21/05/2008 - 22:00

Share spiral exposes weaknesses

21/05/2008 - 22:00


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In the share market, it is extremely rare for anyone to be compelled to buy a share.

Share spiral exposes weaknesses

In the share market, it is extremely rare for anyone to be compelled to buy a share.

This might only occur when someone has sold a share that they don't own and then needs to buy it back to cover their position.

However in any type of market condition, there is always someone who, for one reason or another, has to sell.

In a sharp market downturn, like the fivemonth slump we experienced up until March, many folks will sell because they are trying to avoid further losses or because they have borrowed to buy shares and their bank forces the sale.

In this situation, long-term investors who are comfortable to hold their stock must be patient and watch as the shares keep falling while their weaker fellow shareholders dive for cover and in doing so, push share prices down.

This time-honoured process eventually produces some spectacular, once-in-a-lifetime types of buying opportunities, on which stronger investors are able to capitalise.

This is what we have been witnessing during April and May.

During the most recent share market rout, the ANZ Bank ended up owning quite an interesting portfolio of shares as a result of its funding of a leveraged account run by failed broker, Opes Prime.

Selling by overleveraged investors and their financial backers has exacerbated the most recent downward spiral and many otherwise good companies have been hit by selling from these sources.

Briefcase has been mystified at the market weakness of both profitable and strongly growing IT service company, UXC Ltd and junior oil producer Arc Energy Ltd, despite AWE's takeover bid for that company.

I have previously made an assumption that many UXC shareholders may have been clients of troubled broking firm, Tricom, and some of their stock may have been leveraged.

Well, last week we discovered that ANZ owns 6.3 per cent of UXC as a result of its run in with Opes Prime and it also has in interest in Arc Energy.

UXC presently trades on a prospective price to earnings ratio of about 8.5 times and has a dividend yield of about 7.8 per cent.

The murky world of the Opes Prime web and its ramifications is a mystery to Briefcase, but this news provides some rationale and also confidence that the share price weakness of both stocks has resulted from financial troubles of their shareholders and not as a result of any fundamental problems with the actual companies themselves.

In addition, a close look at trading volumes of Arc Energy shows much higher turnover than normal over the past six weeks.

Clearly one or two larger shareholders are heading for the exit sign, and this selling pressure is holding the share price down and providing a great buying opportunity for everyone else.

Once this news sinks in, these companies should rally strongly, just as Compass Resources Ltd has done, following the sorting out of its overhanging stock position.

--- Another promising company to have suffered from untimely selling pressure by one of its larger shareholders is local natural gas vehicle systems manufacturer, Advance Engine Components.

ACE designs, assembles and markets natural gas (methane) vehicle systems, along with associated spare parts and technical services to original equipment manufacturers (OEM) involved in vehicle assembly and engine manufacturing.

Systems are either retrofitted to diesel engines or, preferably, designed for OEM assembly lines, enabling engines to run on natural gas, which is supplied as compressed natural gas or liquid natural gas.

While competitors use mechanical alternatives, ACE's inherently simple drive-by-wire electronics system, ensures optimal engine performance at all times, cutting back fuel consumption when not required and adding to fuel economy and further reducing emissions by switching to three cylinder operation (for a six-cylinder engine) when the engine is idling.

The technology is applicable to all forms of gas fuel, such as natural gas and Hythane.

The company has begun to generate significant revenues from the sale of its electronic, natural gas injection and control systems to engine manufacturers in China and elsewhere.

This system enables large diesel engines to run on natural gas.

Original equipment manufacturers are setting up their production lines to make new engines which are natural gas ready for use in busses and trucks.

Briefcase wonders how long it will be before Rio Tinto and BHP convert their iron ore trucks and rail stock to run on gas rather than the hugely expensive diesel.

Use of gas would more than halve their running costs, saving millions each year.

As the price of diesel continues to rise and governments mandate cleaner fuels, the search for alternative, less polluting and lower-cost fuels, like natural gas, gets more intense.

Natural gas is relatively more abundant than oil and can often be sourced from otherwise-stranded sources, ensuring that it will undergo strong growth as a transport fuel, especially for municipal transport.

Natural gas can be compressed or used as liquid natural gas to give the sort of mileage per tank that is normally associated with a tank of diesel.

ACE budgets to achieve positive operational cash flow late in 2008 and has just announced a $500,000 deal to sell engines to Thailand over the next two or three months; and it has received a $240,000 grant for engine development work from the federal government.

The company's activities provide exposure to global markets for an environmentally friendly, lowcost alternative fuel technology.

Major inroads to the booming Chinese market have been facilitated by its shareholder the Koo Group, a Taiwanese industrial conglomerate.

Briefcase estimates that contracts for supply of natural gas vehicle systems with two of China's largest engine manufacturers will boost ACE's sales during 2008.

The addition of a third Chinese vehicle manufacturer, Dongfeng Automotive Group, to its list of active customers should lift sales into 2009.

The company is working to develop markets for gas-powered truck and bus operations, advancing several initiatives in Australia, India, Pakistan, Thailand, Bangladesh, France, the US and the Netherlands.

Meanwhile, its high-margin, spare part sales will grow exponentially as the number of vehicles in operation worldwide expands.

Vehicles powered by methane are cheaper to run and emit significantly lower levels of pollution than those which are diesel powered.

ACE is initially targeting the market for municipal buses, which can be refuelled from central depots.

Sales of natural gas vehicle systems are expected to grow as refuelling infrastructure expands in target markets, enabling long haul and regional truck companies to take advantage of this lower cost, less polluting technology.

For example, the Indian capital, Delhi, presently has about 250,000 vehicles using natural gas engines and it has over 200 depots selling compressed natural gas.

The key to ACE's leading edge natural gas vehicle systems is its patented electronic control unit, which monitors each cylinder to ensure the optimum air/fuel mix, enabling the engine to operate at higher power outputs with minimal additional wiring or piping.

ACE's on-line, precision natural gas vehicle system ensures efficient fuel burning, which cuts emissions, meeting Euro 4 standards for carbon monoxide, nitrogen oxides and non-methane hydrocarbons while meeting or exceeding power and torque outputs of the original, base diesel engine.

The ACE system enables engines to meet Euro 4 emission standards, well ahead of requirements which currently stipulate Euro 2 or 3 emission standards.

Component parts of the natural gas vehicle systems are manufactured by third parties and are assembled either at ACE's facility in Perth or at a newly established facility in China.

- The author owns shares in Advanced Engine Components, Arc Energy and UXC Ltd.


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