(Note 2 Aug: I intended to buy the stock on 31 July but shorted the stock by mistake. Bought the stock at 10.75 and exited the next day at a...

Weekly Superstock Scan 31 Jul - 4 Aug: Advanced Emissions Solutions, Inc (ADES)

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(Note 2 Aug: I intended to buy the stock on 31 July but shorted the stock by mistake. Bought the stock at 10.75 and exited the next day at average price of 11.04, a loss of 4.45%)

This week's superstock scan of the week is a bit later than usual. Although I have completed my scan on Saturday morning as usual, it was a frantic weekend and I only have time to blog on the potential superstock now.

The superstock of the week is Advanced Emissions Solutions, Inc (ADES). ADES is the holding company for ADA-ES, Inc. and is an owner in Tinuum Group, LLC. 






ADA-ES focus on emissions solutions for customer in the coal-fired power generation and industrial boiler industries. ADA-ES' solutions include M-Prove™ Coal Additive Technology, which reduces mercury emissions; Activated Carbon Injection equipment for mercury control; Dry Sorbent Injection equipment for acid gases; RESPond® Flue Gas Conditioning Technology to improve particulate capture in electrostatic precipitators; and other offerings in support of our customers’ emissions compliance strategies. 

ADES' 42.5% stake in Tinuum is a bit more interesting. Tinuum owns many coal-fired power using "refined coal". Most of them are leased to various operators interested in generating tax benefits. 

ADES has two reportable segments. The distributions and royalty from Tinuum group are under the 'Refined Coal' segment while the sales of equipment, chemicals and consulting services by ADA-ES are under the 'Emissions Control' segment.

Technical


ADES has been trading in a tight base since April 2017. Last week, price broke from the base with 1.5 times its average trading volume. The stock rose by more than 12% in one week.

There was no news or press release by the company in the week, so it is unknown why there is a surge in price.

Fundamentals


Including the current quarter, ADES reported 6 consecutive quarters of year-on-year EPS growth.

Less Uncertainty on Coal-Related Tax Equity Investments

In 2016, perspective tax equity investors were uneasy about coal-related tax equity investments due to the political and tax environment. There was a recent technical advance memorandum to a non-Tinuum tax equity investor by the IRS. The ADES management believes that this event validated Tinuum's approach and structure. ADES is able to reopen conversations with potential investors on the sideline and is optimistic about closing more Refined Coal facilities over the next few quarters.

Tinuum currently operates and leases out 14 RC facilities and there are potentially 14 more RC facilities to be added. Each facility would add between $5 million - $7 million annually till 2021.

 Growing 'Emission Control' Segment

ADES is focusing on the chemical business. It believes that ADES possesses superior patented technology that will allow it to take market share from its competitors. In the last quarter, chemical revenues were up 426% year-on-year, though it still remains a very small portion of ADES' overall revenue.


ADES estimate that the North American mercury control market consumes $400 million to $600 million of recurring consumables annually. While ADES only have a few percentage points of the market currently, it is targeting to increase its market share to 20% - 40%, or attain an annual revenue of approximately $100 million.

Successful Restructuring

ADES used to face problem in the past due to high operating costs. Restructuring of the company began in 2015 when the new management took over. In a year, the new management manage to cut operating cost by half from $40 million in 2015 to about $20 million run rate due based on the latest quarter figures. ADES is targeting to bring the figure down further to $13 million to $15 million.

Matrices
+ Low P/E - Based on the current quarter, the annualised EPS is $1.56. At last week's closing price, ADES is trading at a low P/E ratio of 6.8 times earnings.
- Large Float  - ADES has a float of 17.4 million. With an average trading volume of 160 thousand shares, the float is approximately 108 times its average trading volume.

Risk Factors/ Things I do not like


  • Lack of Long Term Visibility - The tax incentive program for refined coal will end by the end of 2021. After which, ADES may not receive any significant distribution from Tinuum. In addition, the equipment sales in the current earnings result are for legacy equipment contract and equipment revenue will taper off through the middle of 2018. 
  • Overhead Resistance - ADES reach a high of $12.11 in February this year. People who bought at that point may be waiting for a chance to finally break even and sell when price retest that level again, hence limiting the move of the stock.




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