AFC Energy “outlook is increasingly bright” says Zeus Capital

AFC Energy

AFC Energy plc (LON:AFC) has announced an exciting contract with BK Gulf, that should ultimately significantly reduce the cost of delivering its H-Power system. The capacity for growth is significant, and should position AFC well to deliver on its current commercial pipeline during 2021 and beyond. We believe our forecasts are well underpinned at this juncture, and remain very comfortable with the investment thesis we set out in our initiation note from September. 

Manufacturing contract: AFC Energy has announced a manufacturing contract with Dubai based BK Gulf for the production of containerized and fitted out systems ready to accept AFC fuel cell stacks. The containers will be fabricated utilizing AFC Energy designs, with BK Gulf providing a fully value engineering solution looking at new ways of design and configuration which will reduce cost to AFC Energy and its customers. It is estimated that the quotes provided by BK Gulf are cheaper than UK based suppliers. Importantly, the fabrication facility located at Jebal Ali port in Dubai has scope to increase system fabrication to >100 units per annum, but without the need to invest in this scale up until orders are received.

Background on BK Gulf: BK Gulf is wholly owned by Dubai based Dutco Group – a family owned conglomerate with interests in construction, property development, energy and hospitality. BK Gulf, until recently, were the JV partner of Balfour Beatty in the Middle East. BK Gulf bought out Balfour Beatty in 2017 following a 40 year JV and currently have c6,000 engineers working across their business. AFC signed an MOU with Dutco in 2015 to explore the Hydrogen sector, and remained in touch cementing a new relationship with this agreement. 

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Outlook:  The outlook is increasingly 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 confirmed in its trading update earlier this month. 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. Indeed, it looks like the UK Government will bring forward its ban on selling petrol and diesel cars by 10 years from 2040 to 2030, which could further accelerate potential growth opportunities for AFC and its industry. We believe our forecast assumptions are well underpinned at this juncture. 

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 (£1.6bn) and Ceres (£1.3bn). This gap could close rapidly once sales take off.

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