Summary

KleenAir has been hit by a combination of problems – not all of them of its own
making. Prospects for the London LEZ were significantly reduced by the earlier
actions of TfL. This, and the weakening UK economy, diminish also the prospects
for other such schemes. Following KleenAir’s other problems, notably in its
supply chain and with key personnel, market sentiment now appears to await
results rather than give the benefit of any doubt to KleenAir. We
have materially lowered our forecasts and valuation.

Key points:

• The UK is already in a period of below-trend growth with a non-trivial risk
  of a full recession. Budget squeezes are likely to hit not only city councils
  but also corporates and their CSR programmes.

• We see little evidence yet that other cities are about to launch material
  LEZ schemes. Instead we find several who are continuing to watch the
  London experience with apparently mounting indifference. The risk is that
  LEZs are seen as revenues (from penalty charges) foregone at a time of
  national budget restraint. We have not modelled any business outside the
  London LEZ.

• Changes to TfL requirements and a new Mayor. The changes include a
  late exemption granted to HGVs over 12.5 tonnes which has materially
  lowered the potential total market size of the London LEZ. London’s new
  cost-conscious Mayor may look closely at the LEZ’s anticipated £10m pa
  operating costs.

• Key sales personnel and the technical Director left the company in March.
  KleenAir has effected some replacement to date but clearly those departures
  will have hit sales in the critical closing weeks of the first half.

• Broader supply chain but another currency risk. The existing supplier is
  Canadian and adverse currency movements were cited as contributing to
  the profit warning. The further supplier is based in Germany and we note
  the recent ECB decision to raise interest rates.

• Problems in the KleenAir supply chain and distribution channel caused the
  company to miss a number of orders. Given that compliance deadlines are
  now passed, those orders are now lost rather than deferred. KleenAir has
  added a further supplier although, again, has no exclusivity.

• The recent interim results quantified the extent of the profit warning given
  with the AGM statement in May. Turnover of some £250k was materially
  below management and our own expectations.

The full report can be accessed at:
http://reports.objectivecapital.com/ocreports/OC-UKHNW-full-objective-kleenair-july08.pdf

For all our previous comments on this company visit:
http://www.objectivecapital.co.uk/KSI.L.asp

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