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SOO October 19, 2011

Solco Ltd Wholesaler of solar energy and pumping products Revenue guidance of $41m for FY2012 Facing short-term challenges that may turn into long-term advantages

A WA-based solar energy company, Solco is a wholesaler of panels, inverters and water pumps. Solar panels and inverters enable the harnessing of the suns energy for household, commercial and public use. Solar water pumps use solar energy to pump water out of wells, boreholes or rivers, and can be an important part of daily life in remote areas. Solco buys its products from a range of local and overseas suppliers and sells them to a large number of end-users. The company is also aiming to tap into the commercial projects segment through its Projects division. There is huge potential for Solco if it can establish itself as the go-to renewable energy provider for resource companies, agricultural businesses and government entities. The long-term view for renewable energy in Australia remains upbeat. To remain a net exporter of energy and maximise returns the power industry will need to consider renewable (including solar) a viable alternative for domestic users. The rate of advances in both photovoltaic (PV) and thermal panel technology is likely to increase. The federal government continues with its push for the carbon tax and consumers are worrying about the impact this could have on power bills and related expenses. In addition, subsidy programmes for the solar industry have been introduced to kick-start demand. Unfortunately, these may hurt more than help the industry as businesses become dependent on these subsidies or demand slumps once rebates (such as the solar hot water rebate) are removed. Solco hopes to gain market share within residential solar energy products and be a first mover into the non-residential market space, which only represents 1% of the entire Australian solar power market. Comparatively, it makes up 80% of the US solar market. Despite continual advances in solar technology, the cost of manufacturing solar PV panels, such as the ones sold on to end-users by Solco, is still too high to be competitive in urban areas. Dirtier sources of energy such as coal and natural gas are far cheaper relative to renewable sources of energy, and will remain so as gas and coal prices are subdued by the sluggish global economy. This combination of high cost of goods sold and modest demand will keep margins tight. The high Aussie dollar has helped bring down costs for the company, as it imports a significant portion of its stock. Yet it is best not to rely on volatile currency markets to predict future earnings. Solco expects revenue to be down 24% for FY2012 to $41m from $53.7m. If the Aussie falls back to below parity with the US dollar, estimated earnings could climb back up. Solcos share price is currently sitting at just under 10c, up from a low of 7.6c a share in June of this year. The balance sheet indicates a solid financial position for the company. Trade and other payables make up the bulk of liabilities, and there is no long-term debt. This stability, coupled with solar power becoming an economically viable alternative energy source, could make Solco a dominant player in the Australian energy industry.

Kosta Sinelnikov

2011

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