[BUY] Active Energy: revision of target price (August 13, 2015)

On August 12, 2015 Active Energy Group [AEG LN], an international supplier of wood chip and forestry and natural resources development company, published a trading update for its wood chip division. The company reported 1H2015 wood chip shipping volumes at 103,733 tonnes and commented that 2015 profits will likely be below expectations due to delays in equipment installation and a short-term surge in log prices.

AEG reported that its wood chip shipping volumes in 1H2015 were “broadly in line with management expectations” and showed a considerable uplift over the same period in 2014. However, in July 2015, the company projected its annual shipping volumes at 400,000 tonnes, which would mean that AEG has to ship close to 300,000 tonnes in 2H2015 to achieve this target. 

As was stated by the company in its July 13 press-release, AEG’s new hardwood processing equipment and new softwood production line at its Yuzhny Port facility, both of which were originally scheduled to be operational by the start of July 2015, have been delayed: the former to late-August, and the latter to early-October.  The company also noted that the existing equipment has not been operating at full capacity over the past six weeks due to mechanical breakdowns, which have now been rectified following major maintenance. However, the result was significantly reduced production volumes in the period. 

Furthermore, AEG reported that the Ukrainian log prices spiked in July as a result of the recently passed law banning the export of unprocessed wood from the country (effective from November 2015), which led to a surge in log demand reflecting last-ditch buying efforts by log traders before the ban. Nevertheless, the company noted that prices have now returned to their pre-spike level.

Whilst demand for hardwood and softwood wood chip from the Group's Turkish MDF manufacturing customers remains extremely high, AEG’s Board anticipates that the above factors may result in the Group's 2015 profits being significantly below current market expectations.

Our view:

The news is moderately NEGATIVE for the company. Factoring in the delay in commissioning of the new equipment and the short-term       surge in raw material costs, we expect AEG to ship close to 350,000 tonnes in 2015 and report lower sales and profits. However, we also note that the majority of the company’s value is derived from its JV deal in Canada (to commercialize 250,000 hectares of mature forestry assets), in which AEG has a 45% stake.

We reiterate our BUY recommendation with a new target price of USD 0.245 (GBp 15.67), or an upside of 179% to the current market price of USD 0.088 (GBp 5.63).  



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