21/09/05 (The Star) - Mesdaq counter Carotech Bhd's shares were activelytraded as its price rose seven sen, or 15.4%, to 52.5 sen yesterday onexpectations it will gain from a major expansion of capacity to producepalm oil-based biodiesel.

Carotech was positioned to capitalise on the projected huge demand forpalm oil-derived biofuel, a stock brokerage said in a report yesterday.Several brokerages including Hwang-DBS Securities and CS First Bostonissued bullish reports on Carotech yesterday.

It is expected that Carotech will expand its production capacity ofbiofuel by five to eight times, which will cost between RM100mil andRM150mil. This expansion could give rise to strong earnings growth in thenext three to four years.

Carotech is better known for its production of tocotrienols, a palmoil-based vitamin extract and this side of the business is doing well.

Despite having increased its capacity of tocotrienols to 40 tonnes a daythis year from 17 tonnes previously, Carotech still faces a backlog oforders of four to five months.

The company mainly extracts tocotrienols and carotene (vitamin A) fromcrude palm oil (CPO) while producing methyl ester and glycerine asby-products.

Initially, it sold the methyl ester as raw material to oleochemicalcompanies but it has recently started exporting the product to Europeanbiodiesel firms due to increasing demand, which resulted from high crudeoil prices and environmental regulations.

The European Union, for example, requires 2% biofuel usage by year's endand 5.75% by 2010.

Carotech runs the only sizeable biofuel plant in Malaysia that feeds onCPO, which may enable it to have a lower cost of production compared withthe biofuel plants being planned that feed on refined palm oil. Further,its refinery process is patented.

The company is estimated to be trading at a price/earnings ratio of 10times its calendar 2006 prospective earnings, which some brokers pitchedas reasonable considering it is the purest biofuel stock in the country.

The expansion plans for biofuel are also a catalyst for the share price ofparent company Hovid Bhd, which owns 51.1% of Carotech.

Hovid's share price was also up yesterday, ending the day eight sen higherat RM2.

A brokerage said the group was aware of the risks of the aggressiveexpansion plan in such a short period of time but was confident thatdemand for biodiesel and tocotrienols would continue to increase.