Helius Energy “undervalued”, says Numis

Helius Energy (LON:HEGY), the biomass energy expert, looks ‘fundamentally very substantially undervalued”, according to house broker Numis.

Earlier this month the group reported interim results showing a net loss of £1m, slightly higher than Numis’ expectations of £700,000. Cash consumption over the first half at £3.5m was also ahead of the broker’s expectation of around £2.7m.

Capex meanwhile came in at £2.9m versus £3m in all of its 2010 year, mainly due to investment in keys projects in Southampton and Rothes, Scotland.

While the group is expected to needs further funding to continue its ongoing developments as planned, it has been making progress, most notably by getting Rothes into construction.

Helius revealed in April that it had secured funding for the Rothes plant, which aims to generate 7.2MW of energy. The plant will take biomass products from the malt whisky manufacturing process and convert them into renewable electricity and animal feeds protein supplement in a combined heat and power plant.

Rothes is expected to save around 46,000 tonnes per year of carbon dioxide compared to a similarly sized coal-fired facility.

Numis understands Rothes is progressing well, albeit it is still at an early stage.

The broker notes that progress is also continuing to be made at Avonmouth, where it wants to build a biomass plant that will produce enough renewable electricity for around 200,000 homes, and will save over 720,000 tonnes of carbon dioxide a year when compared to a similarly sized coal-fired power station.

The electricity produced at the Avonmouth plant will be fed into the local electricity grid, and Helius has already secured grid access rights.

The Avonmouth project is now progressing towards supplier and contractor contracts (finalising towards the end of the year), and Helius intends to mandate banks and to identify an equity partner at project level - a similar structure to the one it used for Rothes in a deal with Rabo Project Equity.

The deal with Rabo provided Helius with £42.5m of debt along an  equity investment of £9.3m at project level by Rabo in return for a 44.3% stake in Rothes, with Helius retaining control of the operating company set up for the venture.

Numis notes that Rabo's investment in Rothes implies a value for Helius's stake of

£10.5m, versus a market cap for the company of £12m. This appears to imply almost no value for the company’s other assets including Avonmouth and Southampton.

“Although the requirement for cash is a material uncertainty going forward, the shares look fundamentally very undervalued,” says Numis, rating the stock a buy, with a target price of 37p.

Midday, Helius shares stood unchanged at 14 pence.