How alternative energy beat oil and gas on AIM in 2020

The potential for clean energy is enormous, but high valuations already price in expected growth, according to our AIM writer.

AIM-quoted healthcare and mining companies performed strongly last year, but it was the alternative energy subsector that soared during 2020. The London Stock Exchange groups alternative energy, and oil and gas companies into the energy sector, and the alternative energy companies are capitalised at twice the value of the oil and gas companies on AIM.

At the beginning of 2020, alternative energy had a market capitalisation of £1 billion and it increased to £7.1 billion by year-end. The share price rises have continued and the combined valuation of these companies has reached £8.1 billion.

There have been share issues by these companies, but the share prices of the top four companies have all at least trebled (see table below).

This performance contrasts with oil and gas companies, which had a market capitalisation of £6.2 billion at the beginning of 2020, falling to £3.6 billion at the end of the year.

There is one oil and gas company in the top 100 AIM companies, compared with four alternative energy companies – and two of those are in the top eight companies. Five of the top 10 companies were oil and gas companies in 2010.

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Changing over time

This is an example of how AIM has changed over the past decade. A decade ago, oil and gas companies accounted for one-fifth of the market capitalisation of AIM, while alternative energy companies were just over 1%. Oil and gas companies account for less than 3% of the current capitalisation of AIM.

More than £5 billion worth of shares were traded in alternative energy companies during 2020, compared with £3 billion for oil and gas companies. In 2019, there was £111 million worth of trading in alternative energy shares, which was less than one-quarter of the level in 2010.

The four largest AIM-quoted alternative energy companies, all of which are fuel cell developers, currently have a combined value of more than £7 billion, compared to just over £210 million around 10 years ago. These share prices have continued to rise this year.

Inspired Energy (LSE:INSE) and oil re-refining company Hydrodec (LSE:HYR) were the only companies in the subsector where the share price fell. Inspired is a company that helps companies to secure the best energy deals, so it is not like the other companies in the subsector.

There tend to be historical anomalies in sectors. Advance Energy (LSE:ADV) was previously biofuels company Clean Energy Brazil (albeit a long time ago) and it is still included in the subsector even though it is effectively an oil and gas company.

Most of the current alternative energy companies were quoted 10 years ago, when there were 17 in the subsector. That was a lower number than a few years earlier, when there had been a rush of the companies on to the market.

The make-up of the subsector was different in 2010. There were biofuels businesses, such as GTL Resources, Clean Energy Brazil and D1 Oils, and solar energy technology companies, including China-based Jetion Solar. Wave power technology developer Ocean Power Technologies moved to the Nasdaq, while other companies were acquired or decided to leave the AIM.

Battery technology developer Ilika (LSE:IKA) was included in the alternative energy subsector a decade ago and it has been moved to electronic and electrical equipment. The Ilika share price increased by 595% last year.

Most of the company’s revenues come from grants, but Stereax battery production should be scaled up by the beginning of 2022 and more significant revenues will flow through. There is also the longer-term potential for Goliath batteries for electric vehicles.

ITM Power (LSE:ITM) is the largest alternative energy company on the AIM. It joined in 2004 when it was valued at £45.7 million. Ceres Power (LSE:CWR) floated a few months later and was worth £66 million. This was a period when there were a flow of fuel cell developers joining the junior market. Investors subsequently lost patience and the share prices slumped.

The flotation backstory

In hindsight, these companies floated too early because ‘cleantech’ became a fashionable sector and there was over-optimism about the time it would take to generate revenues. An example of this is AFC Energy (LSE:AFC).

Back in 2008, the then house broker Blue Oar published research that forecast the fuel cell developer could generate revenues of £8.1 million in 2010. Revenues have been patchy and there have not been any in recent years. Even if all the revenues since 2008 were added up, they would not come to £8 million.

The fuel cell companies that could continue to attract the cash they required were the ones that maintained their AIM quotation. Proton Motor (LSE:PPS) had the backing of the entrepreneurial Nahab family, while ITM and Ceres had cash injections from large multinationals. In the case of ITM, it is gases supplier Linde, while Ceres has the backing of Bosch and Weichai Power.

Longer term, the share-price performance is not as impressive. The all-time share price high for ITM was in 2006, prior to last year’s increase, while AFC only passed its 2010 high at the end of 2020. The high for Ceres was in 2007 and that is still more than double the current share price. The Proton share price is still not back to its level at the time of flotation.

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Revenues remain small in relation to the market capitalisations of all the fuel cell companies and they have had to evolve their development strategies over the years. There are signs that revenues are set to gain significant momentum, though.

ITM focuses on electrolysers that can be used to generate the hydrogen to fuel vehicles. A 24MW electrolyser is being sold to 17.3% shareholder Linde. Energy infrastructure operator Snam subscribed £30 million for shares in ITM, which will be preferred supplier of the first 100MW of polymer electrolyte membrane electrolysis projects ordered by Snam.

Ceres has developed its SteelCell solid oxide fuel cells technology, and the focus is licensing this to global engineering and technology companies, including Bosch, Weichai and Doosan. There are combined heat and power, transport and distributed generation applications for the technology.

AFC has developed technology that can use less pure hydrogen, which can be generated using ammonia. The H-Power system provides power for rapid charging of vehicles. The first sales have been made. In recent weeks, strategic partnerships have been signed with ABB and Ricardo. ABB has energy storage and charging point technology, and a high-power electric vehicle charging product using AFC technology will be launched later this year. The collaboration with Ricardo will identify and develop new products.

Germany-based Proton has been developing its fuel cell technology for more than two decades and it floated in 2006. The technology can be used in buses, fork-lift trucks, vans, refuse trucks, river boats and stationary power systems. The majority of initial sales will come from stationary applications before a broadening of the customer base.

Prices at 14 January 2020. 

There are non-fuel cell companies in the subsector. Waste-to-energy technology supplier Eqtec (LSE:EQT) has developed its own gasification technology that can use various waste streams as feedstock to create syngas, which can be used to generate electricity.

Eqtec was the best performer in the subsector last year with a 2,150% gain. This year will be important. Arden forecasts 2021 revenues of £48.1 million, which will move the company into profit and make it highly cash generative. These revenues come from selling and installing the technology. Longer term, the income will come from owning stakes in the projects. Eqtec is also seeking to use its cash to acquire projects.

Even though it was last year’s best performer, Eqtec has significant upside because there are projects that are awaiting the go-ahead and news of progress could spark more share price rises.

The companies have taken advantage of rising share prices to make sure that they have the cash they require. Last year, ITM Power raised £172 million from a placing and open offer at 235p a share, which is not much more than one-third of the current price. The latest to raise money is PowerHouse Energy (LSE:PHE), which has technology to produce hydrogen from waste plastic. It raised £10 million at 5.5p a share.

Proton is the one company that has significant debt, and it may seek to use the recent rise in the share price to raise cash through a share issue. That will help to dilute the majority shareholder, which will be a positive for many investors. Arden has published its initial analyst note for Proton.

The future

The alternative energy companies are undoubtedly in an industry where there will be increasing demand for clean technology and fuels. The valuations are high and most of the companies will continue to lose money for the next couple of years at least. For example, ITM is trading on more than 100x its 2021-22 revenues, falling to 49x forecast revenues for 2022-23.

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Once these companies reach profitability there will be plenty of tax losses to use up, though.

The potential for clean and renewable energy technologies is enormous, but the share prices are already pricing in much of the initial growth expectations and there is no guarantee that those expectations will be met. Investors need to take a long-term view with these valuations.

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.