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AFC Energy “outlook remains bright” says Zeus Capital

AFC Energy plc (LON:AFC) has released a year end update, which summarises the key activities in what has been a successful year for the Group. The confirmation of commercial contracts to FY21e in excess of £1m already committed against our forecasts of £1.5m suggesting a likelihood these forecasts will be exceeded next year. We remain comfortable with our investment thesis and can see a clear near-term intrinsic value of 68p based on UK EV Charging and Distributed Power alone.

Year end update: AFC Energy has released a year end operational statement for the year ended 31 October. In essence there is no significant “new news” following our initiation note in late September. However, it is clear that there has been plenty of positive developments behind the scenes despite the challenging economic environment. Indeed, Adam Bond CEO quotes “Our balance sheet has never been stronger, our technology more ready, our pipeline more developed, the hydrogen market more validated and the need for sustainable energy more important.”

Commercial sales building: 2020 saw the conclusion of AFC Energy’s first commercial contracts with in excess of £1m contracted to be delivered during 2021. This comes from Extreme E and Julich as previously flagged, with income invoiced on several instalments that will be recognised in FY21e, which is consistent with our forecasts. The pipeline of opportunities continues to grow on the back of this, while the product range, particularly with regard to the adoption of ammonia as a preferred vector for the carriage of Hydrogen is also gaining momentum. Key work with strategic partners such as Extreme E, ACCIONA and De Nora as previously discussed is also progressing well, which we believe should deliver high quality revenue opportunities beyond FY21e.

Outlook:  The outlook remains bright, with a growing number of enquiries for its system validating the opportunity in the key target markets of construction, temporary power and ultra-rapid EV charging. Hydrogen is viewed as a firm component of the decarbonisation agenda for every developed nation, which should provide a strong basis for long term growth. While COVID-19 has had some disruption to overall supply chains, AFC did not furlough any staff or make redundancies during the last lockdown and saw minimal disruption to onsite activities.

Valuation observations: Our UK market projections for AFC Energy’s two current products give a 68p per share valuation with conservative assumptions. Success in overseas markets in the same segments would add multiples to this. As the group has only just started securing its first commercial sales its market capitalisation is a fraction of UK listed peers such as ITM (£1.216bn) and Ceres (£1.195bn). This gap could close rapidly once sales take off.