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Eurotrust: Catching the wind

22nd Nov 2007, 12:00 am

Eurotrust recently waved goodbye to a full listing on NASDAQ in New York, and said "hello" to an AIM listing in London. Following its listing on NASDAQ in 1997, the company built itself up into one of Denmark's leading property development companies, so when it left NASDAQ it did so with fond memories. However, in the short space of time that Eurotrust has been listed in London, the company's shares have fallen from ?12 to ?8.33, so the company's management must be wondering what on earth they have let themselves in for by joining AIM!
The logic behind the move to AIM was straightforward: Eurotrust is moving out of the property development business and into the wind farming business, and the focus of this business will be mainland Europe, so it made sense to be listed on a stock market in Europe. Also, the AIM seemed to be a suitable destination as it offered a lighter regulatory burden than the NASDAQ, reducing administration costs, and has a community of renewable energy companies ?and London has deep pockets.

So what is the reason for the fall in Eurotrust's share price? Although Eurotrust is already in the wind power game, its core asset is an extensive property portfolio.  In order to fund its wind power development plans ? wind farm developing is a capital-intensive business - it has to divest of the property division. Eurotrust put its property division up for sale just as the wider property market caught a cold ? both in the USA and Europe. So we have seen a general pull back in anything and everything connected to the financial and property markets, and this in turn has raised concerns over what price and how quickly Eurotrust will be able dispose of its property portfolio.

Eurotrust's property development business has focused, to date, on residential and leisure developments for resale in Denmark and Norway. The Danish property subsidiary, Aktiv Gruppen, is the fourth largest developer of real estate for resale in Denmark and has a pipeline of development projects for construction over the next 10 to 15 years which the company believes could realise ?7 billion for the developer. Cenkos Securities recently released a research note in which it outlined reasons why the Company shouldn't have any major problems realising the value of property of this size and quality. Cenkos values Eurotrust's property portfolio, in its present state of development, at ?388 million ? which is more than the company's current market capitalisation of ?321 million!

So Eurotrust is undervalued? Naysayers will point out that property companies do tend to trade at a discount to the net present value of their investments. But hang on! Eurotrust also has a portfolio of wind power properties!

Wind power projects aren't as straightforward to value as one might think. Rather than applying a valuation model across Eurotrust's portfolio of European projects, a country by country valuation is required. This is a complex market, driven by factors which vary between countries such as: tax regimes, regulatory regimes, planning rules, government incentives and commitment to meeting national carbon emission reduction targets. Location within a country is also a factor, average annual wind speed for a particular location makes a difference, as does the distance from the wind farm to the national electricity distribution grid!


So the value of a wind farm, on a per megawatt (MW) valuation basis, varies dramatically from country to county. Greece may well be enthusiastic about wind farms but good sites for wind farms are likely to be remote from the national grid. In Italy, wind farms are highly prized assets because of the shortage of available development sites and the hugely bureaucratic government machine, which acts as a brake in developments. A wind farm operating in Italy will be valued at twice as much per megawatt of capacity compared with an equivalent wind farm in Germany - which has a well-developed wind farm industry and has a supportive regulatory system!

Fortunately, House broker Cenkos Securities has done some work valuing Eurotrust's whole pipeline of wind farm projects, and this comes out at "between ?276 million and ?615 million". (Remember these figure do not include the value of the property portfolio.) The wide spread between the lower and upper figure is due to the many variables and uncertainties in valuing wind farm projects. Some of these variables are imponderable, such as the number of developments that Eurotrust wants to develop that will actually come to fruition.


So it seems somewhere between bizarre and completely amazing that the market appears to attribute no value to Eurotrust's wind projects! The cash that will be raised from the property portfolio should be more than enough to fund the group's current planned wind development pipeline, especially when one considers that these types of projects tend to attract debt financing easily, allowing the company to leverage its cash resources as necessary.

Eurotrust's management are no slouches. CEO, Robert Skjoedt MSc, has 14 years of experience in the power generation industry, having worked for ABB Power Generation in a number of countries and at ABB's head office. He was a director wind energy activities for the Danish Investment Foundation when he was recruited to Eurotrust. Peter Juul, Chief Operating Officer, was previously a partner in a Danish law firm. Bo Kristensen, Non-Executive Chairman, is a management accountant who has experience in both renewable energy and property development fields. Kim Simonsen, Chief Financial Officer, was previously acting director of finance for a Danish conglomerate with a wind power investment division. The management holds approximately 20% of Eurotrust's equity and, in response to the seemingly never ending share price drift, they recently dipped into their pockets and added to their positions.

Eurotrust already has 79MW of operational turbines, with 92 MW under construction, a further 512MW are at various stages of development and the company has tasked itself to complete 1,000 MW as soon as possible. The company believes there will be big opportunities for wind farm developers throughout Europe over the next few years. Europe is currently dependent on fossil fuels and 30% of its energy needs are imported from areas further afield, such as Russia and North Africa. This dependence is expected to grow to a worrying 70% by 2050. Also, all EU member countries signed up to the Kyoto Protocol, which means that CO2 emissions in 2020 are targeted to be 20% lower than they were in 1990. However, current levels are only 1.5% below 1990 levels! These are some of the reasons for recent rafts of legislation designed to encourage us to embrace renewable energy sources, and of the range of renewable power generation technologies, wind is currently the most rapid, most cost effective and reliable way of deploying renewable power technology. Barring European legislators having a major change of attitude to wind power, the value of this sort of asset is likely to go only one way.

Eurotrust believes it knows which way that is ? and at the current market capitalisation, this company offers an intriguing way to gain exposure to the wind power industry.

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