Bush backing boosts Renova

George W Bush is not noted for according a high political priority to environmental issues. But the American President makes an exception in the case of ethanol, which is produced as an alcohol derivative from grain and sugar, and can be easily blended with petrol to reduce carbon emissions from motor vehicles.

By promoting the use of ethanol, the US administration scores points with the green lobby for helping reduce emissions and with mid-western, Republican-voting farmers for providing them with an extra source of revenue. The new US Energy Policy Act sets out to increase the compulsory use of renewable fuels in motor fuels from four billion gallons a year to 7.5 billion gallons by 2012.

Few are cheering louder than Chris Thomas and Fanton Chuck, respectively founding chairman and chief executive officer of Renova Energy, the London-based company which supplies ethanol for motor fuel in the Rocky Mountain states. Floated on AIM in June with a £7 million fundraising at 69p by broker Bell Lawrie, Renova has seen its shares surge on the back of an expansion programme that sees the company increase its annual production from six million to 100 million gallons within five years.

Chuck, 42, a former head of Asia Pacific energy for Deutsche Bank, holds 26.4 per cent of Renova, which was originally spawned by another company, Melrose Resources, to exploit ethanol potential. Chairman Thomas, 43, with 10.5 per cent of Renova, has been running Melrose’s US operations for seven years and is unequivocal in his reaction to the US legislation.

‘The ethanol industry in the US has been growing at an unprecedented rate in the last few years and this new legislation provides added stimulus to Renova’s growth,’ he enthuses. The company, whose operations are based in Wyoming, negotiates annual supply contracts from local farmers and provides a distribution network in the area – seen as constituting a significant entry barrier to would-be competitors – for retailers, who can obtain a 51 cents (30p) a gallon sales tax rebate for blending it with standard petrol.

At present, ethanol is typically mixed with petrol in a ten per cent blend, though modern ‘flexible fuel’ vehicles can take an 85 per cent blend, and Thomas says a 30 per cent ethanol blend requires no engine modifications and is a competitively-priced product. He also claims significant economies of scale, facilitating the hefty capacity increases he plans.

Renova, which turned a near-£500,000 loss into a £32,000 pre-tax profit in the year to March 2004, expects to report pre-tax profits of around £420,000 for 2004-05. Bell Lawrie sees consolidation in the current year depressing profits to £190,000 in 2005-06, but predicts a surge to £2.6 million pre-tax next year on turnover more than doubling to £15.5 million, with further dramatic gains in 2007-08 and 2008-09.

The company, which has some respectable institutional backing, has declared a progressive dividend policy, with significant payouts beginning with a maiden dividend to be declared in December. At 148.5p, more than double June’s float price, the shares could still repay a strong-nerved punt.