Buy Rurelec (RUR) at 16.5p

Says The AIM & PLUS Newsletter

THE BUSINESS

Operating through its 50% owned subsidiary, Empresa Guaracachi, Rurelec plays a crucial role in the Bolivian power industry. in the country. The company currently owns and operates three gas fired plants with a total of 445 MW (mega watts) of capacity, making it the largest single power producer in Bolivia, with a circa 40% market share. Demonstrating the company's key role in the infrastructure of the country is the fact that the government, which owns the remaining equity in Empresa Guaracachi, has given it a special exemption from national laws which state that no one operator can have more than 35% of the market.

The company's largest plant in Bolivia, located in the city of Santa Cruz, uses a technology known as combined cycle gas turbine, or CCGT. CCGT technology allows the plant to use waste heat created in the production process to generate additional power from the same amount of fuel. Compared to normal gas fired turbines CCGT plants are much more thermally efficient and also help to significantly reduce greenhouse gas emissions for ever MW hour of electricity produced. Rurelec has taken advantage of this by registering the plant for Certified Emission Reduction Certificates (otherwise known as carbon credits), thereby providing an important secondary revenue stream.

In the first quarter of 2010 capacity in Bolivia is expected to rise to 545 MW, mainly as a result of 96MW of new CCGT capacity being added to Santa Cruz. On completion, this will take the company's market share to an estimated 42%. In addition, when the new Guaracachi CCGT plant comes fully on line, Rurelec expects that its power plants will be producing nearly half a million carbon credits per annum.

Elsewhere on the continent, through its 50% holding in Energia del Sur (or EDS) Rurelec runs a 136 MW gas fired CGGT plant at Comodoro Rivadavia, in Patagonia, Argentina. In May 2009 an additional 60MW of steam turbine capacity was added to the plant came on line, with it now working at full capacity and providing power into local the wholesale market. Rurelec used to own all of the equity in EDS but sold a 50% stake in the subsidiary in early 2009, back to its previous owners, Basic Energy, in order to reduce planned loan note payments. The deal removed GBP8.7 million of liabilities from Rurelec's balance sheet.

CURRENT TRADING

While revenues in the six months to 30th June 2009 rose by 36% (on a like-for-like accounting basis) to GBP18.5 million, Rurelec posted an operating loss of GBP0.7 million (from a profit of GBP1.3 million) as both gross and operating margins fell. Sales growth in the period was driven by record levels of power generation in Bolivia and, with effect from April, increased capacity prices. The extra capacity in Argentina, added in May, also had a small contribution to the numbers. Affecting margins were an increase in gas costs in Bolivia and delays in bringing the new Argentinean capacity on line.

Further down the income statement, interest payments of GBP2.16 million and foreign exchange losses of GBP2.67 million helped push the company further into the red. However, this was offset by GBP2.36 million of other income, relating to the profit from the sale of the company's 50% stake in EDS. overall, the pre-tax loss for the period was GBP3.37 million, a performance which the company described as a "dismal" opening to the year.

The picture on the balance sheet at the period end was far better than six months previously. Net debt as at 30th June end stood at GBP53.32 million, down from GBP78.2 million as at 31st December 2008, this being helped by the EDS sale and GBP6.77 million worth of placing proceeds. Net assets at the period end attributable to Rurelec shareholders amounted to GBP51.18 million, with the majority of these being made up of tangibles.

Just before Christmas Rurelec further announced that in Bolivia, Empresa Guaracachihas has applied to regulator, the Electricity Control authority, to install a new gas fired plant with 128MW of capacity on a site at Huaricana in the Department of La Paz. The application was submitted at the suggestion of the government, amid concerns that the capital city and the nearby city of El Alto will experience power constraints as early as 2011 due to demand outstripping supply. Financial close and the commencement of construction are both expected at the end of the first quarter of 2010 and the plant is expected to be in operation by the first quarter of 2011. to date, all of Guaracachi's new generation capacity has been installed to the east and south of Bolivia but this expansion will move the company into the west of the country.

OPPORTUNTIES & THREATS

Bolivia is perhaps best known amongst us Brits for the population's love of deep fried guinea pig. But the country is in fact becoming increasingly well known for its burgeoning economy, which is estimated to have seen GDP growth of around 3.2% in 2009. a recent report from the international Monetary fund stated that Bolivia currently enjoys the highest economic growth of any country in the whole of North and South America. The economy has been performing so well and political risk has reduced such, that in October last year ratings agency Moody's upgraded the country's credit rating from B3 to B2 - still below what is traditionally regarded as being investment grade but a step in the right direction nonetheless.

Arguably the political situation in the country has improved since then, the country voting in new president Evo Morales, with a landslide majority, for a second term in December 2009. Morales has publically stated that his government intends to invest in the electricity sector and Rurelec believes that the election results will allow it to take part in a number of new energy intensive infrastructure projects. On that front the company is in discussions that could lead to a new form of public-private partnership being established with the government. As yet, no further details have been announced. However, there is speculation that Morales, who has nationalised a number of industries since he first came to power in 2005, is also looking to nationalise the electricity sector. But Ruralec does not believe that its shareholding in Guaracachi will be nationalised due to the fact that it has very good relations with the government, with it being the only power company operating in Bolivia which has consistently added to generation capacity - exactly what the government wants of a private sector partner.

VALUATION

Despite the poor first half to the year we can be more optimistic about the company's performance for 2009 as a whole due to a number of reasons. The Bolivian operations will enjoy a full second half contribution from the increase in capacity price; the increased capacity in Argentina will also contribute fully to the figures and the disposal of the 50% interest in Energia del Sur has removed the interest cost associated with its acquisition.

While there are no up to date forecasts on the market at present we note that the shares are currently trading at a 34% discount to the company's net asset value as at 30th June 2009. In the past Rurelec has also paid a dividend, with the funds for this coming from dividend payments which it receives from Guaracachi. In its 2008 final results the company stated that it expected to pay a dividend for the year in second half of 2009, subject to no unforeseen circumstances and the availability of cash and distributable profits. The decision is still pending but if any future payments are similar to the 2.25p seen in 2006 or 2.5p seen in 2007 the yield will be in double figures! BUY.

Key Data
EPIC: RUR
Market: AIM
Spread: 16p - 17p (5.9%)

The AIM & PLUS Newsletter, launched in 1995, covers shares listed on the Alternative Investment Market (AIM) and the PLUS Markets trading facility. Twice winner of the prestigious AIM Best Research Award, every month The AIM & PLUS Newsletter brings you two meticulously researched tips as well as investment ideas, analysis and expert comment on a wide range of companies from these vibrant markets, and is edited by current PLUS Journalist of the Year Richard Gill. To gain access click HERE.