Active Energy Group - Increasing its Presence

With 2015 underway and a further selection of important operational updates released by Active Energy Group since Q3 2014, it makes sense to update the investment case yet again. Rarely have I seen a company make operational progress at the pace being demonstrated by Active Energy, headed by Richard Spinks, and whilst the path so far has been far from simple, there are yet further major and several minor inflection points to evaluate. With the share price now substantially off the ~1.6p 52-week low made in May 2014, and circa 139% off the portfolio addition made around that time, further headway is being made towards Active Energy becoming a respectable multi-asset company with a long-term future; rather a different scenario to the insignificant player that Nikofeso was back in 2012.


The technical outlook for Active Energy remains broadly the same as in September by virtue of the patchy liquidity; the share price continues to remain driven by news events, and the share structure has ensured that the spread remains unfavourable at times, with the spread currently spanning 3.8p -> 4p. Although that is a deterrent for short-term trading, as with any fundamentally sound company buying at the top of the spread can still yield excellent returns if held for a sufficiently long period of time. That has turned out to be the case thus far, over the nearly 12 months that the site has tracked the company.

That said, the relative strength index shows the share price to be overbought at a reading over 80, but given the poor liquidity that is not a particularly reliable indicator. As has been the case, charting Active Energy is neither particularly easy nor particularly useful. Notably, there has been a break above 3p which has changed the chart dynamic to start showing higher-highs, but that is fundamentally driven by the operational news flow. Consequently, news will remain the key driving factor, rather than sentiment driven movements by short-term traders, and trying to time an entry is rather more difficult than for more liquid companies.

There have been two pieces of news relating to the share structure since the previous review; CEO Richard Spinks has continued to purchase shares, adding circa £16,800 to his holding at 3.06p, whilst Ruffer Group decreased their holding below 5% in late September.


Given the relatively uninteresting charting outlook and lack of scope for medium-term share price predictions, the focus continues to be solely on the three main segments that comprise Active Energy's business: the Ukrainian wood chipping business, the early-stage pelleting technology, and the Canadian forestry asset through JV company KAQUO. Although I have detailed these in-depth in previous reviews, there are new facts that can be added.

The focus of investors has encountered another pendulum swing over the latter part of 2014 and start to 2015 with news announced on the core operating, wood chipping business out of Ukraine. From a media perspective, mainstream coverage of Ukrainian-Russian tensions has tailed off over the second half of the year in tandem with a gradual yet low-levels of de-escalation between the Ukrainian Government and pro-Russian rebels. Of course, that does not mean that the tensions have disappeared; rather than the scale of tension has decreased. Movements are still occurring with one of the latest being a swap of prisoners of war between the two sides.

The tough, but slightly improving geopolitical climate combined with internal restructuring ensured that interim results for 2014 painted both a relatively bleak, but also a relatively uninformative overview of the Ukrainian operations. Therefore, the situation in Ukraine does have to remain a critical point to keep tracking, regardless of the level of media coverage. Indeed, the risks can take more than one guise and that was seen in December when shipping problems forced the company to release a profits warning due to volumes being lower than anticipated. The lower volumes in Q3 and Q4 was driven by a need for Ukraine to import coal and iron ore to counter the cessation of activities in some of the Eastern parts of the country where supply had been disrupted or shut off by the violence earlier in the year. Consequently, some activity at Yuzhny Port (which Active Energy operates at) was prioritised to be for imports of strategic resources.

However, those problems have been overshadowed by a strong start to 2015 with two high-volume wood chip supply contracts secured for the year. Interestingly, these contracts cover both the existing production of hardwood wood chip, but also a new softwood wood chip product; a product that is capable of attracting a further $5/tonne compared to hardwood, but with similar levels of costs. The new product came after tests were done with Yildiz Entegre - a major Turkish MDF manufacturer with 8,500m3 daily production capacity - to ensure the product met the quality required. The deals see up to 300,000 MT of hardwood and a similar quantity of softwood contracted for the current calendar year.

Not only does this underline the underlying business proposition of the Ukrainian wood chip for MDF business, but it demonstrates the potential for building scale beyond the volume increases achieved in 2014. Active Energy commented that "the new off-take contracts for 2015 are estimated to results in at least a doubling of year-on-year output to no less than 500,000 tonnes."

Of course, that is premised on operating conditions in Ukraine remaining stable, but there are reasons to be optimistic that the events in Q3/4 2014 will not repeat. Most notably, the company has secured an exclusive birth at Yuzhny after discussions with port operators TIS and that will ensure that there isn't scope for the same level disruption that ensured 2014 estimates were missed. Furthermore, any problems with building scale have been dismissed (as suggested in previous reviews), with discussions ongoing to gain access to two more bulk carrier vessels to handle the higher volumes.

The strength of the wood chipping business out of Ukraine is particularly reassuring given that it is funding the early-stage work with the highly prospective Canadian forestry asset, and pelleting technology. It has ultimately been the potential for profits out of Ukraine that enabled debt facilities to be accessed in 2014, rather than shareholders being tapped for equity, so the progress towards increasing cash flows is a positive that cannot be understated.

Commenting on the January contract deals, Richard Spinks said, "Despite the obvious challenges in Ukraine over the past year, the success of AEG's operational and executive management in transforming the Group's business since 2013 has been nothing short of remarkable.  Not so long ago, AEG was an insignificant player with little credibility and even less business activity.  Today, we are a leading force in the European wood chip market that customers can rely upon to consistently deliver bulk volumes of high-quality feedstock, at the agreed price and in the agreed time.

We are all extremely proud at having secured these new supply contracts with one of the Group's largest clients, which confirm our coming of age as a business and the strength of our position in our core market. The efforts of COO Matteo Girlanda and his operational team deserve particular praise, and I am extremely confident of the prospects for AEG's Black Sea operations for 2015 and beyond.

Global demand for wood chip continues to exceed supply, and all indications are that this situation will continue. Expanding our product offering to Turkey to include softwood is further evidence of our commitment to the long-term development of this vibrant and expanding business. Successfully relocating our production and loading facilities, increasing our fixed price shipping capacity, and chartering additional bulk cargo vessels at the right price will considerably enhance our ability to manufacture and deliver our products in a timely and cost-effective manner.

Improvements in the financing components of this area of the Group's business, including a significant reduction in interest charges per tonne from March 1st 2015, will flow directly to the bottom line, further improving our margins. AEG has now successfully achieved its key goal of becoming a major European supplier of wood chip for MDF manufacturing, and I am certain that the management team has the operational and logistical expertise to continue to grow the business into the future."

What is attractive about the underlying wood chipping business is not only that it is incredibly simple to understand, but Active Energy have carved out a defensible position whilst others scaled back through the problems in Ukraine in 2014. The defensible proposition is that, out of Ukraine, the company can offer fresher wood chip in a fraction of the time that it takes to source from the Americas. Currently approximately 70% of supply is sourced from the Americas, so it is simply a question of gradually building scale, and the expanded contracts for 2015 underscore the superior proposition. The shorter shipping time enables customers to gain access to cost savings, adhere to less risk, improve their working capital position, and consequently gain increased visibility on supply (Ukrainian geopolitical factors aside).

The large scale of opportunity remains, and although just wood chipping is not Active Energy's end game (in terms of scale), MDF manufacture out of Turkey continues to grow. Turkey and Poland are the two notable producers of MDF with annual growth in mid-single digits. In terms of individual companies, there are several expanding MDF operations in Turkey. Kronospan (a worldwide distributor of manufactured MDF) is planning to move an MDF line with over 275,000m3/year of capacity from Austria to Turkey, with Camsan Entegre expanding its operations with Hendek, Turkey, amongst others. Other contracts are in the pipeline although these volumes will be on a spot basis (i.e. will be fulfilled only if AEG has surplus supply).

I commented in the previous review that "The phenomenal progress made over the past six months alone continues to be testament to the capabilities of the management team and although there are unlikely to be any more new major operations unveiled for the foreseeable future, management is core to the investment profile. I noted in the last review that the pelleting technology and core wood chipping business alone were likely to demand a higher market capitalisation - the new Canadian twist only enhances that view, and there is now considerable potential to grow the business using the diverse asset base in place. Cash flows from Ukraine will assist in funding the new ventures, whilst alone supporting a share price considerably higher than circa 3 pence - the pelleting technology and the Canadian business are 'free' additions." This scenario is now starting to hold true.

Although I will not look at the pelleting technology given no RNS'd news, there has been further positive news on the Canadian venture.

Following a forestry sampling programme in October, KAQUO was able to again increase the 'minimum hectarage' estimate to 250,000, up from 200,000. Using the transferable valuations of the previous review, it's again possible to generate a range of asset values for the forestry using the $2,000/ha and $5,000/ha range previously used.

To be conservative, it makes sense to value the additional 50,000 at the lower end of the scale and this allows us to create a revised 2 case scenario:
   -  At $2,000/ha -> $500m total asset value = ~£148m net to AEG
   -  At $5,000/ha for 200,000 and $2,000/ha for 50,000 -> $1.1bn asset value = ~£326m net to AEG

Alongside this an initial 108,141 hectares were marketed in a global roadshow towards the back end of last year. The sampling results showed no signs of timber disease or beetle infestation in the prime plots and with a rough 34%:66% divide between softwood:hardwood. For an investor, early commercialisation could take place through a number of routes. Two such routes would involve little transportation: supplying the wood as timber feedstock to local sawmills, and on-site production facilities for MDF/OSB. An alternative method would be to export high quality logs into Asia. That would be achieved through transporting the logs to one of two port facilities. The first would be Port Metro Vancouver, Canada's largest port. That would require a transportation route through British Columbia towards the border with the US. Alternatively the product could be transported further North to the West Coast where there is Prince Rupert Port, also in British Columbia. Both ports are in expansion and upgrade phases providing plenty of room for those exports if that was the desirable route for a partner.


As alluded to earlier, interim results for 2014 were not a useful indicator of the underlying performance, but that is often the case for companies in a turnaround phase; there are usually exceptional items causing the financial performance to appear confusing. That said, H1 2014 showed a robust increase in volumes shipped to over 100,000MT, with 61% across the Black Sea to Turkey. Revenues tracked higher to £6.4m, but a loss of £0.36m (excluding various items) was posted and that left a lot to achieve in H2 to meet expectations (which later were not met).

What was more interesting was a Q3 trading update that showed revenues of $6.93m vs. $5.89m in Q2. Gross margins rose by 300% and reached $20/MT giving a healthy gross profit of $1.15m versus $0.55m in H1. Due to the import prioritisation, the market was guided towards a breakeven result for the year. The balance sheet was fairly strong with current assets at 1.93x current liabilities or 0.85x total liabilities. Tangible assets amounted to 0.98x total liabilities.

The wider picture of operational progress is reflected in the chart below.

Should the 2015 base 500,000MT target be hit, the Ukrainian operations alone should comfortably justify the market capitalisation. Assuming full take-up of the 2 * 300,000MT contracts, Active Energy should gain $68m in revenues and a corresponding gross profit of $12m. That suggests a 17.6% margin, which is right towards the top end of the 12% - 18% margin range I estimated in H1 2014. It also highlights that this is not a low margin business, given the defensible aspects of the business model. At current exchange rates, that translates to £7.91m in gross profits. Assuming escalated administration costs of £3.2m, adjusted EBITDA would fall to £4.7m which, if hit, would leave AEG trading on 4.6x EBITDA just on the core operations. The ability to hit that target is the critical factor. Therefore, discounting back to a lower case where $50m of revenues are recorded, and applying a similar gross margin gives $8.8m of gross profits (£5.8m) and £2.6m of EBITDA, which alone should still justify the current market cap.

One of the more tangible benefits of the Ukrainian crisis is that the UAH:USD exchange rate has weakened substantially and it has continued to stay weak. Whilst some of that benefit is offset by accompanying inflationary pressures, the 17.6% gross profit margin is premised on a UAH:USD exchange rate of 14 whereas it is currently 16. It's too early to state whether there is incremental upside on the gross profit figure as a result of the exchange rate, but it is worth monitoring throughout the year.

Valuation remains modest

I said last September that "I foresee fair value at the moment to be at a market capitalisation comfortably north of ~ £30 million with room to grow as progress continues." That is still the case, and with the latest contract wins announced in Ukraine, that potential valuation deserves to be upgraded appreciably. Although the forestry value of the Canadian asset is potentially substantial relative to the current market cap, producing a valuation at such levels doesn't make sense before the event has occurred. Consequently a 'next stage' valuation could reasonably be 7x £4m EBITDA on the Ukrainian operations plus 1/10th of the base case value of the Canadian forestry (i.e. circa £14.8m). That generates a 'next stage' target of £42.8m. Upside on that would be derived from Ukrainian EBITDA exceeding £4m, tangible progress being made with the pelleting technology, or value being unlocked in Canada through a forestry rights sale (which would likely trigger a re-rating beyond that target [if within the ballpark expected]). The valuation on a long-term perspective remains modest hence I have retained a Buy tag on Active Energy Group.

Article Updates (Click to view)
UPDATE (28/01/15)- Active Energy Group released today an RNS starting the following:

"The Board of AEG confirms that at the KAQUO Métis Settlements Economic Development Summit, held in Edmonton Canada on 27 January 2015, KAQUO commented that it had received three non-binding, conditional offers, in aggregate amounting to approximately US$300 million subject to further due diligence, which KAQUO may or may not accept and which may or may not come to fruition, depending on that due diligence process.

The offers were received as a result of the pre-marketing roadshow announced previously, to subscribe for a non-controlling equity stake in a yet to be incorporated subsidiary of KAQUO to commercialise approximately 108,000 hectares of the aforementioned Métis Settlements forestry assets. The Board of AEG understands that it is the intention of KAQUO to accept one of the offers, each of which is subject to due diligence, and to enter into detailed negotiations of legal agreements with the successful bidder."

This is clearly an excellent feat to have achieved, and the bid price at the time of closure was north of 10p. In light of the sharp share price rise and potential for a pullback over the months of negotiation, I have moved Active Energy Group from Buy to No Rating. Whilst at 10p the rating is hardly expensive, it makes sense to clarify the precise nature of the offers on the table, and the hectarage that each offer covers. The share price is also likely to be highly volatile in the near term, which is often best avoided. Consequently, I have banked a ~518% gain; the largest for the site to date, and by a clear margin. It remains on my watchlist given the excellent management progress to date.



  1. One of the best calls Ive seen on a company since the likes ofnthomss vook and topps tiles. Excellent work!


  2. Excellent analysis. Thanks.

  3. I cant help but agree because I thought you had lost your mind sticking with this outfit when bombs were flying off in Eastern Ukraine and tanks were shooting each other to high heaven. 11 months on and all is swell. A quite brilliant shout on Character Group and that's why I came to post this. Sales 28% ahead if a far cry form Charles Stanley's flat prediction a few months ago. Share price well up now. Cheers el1te

  4. Bit of excitement today, I see. Wonder what that's all about El1te?

  5. See this RNS and the update added at the end of the article:

  6. Thanks for the update and a nice little earner. I agree that the price is likely to be volatile for a while. Be interesting to see where it settles.

  7. Well done, El1te. This is a huge catch.

  8. I can’t understand why the RNS stated $300m in aggregate which seems deliberately misleading. If we assume three bids at $100m for say slightly less than half of the new company being set up that would give a total value of $200m for the 108,000 hectares. That would mean KAQUO gets $100m plus keeps over half the value of whatever is being produced depending on their share of costs which sounds a good deal.

    Got to feel sorry for poor Mr Spinks though. Starts a business in the Ukraine and the Russians start to invade. Get a bigger business in Canada and the Canadian Prime Minister gets involved after a few people complain.

  9. Anon, agreed the RNS is misleading.

    Been a lot of people heading for the exits today but share price seems to have bottomed at ~ 5p. Still not clear where the market will place fair value. Interesting.

    1. ND - I did wonder whether the total of $300m applied to different parts of the 108,000 hectares but the RNS said that there was a plan to go ahead with one of the bidders which would appear to make that unlikely. Maybe Elite will be able to shed further light on the confusion and the current Canadian investigation. Does seem to be steady buying though and while the last quarter was dissaoointing hopefully the extra $4 a tonne from beginning of March will up AEG’s value regardless of Canada’s progress.

      Should mention that I post as marab on ADVFN and the only reason that I am anonymous is that I couldn’t get any of the other log ins to work. Computer genius I ain’t ;-)

  10. El1 thanks for the further update. I noted the 5p support level hadn't held and have seen the news report of an investigation. Reassuring noises from the company but that is what you would expect. ArghH!

  11. Whilst I applaud el1te for finding this opportunity share moves like those seen in the last two days are something to be feared, rather than chased.

    Heaven knows how you were able to time an exit at SP 10.08 - but I'll have some of whatever it is you're taking to be able to see the future.

  12. Quite a discussion going on; I have to concur with the last post in that I am not looking to re-enter for now given the sheer volatility of the share price. It ultimately keeps you glued to the screen and difficult to predict! Although not currently holding, it is a shame the Edmonton article came out today and hit sentiment the way it did, as fundamentally at this value, it looks good (assuming the Canada forest deal does complete). It has blurred the near-term outlook barring further news and made the whole situation look pretty messy.

    With regards to timing, the best method for such sharp rises is almost always to take a profit once liquidity allows you to. In this situation there wasn't a great deal of thought required given the sheer rapidness of the spike to just under 12p. All too often there is a retracement as the initial 'excitement' dies down, albeit the drop today is more related to the investigation with the Edmonton Journal article released early today.

  13. I posted a reply from RS on the ADVFN and LSE boards which may be of interest. I agree it is likely to be a choppy day for the SP and short of future news the SP is as likely to go down as up.

  14. El1 I have noticed that it is not possible to copy text from a post so the links in the post from marab and the link you posted on 28 Jan at 16:39 are just about impossible to follow

    Dont suppose there is anything that can be done?

  15. Replies
    1. Thanks El1te and thanks also to marab. Good work all round.

  16. Good price movement today El1te. Are you re-considering opening a position here? The risk/reward is surely favourable after the last few RNS's?