Energetix: worth the sum of its parts?

The worldwide financial crisis has been responsible for frightening plenty of investors away from the stock market. Of course, the most common way of judging how frightened investors are of equities is by looking at the performance of stock market indices over the past couple of years, but another sign that investors must still be scared to death of equities is the number of companies out there with market caps below net asset value and/or cash holdings.

The phenomenon of large numbers of companies being valued well below their net asset value was last seen during the dot.com boom, when shares in many firms were trading below their cash value. This was because plenty of firms had been able to raise huge sums not long before the market turned sceptical of Internet-based business models.

However, although many listed dot.com and Internet-related software firms did in fact quickly burn through their cash piles and disappear, there are today several firms that not only survived the bursting of the dot.com bubble but have since thrived.

Of course, many of these companies have since been taken private because management and owners recognised value where the market would not. But it is worth remembering that FTSE-100 firm Autonomy, which makes search software, saw its share price trade as low as 91.25 pence amid the dot.com doom and gloom of 2002 before their long, steady rise to today’s price of more than £14 (although this is still way off its flotation price of £32.76 in November 2000 when it floated on the London Stock Exchange).

One sector that saw plenty of fund raisings before the recent financial crisis has been the clean energy industry. But today, as clean energy indices such as the Envirodaq index have reached all-time lows, there are several clean energy businesses whose shares are now trading well below net asset value. One such firm is Energetix Group.

Energetix is an Alternative Investment Market-quoted developer of ‘new energy’ products that are based on what it describes as robust, proven technologies. By focusing on distributed generation and energy storage, it has already grown three subsidiaries that develop and commercialise new products in these markets.

The first of these subsidiaries, VPhase, itself joined AIM in September 2007 via a reverse takeover. Today, it has a market capitalisation of approximately £44m and Energetix still retains 49% of the business. Yet, despite the stake in VPhase being currently valued by the market at £21m and Energetix’s cash balance of £11m (equivalent to 20 pence per share) at the end of last year, the group’s current share price of 28.5 pence values the entire group at just £15.7m.

According to Ken Rumph, an analyst focusing on climate change-related companies for investment bank Noble, VPhase is a tightly-held share and not traded much. This could explain some of the discrepancy in the firms’ respective valuations, but it does seem odd that the market is placing a combined value of Energetix’s stake in VPhase and its other subsidiaries of under £5m – especially since VPhase recently launched its first product while the two other businesses are also close to becoming fully commercialised.

VPhase exemplifies Energetix’s overall low-risk strategy of focusing on smart, robust technologies rather than “cutting edge” science. Its first product, VX1, is a simple device that uses a straightforward technique to reduce energy consumption in households and small businesses.

The VX1 device exploits the fact that voltages supplied to homes and businesses vary in order to ensure that the electricity distribution network works effectively.

Across Europe, voltages generally vary between 208V and 253V with the UK’s electricity network having a typical average voltage of around 245V. Because of this variation household appliances are required to operate at the lower end of the voltage range, and this means that the electricity entering a household or business can be regulated at the fuse box to a lower voltage, so reducing energy consumption.

VX1 works in a similar way to noise-cancelling headphones, creating a small, anti-phase voltage to reduce the incoming voltage to the building to 220V. So, if the incoming voltage is 243V, it applies an opposite voltage of 23V. This means that a household or business can save around 10% of electricity usage just by fitting VX1 to its fuse box.

Already, VPhase has agreements in place with British Gas Services and Scottish and Southern Energy to trial and commercialise the VX1 device. And in January energy regulator Ofgem gave approval for the trialling of VX1 under the UK government’s Carbon Emissions Reduction Target scheme, so the device will be trialled in a number of Scottish and Southern Energy’s customers’ homes (the cost of the trial is being met by Scottish and Southern).

Energetix’s other two businesses are Genlec and Pnu Power.

Genlec has designed a low-cost, wall-hung, micro-CHP (combined heat & power) device for the home. Although it operates like a normal domestic boiler, when it is heating the home, or the home’s hot water supply, it also generates electricity – saving the average homeowner around £200 off their annual electricity bill.

Genlec now has six relationships with boiler manufacturers and power utilities, giving it the potential to access all the major European boiler markets. In particular, the company has a product supply agreement with European boiler manufacturer Daalderop that is targeting sales of at least 30,000 Genlec micro-CHP units to the Dutch and Belgium heating markets over the next three years.

Pnu Power has developed a new type of battery for uninterruptible power supplies (UPSs), which are used to protect critical systems from interruptions in electricity supply. Its battery works by using compressed air, and the company claims that its performance exceeds that of conventional batteries both in terms of cost and reliability.

Pnu Power has already received orders from the South African utility Eskom, P&E Automation in San Diego and Telecom Italia.

Certainly, all three of Energetix’s subsidiaries are still at an early stage of commercialisation and there is always the prospect that none of these businesses becomes a success in the long term. But investors looking to benefit from a growing focus on energy efficiency by utilities and consumers might see the discrepancy between the respective valuations of Energetix and its 49%-owned subsidiary VPhase as a tantalising opportunity.