LGB Investments has a regular programme of monitoring and meeting with companies which we have introduced to our clients as investment opportunities. Please note that this note is not research, it is not a buy list, and these are not recommendations. Clients with an advisory mandate in place with LGB may contact us for opinions on the companies mentioned here. LGB has received fees from some of the companies mentioned, and LGB directors and staff may hold positions in them.
Like many other areas of AIM, some of the clean energy stocks we have been following have had a torrid time over the last year. The huge rise in energy prices might have been expected to have driven valuations of alternative back up but it was overlaid by so much other bad sentiment that it has not really come through (and nor therefore is the modest retracing of oil prices we are currently seeing likely to have much effect). The recent share price recovery in some of the US-quoted names – which has of course already had some knock-on effect in London- makes it worth considering where we are now.
The trigger for the move in the US is the proposed Inflation Reduction Act which now looks like a done deal after Senator Manchin dropped his opposition. The bill includes a mix of tax and spending measures. As regards climate change there is a large ($369 billion) mix of tax breaks intended to bring down the costs of solar, wind, batteries, cars, heat pumps, and other clean technology. The idea is to drive as much renewable development as possible in the heaviest-polluting parts of the economy: transportation and electricity generation. Whilst environmentalists are not happy with some of the continuing support for natural gas it is still a huge step forwards. The bill is expected to be scheduled for a final vote later this week.
The act offers various tax credits. Some are aimed at encouraging clean energy companies to deploy more solar, wind, and batteries on the grid, extending existing credits for another ten years. Others seek to drive more consumption of renewables, providing incentives for installing heat pumps, adopting solar energy, and buying electric cars (for example, offering consumers $7,500 per new car and about $4,000 for a used car until 2032- though with some limitations on the source of the cars and batteries). There is another $60 billion in incentives and financing intended to boost US manufacturing of clean energy technologies. Most of those incentives will go to accelerating US manufacturing of solar panels, wind turbines, batteries, and critical minerals, and to help build the facilities that would make electric vehicles.
Although there is no equivalent direct catalyst here, and in any event the AIM-quoted shares are serving an international market not a UK market, there have been clear improvements in the fundamentals. The rise in fossil fuel prices, already well in place ahead of the Ukraine invasion, has shifted the economics and indeed the politics of decarbonisation as energy security has become a policy objective. Private companies have responded to public, political and shareholder pressure- and to government incentives- and stepped up their investment in alternatives. However, most of the share prices remain depressed. And the technologies continue to improve.
BP for example now plans to move towards spending half its capex budget on low carbon energy. Investors who missed it may find the webinar we recorded with James Patterson, BP’s head of hydrogen for Europe, interesting to help understand their priorities, and how they see the production of green hydrogen and ammonia, where there are already clear supply networks (particularly for ammonia) as a logical fit for their business model.
At LGB we have looked to invest in the theme of decarbonisation in the past two years and have found opportunities in a number of ways. This note looks specifically at energy provision, although there are also opportunities in food production and packaging that we have looked at, and in the wider market in for example solar infrastructure, recycling and minerals.
Fuel Cells
Falls in some of the alternative energy stock prices started before the decline in Nasdaq last summer. The fuel cell companies are a good example. In the USA Ballard peaked at $36.68 in February 2021 (now $7.82 having got as low as $5.83 ), Bloom Energy at $42.21 (now $20.03 having got as low as $12.89 ), Fuel Cell Energy at $26.01 (now $3.44,not far off its low of $3.04 ), and Plug Power a month earlier, in January 2021 at $66.87 (now $21.24 having got as low as $13.45 ).
On AIM the peaks were in January 2021: AFC at 83.5p (now 25.4p having got as low as 18.4p ), Ceres Power at £15.76 (now 577p having got as low as 492p ), and ITM at 682p (now 201p having got as low as 171p ).
At its current share price, AFC Energy, the fuel cell company we know the best, has a market cap of £187m, against a cash balance in April of £48.6m (their brokers are forecasting they will still have £40m at the year end in October. The company is seeing considerable interest in its modular “Power Tower” fuel cells from construction companies, seeking to trial replacements for diesel generators. ABB are working with them to provide back-up power for data centres. AFC’s fuel cells appear to be particularly flexible, not requiring pure (99.999%) hydrogen, and being able to run off ammonia, so having potential industrial and particularly marine use. Revenues are beginning to become meaningful albeit hard to predict (again, broker forecasts are around £11.5m for the year to October 2023).
Hydrogen & Ammonia Generation
Fuel cell technology has been around for a long time. There are meaningful technical challenges- operating temperatures, degradation of the electrolyser membranes- but it does seem that progress is being made. In the electrolyser market (i.e. for running cells backwards to produce hydrogen from surplus power) we have been following Clean Power Hydrogen (CPH2), which came to the market late last year at 45p, and is currently trading around 50p. CPH2, which has the technology for a membrane-free electrolyser, which they are warranting has a far longer life than membranes, has had some interesting validation including a licensing agreement with GHFG Ltd, which is embarking on a large hydrogen generation plan in Ireland, and from Atome Energy, which has a project (Villeta) and offtake agreement with the Paraguayan government to use surplus power from the vast Itaipu dam for hydrogen and ammonia production. The fuel cell companies themselves are also involved- ITM is largely a play on electrolysers and Ceres has a deal with Shell to develop them.
Atome itself is an interesting situation. Whilst it has no IP and operating in Paraguay comes with some unavoidable political risk, we were impressed with management and if they can bring the Villeta project to completion (or perhaps more likely, sell it to a major oil or chemical company) it will prove very lucrative. They have plans also to operate in Iceland. We do not have holders of the company but do keep an eye on it.
Batteries
There has been a lot of focus on the growing shortage of lithium. We do not look at lithium miners or refiners but we have taken an interest in alternative battery companies. Whilst lithium batteries have high energy intensity which makes them particularly useful for electric vehicles, not all battery uses require this. Static applications are (relatively) indifferent to weight and bulk. We met the Lancaster-based LiNa Energy last year, which may yet come to market. They have a design for a sodium ion battery, which has very cheap raw materials- their nearest peer, Faradion, a Sheffield Uni spin-off, was sold to Reliance of India last year for $100m. The Australian company Gelion listed on AIM late last year, and has been very quiet since then (results are due later this year but progress in commercialisation is more important than the numbers at this stage). The technology- Zinc Bromide batteries- is also reliant on relatively cheap materials, and is potentially very useful for storage applications. They are robust, low temperature, not a fire risk (unlike lithium). The company also has a performance additive for lithium batteries. The IPO, in December 2021 was at 153p. The share price is currently at 81.9p (initial excitement moved it to over £3!) The current market cap is £87m: they had over £20m cash at the end of 2021 albeit will be burning through that – their brokers see them as going cash negative in the year to June 2024.
Electric Vehicles
We have met two interesting EV companies, both operating in interesting niches. Saietta came to the market in July 2021 at 120p as a manufacturer of electric motors for scooters and very light vehicles, but has diversified into motors for heavier vehicles, particularly buses, though an interesting acquisition of facilities. The share price peaked at 292p and is currently at 149p (not far from its post IPO low of 140p). We do not have holders of the company but it feels as if it is one that at least initially got away! We recently took part in the IPO of Equipmake, a designer, assembler and manufacturer of electric bus drivetrains and chassis. The IPO raised less than originally hoped and the company has scaled back its ambitions- a rather sad commentary on the failure of large fund managers to deliver on their ESG commitments when it actually comes to investment?- but still appears to have identified an interesting niche. The founder and some of the key staff come out of the UK motorsport industry, which has been extremely successful in developing cutting edge technologies. The stock is quoted on the Acquis market at 6p-7p vs an IPO price of 4.25p.
Funds
There are many other companies, listed, and unlisted, that are investing in this transition. There will be huge infrastructure projects- not all of which will earn a return. There will be massive requirements to deliver the required minerals. Not all the technologies will work. It certainly makes sense to diversify exposures. We have been impressed by the approach taken by the Hydrogen One Capital Growth fund which is predominantly invested in unlisted assets, and is currently trading on a small discount to its NAV (90.2p vs just over 95p). Encouragingly, Jim Ratcliffe’s Ineos took a 10% cornerstone investment at the IPO last year.
