We are initiating coverage of prospective bio-diesel producer ElstarOils with a Buy rating. Though the company’s stock price has gained 274% in absolute terms over last 12 months, outperforming the WIG index by 157%, we believe that the stock still has upside potential, especially given the recent correction. Stubbornly high oil & gas prices have changed the economics of alternative energy sources, resulting in new opportunities for the renewable energy market.
We believe that ElstarOils, as one of the first companies on the market with its products, should have a better chance of positioning itself as a bio-components supplier than the numerous other companies that have announced plans to enter biodiesel production. Moreover, ElstarOils should continue to grow at an above market rate in its traditional vegetable oils and fats business. Against this backdrop, we forecast ElstarOils net earnings to grow at a 46% CAGR over the period of 2007 – 2010, driven by rapid growth in biodiesel use and gains in market share in the vegetable oil business. Trading on a 2006F P/E of 49.2x, ElstarOils trades at a wide premium to its peer group but we believe this is justified by the growth potential of the company.
Biodiesel production to expected to generate a surge in earnings as early as 2007. Our DCF model yields a value of PLN 170.0 per share, which would put the stock on a 20% premium to Polish industrials average 2007F P/E multiple of 19.0x.