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Hydrogen – brave new world or a pipedream?

Former City analyst Robin Hardy concludes his examination of the hydrogen sector by casting his net worldwide
May 12, 2022

We conclude our look at the green hydrogen (GH2) and fuel cell energy sub-sector with a look at a broader spread of international stocks operating in this space. In our previous articles we looked in depth at the leading UK-listed stocks Ceres Power (CWR) and ITM Power (ITM). One conclusion we reached was that this sector was at such a nascent stage and profitability was still so far out, anyone looking to invest here needed to take a portfolio approach and hold a number of stocks by size, location and technology bias. In this piece we offer brief profiles of half a dozen more stocks that could help form the basis of a portfolio that is more likely to capture the best investment gains from this very interesting area of green energy and de-carbonisation. We also take a tangential look at exposure to hydrogen et al.

US stocks

North American listed green energy stocks have seen even larger falls than the technology sector, unsurprising as end markets here remain tiny, many business models remain largely unproven, profitability is in the blue yonder, alternative power solutions are myriad and there is a seemingly endless stream of new stocks, the latter making competition for vital capital more intense. Distant profitability means reliance on DCF models for valuation (we have seen some racy assumptions used for long-term growth) and with benchmark yields now past 3 per cent (a six-fold increase in 18 months) pushing up discount rates, sustaining valuations has been near impossible. Investors are still edgy as evidenced by Plug Power’s precipitous fall on its recent quarterly figures.

Plug Power (US:PLUG) – the largest pure-play stock in the space ( valued at c.$11bn (£8.81bn)), this is a fuel cell and hydrogen business focused on lead battery replacement in materials handling machinery (eg, fork lift trucks) and long distance trucks. It is also a supplier of GH2, previously bought in but a range of electrolysis plants are under construction: 0.3 gigawatts (GW) by  the end of 2022 and 4GW by 2028 (1GW = 90,000 tonnes of GH2 per annum). While fast growing (up sixfold since 2016) and forecast to show revenues approaching $1bn, PLUG, typical of the sector, is still a heavy loss maker with negative EBIT margins of 30 per cent. However, breakeven is forecast in FY2024, with significant EBITDA in FY 2025 (>$550m),  which could almost double in 2026. The shares have fallen almost 80 per cent since early 2021, with 16 per cent on the recent first-quarter results, leaving the stock trading on c.16 times EBITDA by 2025 potentially meaning a single digit multiple within four years. There is also over $2bn of net cash held here (raised from five equity issues in 2020 and 2021), much more than the competition holds, and while risky and volatile, the valuation looks interesting. 

Bloom (US:BE) – another fuel cell stock but one focused on distributed electrical generation using existing natural and biogas infrastructure to power solid oxide cells. Valued at $2.4bn, its sales already are set to top $1bn in 2022 and is forecast to be EBITDA positive this year and PBT positive by 2024. Value here looks better with the stock trading on close to six times 2025 EBITDA but half of recommendations are only HOLD. This is likely because Bloom is out of cash and is likely to need more equity or to take on debt when rates are climbing although it is about to turn cash flow positive. It does feel that fuel cells are less attractive to investors than GH2 and that may explain some of the apparent cheapness but again, this looks interesting. 

Fuel Cell Energy (US:FCEL) – a smaller ($1.3bn market cap) and diverse business across a range of green energy solutions, perhaps too diverse. It operates in utility (as infill) and local distributed generation, CHPs, hydrogen distribution, carbon capture and hydrogen storage. Revenues are much lower than the previous two stocks at only around $130mn and breakeven looks only a possibility by 2025. Analysts are not fans, with no-one a buyer (half have HOLD and the others are sellers) and the stock has fallen 85 per cent in a little over a year, and still seems to have downwards momentum. Too much diversity and some might see FCEL as ‘sleeping with the enemy’ – it is involved in ‘blue’ hydrogen and carbon capture for fossil fuel companies making it far less green and that makes it hard to support a tech-stock style rating. 

Ballard Power Systems (CA:BLDP) – Canadian rather than US listed, this is another fuel cell manufacturer, the smallest of the group with $100mn of revenues, a figure that looks to have stalled and is unchanged since 2019. But a fivehold increase is in the consensus by 2025: a strong position in the Chinese fuel cell vehicle market coupled with fast changing government policy here looks to be the drivers. However, profitability is not on the horizon, with analysts trimming their forecasts and only two are buyers, even after an 80 per cent slump in the stock. Exposure to China could be an issue and no GH2 exposure looks to be a turn off. 

 

European stocks

European stocks in this space have fared a little better than their North American counterparts but have still tumbled in the last year: falls have been nearer 50 per cent than 80 per cent. Ratings were less extreme as, we surmise, valuations approaches were more cautious. They are generally much smaller than their transatlantic cousins and there is often concern (usually unwarranted) for UK investors over investing in European stocks. 

McPhy (FR:MCPHY) – a French stock almost entirely focused on EU markets (Germany, France and Italy). This is a business focused on GH2 via electrolyser manufacturing, hydrogen fuelling stations and GH2 storage. From only €13mn of revenues in 2021, a 10-fold increase is forecast by 2025 when breakeven EBITDA is also expected. Having a market cap of c.€500mn, even by 2025 the shares are trading on 60 times EBITDA but that ought to drop rapidly. Most analysts are positive but target prices show more limited scope for gains. 

SFC Energy (DE:F3C) – an interesting difference here is that this German operator is already profitable with a long history of large levels of deployment into the field and is focused on the less common direct methanol fuel cell (DMFC) sector. This uses pure alcohol rather than mains gas or complex-to-handle hydrogen which makes its devices truly portable. Trading on <15 times EBITDA to 2024 and two times EV/Sales, it is easy to see why SFG’s share price has avoided the sector slump and kept up positive momentum. Small scale at less than €400mn market value, this stock looks very interesting. 

Nel (OSL:NEL) – this Norwegian player is the world’s largest manufacturer of hydrogen electrolysers (operating since 1927) and a leading manufacturer of Hydrogen fuelling stations. Rising sales with a fourfold increase by 2025 lags others’ potential but EBITDA breakeven is forecast for 2024. However, the rating is still high at >60 times EBITDA by 2025 and the share price has recently been hit by some heavy selling by board members. This stock, however, has an interesting share price chart: if the spike and slump of 2021 is ironed out, there is a solid-looking longer-term trend suggesting scope for a positive TSR. 

 

NEL share price in € and trendline

Source: FactSet, Investors’ Chronicle

 

Anyone interested in much smaller stocks might look at Denmark’s Green Hydrogen Systems (DK:GREENH) or the UK’s Clean Power Hydrogen (CPH2).

Conclusions

It is easy to see the benefits of GH2 and the desire of governments globally to maximise its potential is strong. But compared with the scale of other green fuel industries, GH2 still feels like more of a cottage industry. In order to begin to challenge not only the established forms of hydrogen production but wind, solar, biomass, nuclear and scrubbed fossil fuels, vast sums of money will need to be invested – as we set out in our ITM article, every 1GW of capacity costs around £50mn and while the production costs of the ‘stacks’ is falling fast, the cost of land, buildings, manufacturing plant and physical housing of plant and hydrogen storage are more likely rising. 

In a recent note, Goldman Sachs reckoned that for the world to achieve carbon net zero using H2 would require a total investment in production of $5 trillion by 2050: the Energy Transitions Commission (ETC) puts the figure at $15 trillion. For scale, the entire market capitalisation of the FTSE 100 is just $2.2tn. Looking today, it is not clear from where such levels of investment will come. There does look to be a pipeline of new IPOs or SPACs (special purpose acquisition companies) bringing fresh names to the sector (eCombustibles, Lhyfe, Thyssenkrupp Hydrogen or Titan Hydrogen to name but a few) with Haffner raising €83mn in Paris and Clean Power Hydrogen £31mn on Aim already in 2022, but these are pin money. Raising additional funds after such a market slump will be uncomfortably dilutive. The sums required run at governmental funding levels and could fund schemes not available for private investment. 

 

Think dirty to get clean

Thinking tangentially, perhaps investors could look at today’s energy pariahs – the oil & gas companies. Shell’s (SHEL) £7bn quarterly profit (or a windfall tax on it) invested in green energy would go a long way to expanding GH2 and other markets. These businesses urgently need to change their spots and, almost like no others, have the resources and the existing infrastructure to deliver. Perhaps to get clean, investors need to think dirty. Alternatively, a stock such as Linde (US:LIN) a $150bn industrial gases business that is involved in the transition to GH2, is a leading operator of electrolysis plants and an investor in / strategic partner of ITM Power could provide a lower risk approach.

Hydrogen is transparently a fuel for the future and is the ultimate carbon-free, end-to-end fuel when dealing with GH2. The demand is there, policy is there and public support to rid the atmosphere of CO2 is there but today, and for at least the next five to eight years there is lack of capacity and a need for huge amounts of new investment. GH2 also has the advantage that any (even all) of the world’s future output can also be used to clean up dirty industrial processes, an ideal counter if one is worried about which green energy source will ultimately win out: nuclear fusion might eclipse all others. It is worth investing in, but: you need a portfolio, you must expect to have to top up with new stocks that emerge as the big winner is not always within the early movers and must expect additional funding calls. This sector is unlike technology, all stocks are fishing in the same pool, meaning the risk resides primarily in execution. 

There should be good money to be made in GH2 stocks from today’s levels but the timescales are long and volatility high, so direct investment in GH2 is best balanced with larger, established and transitioning stocks that have resources and existing strong earnings streams that should provide greater stability. Buying a fossil fuel stock to access green energy may appear counterintuitive but these businesses need to undertake rapid revolutionary change in order to stay relevant in a low carbon world. Go for a rich mix of a wide spread of pure GH2 along with established energy stocks for the best returns as these stocks have been around the block many times before.