AFC Energy plc (LON:AFC) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.
Q1: AFC Energy, can you just talk us through your latest note and explain the approach that you used in your valuation?
A1: We’ve issued a note earlier this week and we’ve updated our valuation following the initiation note that we dd back in September.
Since September, there’s been a number of positive developments in terms of new strategic collaborations with world leading organisations, there’s been investment to ensure capacity can be built up to satisfy demand and obviously the UK government has banned the sale of new petrol and diesel powered cars after 2030 and hybrid after 2035, that was previously set at 2040.
So, there’s been a lot of different market dynamic changes but the company have set themselves well with some future collaborations as well.
In terms of the approach we took to valuation, they obviously set up a collaboration with ABB recently and we’ve looked at the agreement and the platform the company would have with ABB and we’ve started looking at the potential valuation impact. So, we’ve looked at the major markets where ABB and the company work together and we’ve ascribed 131.5p of DCF value and that’s just considering them working together in the US, Canada, Germany, France, Italy, and Spain, obviously, ABB are in over 80 countries so the upside could be bigger. We’ve also ascribed some value to the EV opportunity, mainly in the UK and also the upside with diesel-powered generators as well and that opportunity gives us value of around 60p.
So, taking that the total of that gets us to a valuation of 191p which we think is centred more on this existing capital structure.
To add to that, there’s a lot of things we’ve not considered in the valuation as well so we’ve not put everything into that valuation at all, we’ve ignored wider markets with ABB and we’ve ignored product development with ABB as well. We’ve also haven’t looked at the temporary power market on a global basis which could be an opportunity, we’ve not put anything in for the AlkaMem as well and they’ve recently signed an agreement with Ricardo and we’ve not put anything in there.
Interesting as well, we’ve only looked at the EV charging market on passenger cars, Scania recently flagged that they would be using stationary fuel cells as an important component in the electric charging system. We think that would play well with the company as well so we’ve not considered the commercial vehicle charging market at this stage.
We have looked at the current opportunities that we see but there’s a lot that we’ve ignored in this valuation as well.
Q2: You’ve excluded quite a few things from the valuation, is that something that you’ll re-evaluate later down the line?
A2: Well, obviously we are looking at this on a long term basis and clearly the market is moving very quickly at the moment so as ever, there’s always risk attached but if some of these opportunities emerge more quickly then that’s something we’d have to consider in our valuation.
So, we are comforted that there’s a lot going on at the moment and the fact that the company has signed with such a big player such as ABB suggests that the technology is right and there at the right time. There’s a lot of opportunities that could come in quicker than what we currently expect.
Q3: For anyone looking at this stock, what are the next catalysts?
A3: We expect results next month from AFC Energy, there won’t be an awful lot in those results we don’t think as it clearly takes time for the revenue to be generated. So, we wouldn’t be expecting any ABB revenue in these results and clearly, we’d expect the business to be loss making as well and equally, we’d be expecting the company to be investing in these opportunities.
So, the results we don’t think will say a lot, the bigger catalyst is probably any new strategic collaborations, further progress on Extreme E etc., these are probably going to be the bigger catalysts. It’s the unscheduled strategic alliances and collaborations which we think will be more important.