French fund warns on green investment bubble 

An Internet-style bubble is looming in renewable energy stocks with valuations reaching the ozone layer and businesses managing to secure flotations with little or no turnover, a French investment fund has warned.

With raw material prices showing no sign of abating, companies that supply renewable energy or equipment such as wind turbines and solar panels could see their margins suffer, Matteo Novelli of Star Innovation at CFD Capital Management said.

“There is clearly a bubble forming in the eco-energy market and there could be a hefty correction at some point,” Novelli told Reuters in an interview on Thursday.

European Union leaders have pledged to get a fifth of the bloc’s energy from renewable fuels like wind, solar and biofuels by 2020, three times the current level.

Political pressure for a cleaner environment and high oil prices have sparked an investment rush into alternative energy.

But Novelli said such businesses were so fashionable that valuations could not be sustained in the short to medium term.

Companies that have seen their shares rise sharply include Theolia , a French wind farm specialist whose market value doubled since January to 920 million euros (619 million pounds).

Shares in EDF Energies Nouvelles  – the renewable energy arm 50-percent owned by French electricity provider EDF which floated at the end of last year – have gained more than 25 percent since the beginning of the year.

Theolia trades at around 35 times estimated 2007 earnings, a multiple which stretches up to almost 90 times for EDF Energies Nouvelles, according to Reuters data.

The Star Innovation fund is not currently invested in any renewable energy stocks and has progressively sold all of its holdings in the sector over the past two month.

Eric Hayoun, who works with Novelli, said he preferred solar equipment companies that were vertically integrated – owning many levels of the production chain – which gave them some flexibility over costs and prices.

These included Renewable Energy Corporation of Norway , SolarWorld and Q-Cells of Germany.

“It is going to be like the Internet, only the good and serious companies will survive,” Hayoun said.

Investors worldwide piled into new technologies in the late 1990s only to see the bubble burst in March 2000. Echoing the Internet boom, Novelli said he was surprised to see green businesses come to market with little or no sales.

Renewable energy specialist EO2 floated in Paris in March on the over-the-counter market, has reached a value of 20 million euros yet it expects to recognise its first sales only in June 2009.

Another renewable energy specialist Voltalia , listed on the OTC market since 2006, generated revenues of 17,000 euros last year but has a market capitalisation of 85.7 million euros.

Novelli said he was more attracted by companies involved in recycling to gain exposure to high metal prices.

Currently about 4 percent of the fund he manages is invested in French lead and zinc recycler Metaleurop which nearly quadrupled its operating profit in 2006, partly thanks to high metal prices.

By Astrid Wendlandt

Reuters

20 July 2007