Hydrogen will play a big part in power generation but AFC Energy? Gary Newman writes...

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When it comes to new technology that is yet to become common place, being amongst the first to get involved doesn’t necessarily guarantee success, especially for early investors in smaller companies. That is particularly true in the green energy sector which is fast evolving, and some of the technology that has been developed will never make it to commercial production before it is superseded or a better alternative is found. Even if these small companies end up being involved in something which in years to come turns out to be huge and the technology becomes widespread, it is still possible to be too early and to burn through large amounts of cash over a number of years, usually via equity dilution and leaving little for anybody who put money in at the start. Now I know that Tom Winnifrith hates green energy (TW note: I am playing the zeitgeist in a small way but consider myself a filthy spiv for doing so! I am ashamed of myself for owning green shares), and when a ShareProphets reader asked us to take a look at AFC Energy (AFC) he passed it over to me...

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AFC specialises in alkaline fuel cells which use hydrogen to generate clean energy, and has developed its own technology that allows lower grade hydrogen to be converted into energy whilst using the minimum amount of precious metals possible – both of which play a big part in the economic viability of these types of fuel cells, as both high grade hydrogen and precious metals are very expensive, and have been prohibitively so in the past for this type of energy generation. The original product which AFC developed, called HydroX-Cell, has continued to progress and has been successfully scaled up to a commercial operation with a performance comparable to the leading PEM fuel cells, and the company is expecting to release these to the market in 2022. The company has also been making progress with its hydrogen powered, zero-emission, vehicle charging solutions, utilising the HydroX-Cell, and recently announced a collaboration with Extreme E (who were involved with setting up the FIA Formula E as well) to provide the power for the world’s first all-electric rally championship, which will be held in some very remote areas. Even the water by-product produced by this system will be used elsewhere. I’m no expert on the technical side of things with these fuel cells, nor do I think you really need to be, as it is more about understanding whether the technology has a place in the future, and if so, then how big potentially that will be.

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It sounds as though the company is making progress towards a commercial roll out in the future, and validation by Extreme E of the charging system would also likely attract interest in that, especially with the racing being shown on TV around the world – and AFC also has marketing and branding rights associated with the series. I personally can see the hydrogen power market being huge in the future, and that includes the use of the gas to generate power for charging conventional electric vehicles, alongside actual hydrogen fuelled models as well. Assuming that the AFC technology is as good as they claim and does reach the commercial roll out stage, it then really all comes down to the level of demand for it, as although this sector is growing rapidly, it is still relatively early days and we are years away from seeing mainstream adoption of it, certainly in terms of everybody owning an electric vehicle. The amount of competition is also crucial, as is the performance of the AFC products against any others that might come to market, and in addition to those already involved in the sector we are going to see a lot of very large companies getting involved. You only have to look to the likes of Royal Dutch Shell (RDSB) and the rapid expansion of its network of hydrogen stations across Europe and the US to see that company believes that the technology will play a big roll in the future. It has been a similar story with BP, which plans to pump more money into renewable energy and see a move away from fossil fuels. Only this weekend, we have also seen easyJet (EZJ) founder Stelios Haji-Ioannou in talks with a company called Easy Power International, which was recently set up with the aim of producing clean energy from waste, and is hoping that Stelios will get involved and allow it to use the ‘easy’ branding. So whilst it is great that the sector is getting so much attention, it always raises concerns that some of the smaller companies involved already could get pushed aside once hydrogen power really does take off and the multinationals enter the sector, with far more money, contacts and marketing power. So the biggest danger I see is that even if companies like AFC do get their products to market, just how big a slice of the pie will they get and will it be enough to justify the valuations currently being placed on them, and to generate a good return for shareholders?

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AFC has been around for quite a few years now and is trading at a market cap of £150 million and a share price of around 22p. In some sectors I would argue that if it hasn’t managed to achieve commercial sales in the amount of time it has had to do so, then it probably suggests there isn’t much demand for the product. But green energy is a bit different as it is still fairly new, and the use of hydrogen hasn’t yet been widely adopted, so there is still a chance that the tech that the company has could suddenly take off in popularity. But I would also argue that the level of market cap is already pricing in a degree of future success, which the company still needs to live up to – it is pointless coming up with some great technology and being one of the first to do so, if subsequently the company can’t monitise that to a level which generates decent returns for investors. I think the fact that the company recently managed to raise £31.6 million via a placing at 21.4p – although that was a 25% discount to the prevailing market price – shows that there is interest in the company and its tech. That money was raised via a mixture of institutional investors and a PrimaryBid offer, and it would appear that Schroders bought a substantial amount as its stake jumped to 7.66%, from under 5% previously, although most of the other large shareholders just seem to be nominee accounts holding on behalf of clients. Certainly I found it interesting that the company was able to raise so much money in the current market conditions, albeit at such a large discount. It means that the company now has enough funds in place to see it start to move into the manufacturing and commercialisation phase for its products/technology, and to support its ongoing costs of running the company on a daily basis, which resulted in it showing a net loss of £1.8 million for the six month period up until the end of April. In terms of its assets it has very little aside from cash in the bank, with very little value being attributed to anything else on the balance sheet, and NAV stood at just £4.8 million as at the last accounts and prior to the latest funding.

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When you compare that to the £150 million market cap it does show just how speculative this share is though, and how much value is being placed on its tech and eventual commercial success. I actually think that the technology here is quite interesting, but where I still have some doubts is how much of the market AFC will manage to secure and the future revenue streams that will come. So, I’d actually be more inclined to look again in a few years time. Assuming success, then obviously I’d expect to pay more for the shares at that point, but a lot of the risk would have disappeared. Currently, at this share price, I'll very much pass.

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