failed to break the 78 cents peak, page-4

Hi B2

I cant help with a comparison of AMU and OPL, as I am only familiar with AMU.

On your question about whether bio-diesel is a constraint on the share price, my answer is 'probably yes because the market appears not to understand the bio-diesel business, but if it did understand it then the market would give AMU a big tick and push up the price'.

This business arm of AMU is really a bit of a sleeper. At present they have 67% of ARF, which is due to be hived off in an IPO around March of this year. Shaws have estimated that, following the IPO, ARF will have a market cap of around A$104 million (and AMU will have 37% of the post-IPO entity).

I know you have earlier commented that why pay any attention to Shaws in valuing something when they are not a dispassionate party. I agree that a healthy degree of scepticism is usually warranted, but in this case I reckon Shaws are being conservative rather than fanciful.

ARF has successfully knocked over a heap of milestones you would want to see, and in my view are on the way to being a VERY profitable little business. For example:
* it has teed up feedstock agreements with Gardner-Smith to ensure supplies;
* it has signed offtake agreements with a European trading house for the full production of three 45 million litre plants, and at prices above those used in their base case feasibility study (ie even more profitable than initially envisaged and no marketing risk). What's more, this allows ARF to sell on the Australian market if it can get a better price - which appears likely. Talk about win-win;
* it is using proven technology from Energea which is offering a 100% guarantee (ie no technology risk);
* it has teed up construction with a reputable major under (I believe) a fixed price contract;
* it has been awarded $7.15 million for its Adelaide plant under the Commonwealth Government's biofuels capital grant program (a criterion of which was that the plant had to be commercially viable without government assistance).

In addition, bio-diesel is in the fortunate position of being eligible for concessionary excise treatment in the Australian fuel market out to 2011. (This basically means ARF can appropriate a bigger chunk of the final diesel price and boost profits).

My own assessment of the economics of the plants suggest that, at full production, each plant will deliver
profits in excess of A$8 million. AMU's share of that following the IPO represents around $3 million per plant. That level of profit represents an earnings per share of around 2 cents, and (at a conservative PER of 10 to 15)should be worth about 20 to 30 cents per share in value. (Down the track you can multiply that by the number of plants ARF will have).

Construction of the first plant in Adelaide kicked off around November last year, and the plant in W.A. is due to begin soon. Productino from Adelaide is due in November of 2005, with production from Picton in W.A. expected early 2006.

My estimation of the worth of an asset that drops $8+ million per annum would be closer to $80 million. With 2 plants due to produce in the near future, and plans to have 5 such plants in total before much beyond that, I reckon AMU's holding in ARF is worth considerably more than the 37% of $104 implied by Shaws. (By the way, I intend to take up whatever share of the IPO I am eligible for as an AMU shareholder - plus some).

I guess all the above is a long-winded way of saying the market doesn't understand or appropriately value the worth of ARF in the AMU share price.

Sooner or later though the weight of value will force a re-rating.

Hope this answers your query.

cheers