Midas 11 October

Renewable Energy Group (RWE – Aim)

Wind farms arouse mixed emotions. For environmentalists and politicians, they are unquestionably beneficial. They use what is freely available – wind –to generate something that everybody needs – electricity. But, for many ordinary people, wind turbines are a blot on the landscape, ugly, irritating and to be avoided at all costs.

The widespread antipathy towards wind farms, particularly large-scale ones, has been a major setback for the industry in this country. Planning permission is costly, time-consuming and frequently refused. Over the past year or so, developers have also been hit by falling electricity prices, which makes the energy they produce or hope to produce less valuable, and a scarcity of credit, which means it has been extremely difficult for them to fund their businesses.

In this context, Renewable Energy Generation stands out from the pack. The company focuses on small developments, of just a few turbines, generally located on or near farm land. These are easier to finance and tend to receive planning permission at a slightly speedier rate too.

The company is already operating several small wind farms generating 21 megawatts of electricity, enough to power around 10,000 homes a year and it has received approval for developments that will generate a further 15 megawatts of power. There is also a string of projects in the pipeline, which could, if approved, add a further 300 megawatts to Renewable Energy’s portfolio.

Separately, the company operates a business turning used cooking oil into electricity. The division expects to be able to convert enough used oil into power to generate 13 megawatts of electricity by the end of next year.

In the meantime, Renewable chief executive Andrew Whalley has just agreed to sell the company’s Canadian subsidiary to International Power Canada for £69 million. The deal needs shareholder approval but they are highly likely to agree to it, as the transaction will allow Renewable to pay off all its debts and have around £50 million in the bank.

Whalley intends to use the money to develop his wind farms and the cooking oil division, focusing the company entirely on the UK , rather than splitting his time between here and Canada .

Midas verdict: Brokers estimate the farms that REG is already running are worth £30 million while the farms it intends to construct in the next few months are valued, even now, at about £13 million. Add in the £50 million of cash that the company will have once the Canadian sale is completed and REG is worth some £93 million, even without ascribing any value to the oil business or the sites for which REG hopes to receive planning permission. Today, REG shares are trading at 58p and the entire company is valued on the stock market at £60 million, a substantial discount to the value of its assets. Unusually for a business of this nature, there is even an annual dividend. Last year, Whalley paid out 0.5p and he has committed to pay a dividend for 2009 as well. The shares are under-valued. Buy.

Novera (NVE – Aim)

Novera is another company involved in wind. Larger than REG, it has 58 sites across the UK , capable of generating 148 megawatts of electricity, enough for more than 70,000 homes. There are a number of projects awaiting planning permission and the company has another business which takes harmful methane gas from landfill sites and turns it into electricity.

Midas Extra, the midweek column available on subscription to Financial Mail readers, recommended Novera in early May, when the shares were 42p. Early last week, the company received a takeover bid at 62p a share. The offer came from Novera’s largest shareholders Infinis, the green energy division of private equity firm Terra Firma, owned by Guy Hands.

Infinis tried to buy Novera 18 months ago, offering 90p a share, but its approach was rejected and it ended up with 29 per cent of the business instead. Last week, it took its holding to 43 per cent, after buying a block of shares from the Swiss bank Credit Suisse.

Investors who bought into Novera at the same time as the original bid from Infinis will be pretty peeved to see the group coming back at a much lower level. For Midas investors however, the current offer is still 47 per cent above the price at which we recommended the stock in May.

Novera has rejected Infinis, saying 62p a share undervalues the company. Brokers agree but a rival offer is unlikely given Infinis already has such a large holding. Novera is also slightly ham-strung because its highly-respected chief executive David Fitzsimmons resigned, ‘by mutual agreement’ only five days before the Infinis offer, leaving finance director Richard Round as acting boss, even though he has only been with the company since early August.

Midas verdict: Novera shares are trading at 64.5p suggesting investors may be lucky enough to squeeze a few more pence out of Infinis . There is no harm in watching the situation develop over the next few weeks but shareholders should be prepared to sell at or near the current price.