Aventine Renewable Energy Holdings, Inc. (AVR): ARS concerns raises a liquidity question to already weak outlook - Goldman Sachs - February 22, 2008
News
In conjunction with its 4Q2007 earnings release, Aventine revealed that it owns $127.5 mn in student loan auction rate securities (ARS) that were originally purchased as cash equivalents but have now been caught up in the credit crunch and are no longer liquid. The company also stated that it has a near-equivalent amount of availability under its secured revolving credit facility. However, with cash inflows at minimal levels and the company still facing a hefty capital spending program to complete two plants currently under construction, the company stated it will likely either need to slow construction of the plants or seek new external sources of capital, or both.
Analysis
While we have had a negative view on ethanol crush spreads and a Cautious coverage view of the ethanol sector for most of the past year, an inability to fully access apparent cash equivalents is a new negative development for Aventine we had not contemplated. Based on our current somber ethanol margin outlook, we believe Aventine will need to find new sources of financing before year-end, unless it meaningfully curtails capital spending. We believe access to external capital markets will prove challenging for the ethanol sector, including Aventine.
Implications
After a brief rally following passage of Energy Bill in December 2007, the shares of Aventine and its ethanol sector peers have been under renewed selling pressure in 2008. Despite already trading at nearly a 30% discount to our replacement cost value estimate, we believe the new liquidity concerns will drive further near-term downside in its shares. While we have a Cautious ethanol coverage view, we are Neutral rated on Aventine, as we have seen even greater downside risk in Sell-rated peers Pacific Ethanol and VeraSun Energy. At this time, we are sticking with a Neutral rating on Aventine given its already sharp discount to RCV. Our price target is under review. |
