SBI is currently trading at $0.66 seems extremely good value given they raised $35 million in cash or $0.53 in the IPO.
My broker spoke to the directors of Sterling Biofuels yesterday to get an update post the sub-par listing. The key reason for the poor performance to date has been the lack of buying support on the back of the oil price falling from $70 USD/Barrel to $60 USD/Barrel from the 1st of September to the date of listing. This is sentiment driven.
The directors advised that the fundamentals underlying the prospectus and the prospectus forecasts have not changed despite the weaker oil price.
Key points:
- As discussed previously the market is linking the value of Sterling to the fall in the oil price from above $70 to around $60 currently. The fact is that while this oil price has fallen the net biodiesel price has actually risen over the same period from US$820/t to US$840/t.
- This stability in the biodiesel price is driven by the demand for biodiesel being underpinned by environmental issues and European Government mandates to increase the use of biodiesel to 5.75% by 2010. That would mean around 11.7m tonnes of biodiesel will be required in 2010 up from 3.18m tonnes in 2005. Therefore the market is incorrect in making a direct comparison of the value of SBI to the fluctuations in the oil price as the underlying drivers of the two are different.
- Over this period the cost of the feedstock has also increased but because of the rising price of biodiesel the margin assumptions used in the prospectus remain in tact.
- The plant is being built by Desmet Ballestra. They have recently completed another plant in Malaysia which uses the same technology as will be used in the SBI plant. This plant is commissioned and producing to specifications with the first shipment completed, significantly reducing any concerns about engineering risk. Pre-engineering on the SBI plant has been completed.
- Offtake agreement with Masefield: As discussed previously SBI has an offtake agreement in place for 100% of its output with Masefield a global energy trader. As part of the agreement SBI has an exclusive right to sell to Masefield any biodiesel produced by third parties giving the potential for additional revenues.
- The closest listed comparison to SBI in the market is Mission Biofuels (MBT). Both are looking to produce 100t of biodiesel from Malaysian palm oil. MBT continues to have a market cap more than twice that of SBI - $125m vs $50m respectively.
- SBI management are beginning to road show the company including presenting at a BBY biodiesel conference this week in Sydney to institutional investors.
- BBY research note has a buy recommendation on SBI with a 12 month price target of $1.45.
SBI Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held
