A small cap with huge potential
Growth at hydrogen play AFC Energy is poised for take-off in 2024. The stock could rocket
This stock is a highly speculative opportunity in the hydrogen sector. This may seem a waste of time. After all, hydrogen is still in its infancy and remains far more expensive than fossil fuels. And that’s the angle from which I have approached this idea. The returns could be tremendous if it secures even a sliver of the market. At this stage, hydrogen is not an economical or efficient alternative to fossil fuels owing to the energy required to produce the element. We are still a decade or more away from efficient green hydrogen. There are two main types of hydrogen: green hydrogen, which is produced using renewable energy, and blue hydrogen, made using fossil fuels such as natural gas.
In a perfect world, green hydrogen would be produced when the grid is in a state of oversupply. That usually tends to be on windy nights when there is lots of energy from wind power, but not enough demand to soak it up. Currently, when this happens power prices turn negative on the spot market and energy users are paid to take the excess from the grid. One of the biggest users of this cheap, green energy is pumped-storage power plants: giant reservoirs that work in much the same way as traditional hydroelectric plants, but with one key difference. When the water has passed through the facility, using gravity to turn turbines and generate power when demand is high, it’s pumped back up using cheap power when the grid is in a state of oversupply. These facilities are essentially giant batteries.
The production of green hydrogen when the market is oversupplied would lean on the same principle. Green hydrogen costs between €3 and €8 per kilogram (kg) today, according to consultancy PwC. That cost could halve by 2030 and fall to €1/kg in some regions by 2050 as the world gets better at balancing energy demand and supply from renewable sources.
Generating power
These costs suggest that hydrogen won’t be costcompetitive with fossil fuels for decades, even with a welldeveloped market. Therefore, it is unlikely that hydrogen will replace the entire diesel market. The future will be dominated by a mix of fuels. Diesel and petrol may remain relevant, alongside hydrogen vehicles and generators, battery electric-vehicles, and other alternatives. Our power system has transitioned from being mainly coal and natural gas-powered 50 years ago to a grid supported by several sources, including onshore wind, solar farms, and tidal energy. Similarly, the fuel market is likely to be split between several technologies in the future.
It’s against this backdrop that AFC Energy (Aim: AFC) is trying to develop its offering. AFC has been trying to create a sustainable business by providing what are essentially electricity generators powered by hydrogen. The global market for temporary and easily manoeuvrable generators is massive. These are usually powered by diesel and provide a temporary power source. They are most commonly found on construction sites and at large events, although they can also be used to provide back-up power after natural disasters. AFC is working to gain a toehold in this market, but its Power Tower units use hydrogen rather than diesel.
If a construction firm wants dependability and predictability, using hydrogen on a fixed-price contract rather than unpredictable diesel makes sense. It’s the same for large events. Event providers don’t want a big diesel generator in the middle of the event space, creating noise and pollution. Creating clean, green energy may be expensive today, but as the market grows, the cost will fall. AFC is unlikely to become a world-beating energy provider. But the stock could be a multibagger as AFC becomes a key player in an important and growing market.
This year will be a transformative one for the business as two key contracts start to deliver results. In November, AFC concluded an agreement with tool and construction-equipment rental firm Speedy Hire to develop a 50:50 joint venture called
Speedy Hydrogen Solutions. This venture has placed an initial order of £2m for AFC’s ten kilowatt (kw) fuel-cell Power Tower units, which will be rented out to customers in the construction sector. Speedy will provide the Tower and the hydrogen, allowing customers to rent a clean, green-energy solution. The project’s launch followed successful testing of several Power Tower units with major contractors, including Acciona, Kier and Keltbray, and demand is reportedly very strong. Last year, AFC also signed a distribution agreement with Saudi Arabia’s Zahid Group, which gives the latter exclusive distribution rights to AFC’s fuel-cell generators in Saudi Arabia and 16 other countries in the Middle East and North Africa.
A pivotal year
Thanks to these major deals, AFC’s growth is expected to take off in 2024, with sales hitting £6m, up from zero last year. As its partnerships expand and the adoption of hydrogen technology gets under way, its sales should rise at a compound annual rate of 81% between 2025 and 2030, according to analysts at investment bank Liberum. The same projections suggest AFC will break even on an earnings before interest and tax (EBIT) basis by 2028. A £27m order book for its technology supports these projections in the near term. With cash on the balance sheet of £18m, it has the resources to support this growth. Investment bank Peel Hunt and Liberum have pencilled in price targets for the stock of anywhere between 85p and 125p. That showcases the scale of the opportunity for investors.