Having struggled to make an impact in the world of electric cars in the three and a half years following its incorporation in June 2006, Metroelectric PLC was transformed shortly before Christmas 2009 by the purchase of Powabyke, a distributor of electric bicycles in the UK and Europe. The company has already demonstrated the potential of this market, announcing on 23rd April 2010 that it was operating profitably and since then, we believe, that its sales growth has accelerated. With a low fixed cost base, Metroelectric enjoys huge operational gearing and as repeat orders from major distributors such as Amazon, Evans Cycles, and Currys start to come in, earnings visibility is increasing all the time.

The company has not abandoned its hopes of creating a business in electric car distribution but that offers long term upside potential. For now the focus is on driving sales of Powabyke forward both in the UK and abroad.

We believe that the company will have recorded a small profit in the year to June 30th 2010 but it is in the current year and next that investors will start to appreciate the scale of this growth opportunity. We forecast that sales in the current year will increase from £550,000 to £2.23 million, increasing to £3.15 million in the year to June 30th 2012. That will equate to EBITDA of £697,000 in the current year, rising to £968,000 next year. With minimal debt of £170,000 (in the form of convertible loan notes which we expect to be repaid within a year) we value the business, at this stage on 5.5 times forecast EBITDA which gives a one year valuation of £5.35 million or 1.5p per share. However as the company starts to deliver on this growth and we see increased visibility of earnings we expect the stock to be re-rated and there is therefore scope to increase that target materially. The spread on these shares is exceedingly wide but it is possible to buy at well within the spread and at 1p we initiate our coverage with a stance of buy and a one year price target of 1.5p.

 Forecast Table

Year to 30 June	Sales (£million)	Pre Tax Profit (£million)	Earnings Per Share (p)	Price Earnings Ratio (x)	Dividend (p)	Yield (%)
2008A	0	-0.137	-0.078	n/a	n/a	n/a
2009A	0	-0.056	-0.032	n/a	n/a	n/a
2010E	0.55	0.165	0.04	25	n/a	n/a
2011E	2.23	0.675	0.14	7.1	n/a	n/a
2012E	3.15	0.945	0.19	5.2	n/a	n/a

*Metroelectric is a corporate client of RSCF, which is owned by RSH, the owner of GE&CR. RSH also owns shares in Metroelectric as does WSI, an investment vehicle managed by another RSH subsidiary.WSI also owns Metroelectric convertible loan notes.

 

 

 

Background
Incorporated upon 8th June 2006, as Metrocapital, this company listed on PLUS in July 2007 at 2.5p when its stated aim was to act as an investment vehicle. However, as a result of a General Meeting on 26th November 2007, the company changed its name to Metroelectric and its stated purpose to investing and trading within eco-friendly products and technology sectors. For two years the company made unsuccessful attempts to break into the electric car and van production and distribution market.

However the prospects of the company were transformed by the purchase of Powabyke a distributor of electric bicycles which had been badly run and had entered receivership in the Autumn of 2009. On 22nd December, Metroelectric purchased Powabyke from a group of investors who had bought it from the administrator while retaining the services of its key manager, in a cash and shares deal valuing the bicycle company at £983,997.

The cash element of the transaction was funded by an investment of £200,000 made in new Metroelectric shares by AIM listed China Wonder, an associate of the NASQAD entity Wonder Auto Technology Group. China Wonder paid 0.8p for its shares and has an option to buy an additional 50 million shares at 0.8p. China Wonder owns a number of specialist engineering facilities in Jinzhou, China, and it seems likely that Metroelectric will resource cycle production to China in order to improve its gross margin.

Operations
Metroelectric’s main operation is the sale and distribution of the wholly owned Powabyke range of electrical bicycles. Powabyke is marketed as having all of the enjoyable qualities of traditional cycling, but with the convenient difference of having a 200 watt motor able to take the strain when needed. Metroelectric currently produces a range of 6 ‘bykes’; the top of the range 24 speed, X-24, two mid range 6 speed models, the X-6 and the ‘low step’ X-6 LS, the 6 speed Eurobike bike, available in the classic style and ‘mountain’ style, the 6 speed City Byke, a low step 250 watt model, and a 5 speed Powatryke Cruiser, a 3 wheeler ‘tryke’ model.

All are classified as ‘bicycles’ and do not require a driving license to operate. We believe that plans have been made to further diversify the Powabyke range, with entirely new bike designs planned, including a folding bike, scooter, and a more mountain bike type style, with the addition of suspension, making certain models increasingly robust and adaptable for specific activities, and marketed towards specific groups of users. Metroelectric is also the exclusive UK distributors of the Comarth Cross Rider, a 4kw motorised All Terrain Vehicle, with an all wheel independent suspension system.

Monthly orders have been secured with Amazon, Evans Cycles, Currys, and most recently an agreement to distribute in Eire, plus a current, and growing, database of 3,000 private bike shops. The 3,000 private sellers alone create a demand for a further 200 bikes per month. Management aims to increase monthly orders per account, as well as signing new clients up to monthly distribution deals during the next full year. There are also a number of Powabyke dealers across the UK to complement the e-sales operation.

Strategy
The clear focus of Metroelectric is to grow the bike business both in the UK and in Europe. The only constraint on growth at present is the cash needed for working capital – as bike components and completed bikes must be transported in from Asian producers who demand upfront payment and travel times are up to eight weeks. The company aims, through its association with China Wonder, to secure new Chinese suppliers who will both produce at a lower cost and allow more favourable terms of trade so accelerating the expansion of the business.

Metroelectric will consider investing in other complementary electric vehicle businesses but only those which offer the prospect of immediate cash flow generation and whose purchase and expansion can be internally funded. For the time being this therefore suggests a sole focus on growing the range of bikes offered, increasing distribution channels and seeking to increase gross margins. As the number of sold bikes increases, Metroelectric is also likely to see an ever growing demand for replacement parts which will also add to the visibility of earnings.

Strengths
The British Electrical Bike Association (BEBA) claims that in 2009, approximately 30,000 electric bikes were sold in the UK and that sales will increase dramatically during 2010. The overall market is clearly growing.

The company has an established network of distributors including Amazon, Evans Cycles, Currys, plus a databse of 3,000 independently owned bicycle shops across the UK.

As the number of bikes sold increases, Metroelectric will generate an increase revenue stream from supplying replacement parts to owners of its bikes.

Weaknesses
The company’s growth may be constrained by a lack of working capital as suppliers must be paid upfront while it takes up to 8 weeks for product to arrive in the UK and a further period for end users to pay for products.

Opportunities
Although it is well established in the UK and Eire, Powabyke is yet to tap into other European markets in a material way although it is demonstrating that it has the ability to do.  On 27th April it announced an initial one year agreement with Powabyke Sverige, an independently owned company, to distribute Powabyke products across Sweden. It is now planning a number of other initiatives in both Europe and the US. Rapid expansion into these markets is not discounted in our forecasts and offers additional upside potential.

The relationship between Metroelectric and China Wonder offers the potential for the company to reduce the costs of production and thus to increase its gross margins.

There are also growth opportunities from the distribution of other electrical vehicles. On  21st July 2010, Metroelectric announced that it had entered into an initial exclusive three year agreement with Wonder EV, a subsidiary of China Wonder, to distribute its electric car range in the UK and Eire. This has the potential to create a strong revenue stream for the company but given the immature nature of that market we do not discount any material contribution in our forecasts.   

Threats
Demand for electric bikes is clearly growing rapidly but from a low base. It remains to be seen whether this growth is sustainable.

The barriers to entry in this market are limited. Powabyke will compete against rival products and there can be no assurance that its brands will prove dominant. However, it appears that the market is likely to be large enough to support multiple players.

Forecasts and Valuation
Having recorded two years of losses as it sought a real business to grow, Metroelectric is now operating profitable and growing as a result of the Powabyke transaction. Results for the year to June 30th 2010 account, in reality for just over 5 months real trading and we expect the company to show sales of £550,000 and a pre-tax profit of £165,000 ( on which it will pay no tax as historic losses provide shelter). In the current year we expect sales to increase to £2.23 million, increasing to £3.15 million in the year to June 30th 2012. That will equate to EBITDA of £697,000 in the current year, rising to £968,000 next year – pre-tax profits will be only marginally lower as interest costs are immaterial. On a full tax charge, earnings per share should reach 0.14p this year and 0.19p next year. There is upside in our forecasts if the company can expand Powabyke sales overseas at anything like the rate it has grown its UK business or if there is some income from its fledgling electric car distribution operation.

We value the business on a multiple of 5.5 times forecast EBITDA which, even on the basis of our cautious estimates, values the shares at 1.5p on a 12 month view. If you can trade within the spread we recommend shares in this very lowly financially geared but highly operationally geared green growth stock, at 1p, as a buy.

Forecast Table

Year to 30 June	Sales (£million)	Pre Tax Profit (£million)	Earnings Per Share (p)	Price Earnings Ratio (x)	Dividend (p)	Yield (%)
2008A	0	-0.137	-0.078	n/a	n/a	n/a
2009A	0	-0.056	-0.032	n/a	n/a	n/a
2010E	0.55	0.165	0.04	25	n/a	n/a
2011E	2.23	0.675	0.14	7.1	n/a	n/a
2012E	3.15	0.945	0.19	5.2	n/a	n/a

*Metroelectric is a corporate client of RSCF, which is owned by RSH, the owner of GE&CR. RSH also owns shares in Metroelectric as does WSI, an investment vehicle managed by another RSH subsidiary.WSI also owns Metroelectric convertible loan notes.