of acquisitive growth with relatively uncertain cash flows (cash flow negative in 2010 due to Stablex acquisition), excess cash balances are extremely valuable, and $13.1 million in yearly dividend payments only detract from ECOL’s meager $6.3 million cash balance, which is currently at its lowest year-end level since 2006.
    For dividend investors, low cash balances would not be that big of a problem if:
    1.      ECOL was more comfortable with raising debt to support acquisitive growth/fund dividends, or
    2.      ECOL was projected to generate the FCF necessary to sustain $13.1 million in dividend payments, while also preserving cash for expansion activity
    ECOL’s reliance on Event Business and their exposure to seasonality raise concern for future cash flows. The cash-generating Honeywell cleanup projects, which accounted for 38% of total revenue in 2009 and 43% of total revenue in 2008, have ended. So what’s going to take its place and support ECOL’s profit guidance? Not government cleanup project revenue, which represented 21% of total revenues in 2010 and grew 32% from 2009 levels. Management guidance indicated that 2011 government business revenue will remain flat relative to 2010 levels, as government spending becomes more stringent.   Although ECOL’s acquisition of Stablex provided more certainty in terms of cash flow (Stablex revenues are more dependent on Base Business), without a major Event Based project to propel revenues to 2007/2008/2009 levels, I believe ECOL’s 2011 year-over-year total revenue growth will be low, 2011 EPS figures will be on the lower end of management’s guidance range of $0.75-0.85/share, and 2011 cash flow will just barely break into positive levels. These projections do not leave ECOL with much freedom (ex-debt financing) to fund acquisitions and maintain a $13.1 million annual dividend.
    In February 2011, ECOL’s asset purchase agreement with Siemens Water Technologies in Vernon, CA expired and was not extended. The value of Siemen’s liabilities was approximately $8.65 million, which if you were to use the 27% goodwill premium of the Stablex acquisition, values the deal at around $11 million. In their Q4 call, ECOL’s management acknowledged that the company continues to negotiate a deal with Siemens. So if this acquisition was completed in 2011 before the first of the revolver payments are due in 2012, how would it be funded? ECOL’s squeaky clean balance sheet history makes me believe that funding for the Siemen’s deal, after just tapping $63 million in reducing revolver for Stablex in 2010, would likely be provided by freed-up cash from dividend payment reductions. Based on my projections, if ECOL cut its dividend in half, freeing up $6.5 million in cash, it could complete the Siemens acquisition without taking on $11 million in additional revolver debt – all while staying cash flow positive in 2011.
    Furthermore, if dividend payments were reduced to about $6.5 million, ECOL would be left with a solid cash balance for 2012 and 2013 even after it pays down its revolver debts. The company can use this excess cash, which may resemble ECOL’s 2009 levels of approximately $30 million before Stablex, to search for additional accretive acquisitions and satisfy its bigger debt repayments ($47.2 million total) due in 2014 and 2015 without having to extend its revolver.
    Management appears to already be making spending changes in hopes of preserving the company’s cash flow. 2011 capex guidance ranges between $10-11 million, which when the $4.3 million in investment for Stablex is removed, appears to be significantly lower than previous capital spending on a percent of revenue basis. While these capital spending cuts may provide ECOL with the cash flow it needs to maintain its current dividend for 2011, this is a shortsighted idea. At such low capex levels, there has to be some concern that ECOL will not be able to fund the upkeep of its facilities and equipment and/or will be unable to expand its current site offerings in 2011. If the capital spending cuts prove to be ineffective, I believe ECOL will raise their 2011 capex guidance, and will look to reduce their quarterly dividend in hopes of staying cash flow positive.
    Capex Analysis
    2006
    2007
    2008
    2009
    2010
    2011E
    Capex (millions)
    $19.8
    $15.4
    $13.6
    $9.4
    $14.2
    $6.4*
    % of Revenue
    24.5%
    16.9%
    9.3%
    7.7%
    13.5%
    5.6%
    *Does not include $4.3 million for Stablex investment
     







    I believe there is a perfect storm brewing that will ultimately lead to a dividend payment reduction. ECOL is looking for acquisitions with:
    -          A low cash balance
    -          A low propensity for debt
    -          Weak/uncertain future cash flows and $15.8 million of debt payments due in 2012/2013
    If ECOL expects to add to its cash position to fund acquisitions, it will need to cut its current dividend and stay cash flow positive. To add a bit of human element to this analysis, management, when asked a question on their Q4 call regarding funding their dividend with cash from operations, seemed less than confident about the future of their dividend program. Yes, they may be able to fund their current dividend with cash from operations, but I believe ECOL’s focus is on rebuilding its cash account to finance acquisitions. I also believe that, based on their history, ECOL would much rather build a cash base with dividend cuts than additional debt.
    ECOL may be worth 16x forward earnings, which is a discount to CLH’s 24.6x forward multiple, but for a company with unstable revenues, it looks overpriced on a 3.0x price to sales basis compared to CLH’s 1.5x sales. And as I’ve indicated, I’m not sure how much longer ECOL’s dividend program can and will last. So if you’re looking for a high dividend yield investment, the time may soon pass for U.S. Ecology.
    Apr 27 8:03 AM | Link | Comment!
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