Advent Technologies: Positive Alpha In Uncertain Times (ADN)

There are lots going on for Advent Technologies (NASDAQ:ADN) in the past few months given the rapid pace of adoption for hydrogen and the increasing need for it for energy resilience especially in Europe and the United States.

Investment thesis

I have previously written articles on Advent that elaborate more on the company’s business model and technology. The investment case for Advent is becoming increasingly compelling in my view and are detailed below:

1. With the recent notification that Advent will be receiving a significant amount of funding in relation to its Green HiPo project, this funding shows the confidence that the Greece and the EU has in Advent’s ability to execute and its hydrogen technology.
2. Advent’s partnership with Hyundai is moving on to the next phase while it is in technology assessment with a second global automaker. Furthermore, there are ongoing discussions with global conglomerates that act as further catalyst for the stock.
3. Management has set an ambitious revenue target for 2025, with strong growth in mind as it leverages on the huge and rapidly growing market opportunity in the hydrogen space.

Green HiPo update

As highlighted in my earlier article, Advent received notification of Euro 782 million for the IPCEI Green HiPo project, which shows the confidence that Greece and the EU has in Advent’s technology and ability to deliver.

Management gave some estimates as to what opportunity the Green HiPo project could bring. In the 6 years for the Green HiPo project, the company expects revenues from both electrolysers and fuel cells. Based on an assumption of 0.35% of market share of the 400 GW of capacity by 2030, this translates to Euro 350 million in revenue opportunity for Advent during the next 6 years. Furthermore, assuming a 0.07% market share of the 170 GW expected by 2030, the fuel cell revenues generated from the project is expected to be $205 million during the next 6 years.

New opportunities and collaborations

The most recent collaboration announced was a Memorandum of Understanding (“MoU”) signed with the New York State Energy Research and Development Authority, along with 60 other clean hydrogen partners. The consortium will collaborate towards the goal of enabling Northeast states in the United States to become one of the 4 planned regional clean hydrogen hubs in the United States. This will include states like New York, Massachusetts and Maine.

This consortium of partners will provide a foundation for a proposal involving a total funding opportunity of $8 billion available. The partners in the consortium include leaders in their own industries, OEMs of hydrogen technologies and even non-profit organisations and universities (The list can be found here).

Among some of the goals of the consortium, the main goal is for the consortium to come up with a plan for the hydrogen hub that would result in lower emissions, while producing clean and safe hydrogen energy and providing energy resilience, and eventually meet the individual states goals of net-zero carbon emissions.

As a result of its focus on green hydrogen, it is crucial for the plan to integrate renewable energy like wind and solar for the production of hydrogen. Also, it is expected that the eventual clean hydrogen be used for a variety of use cases like in heavy duty vehicles and power generation, amongst others.

For Advent, I think that this collaboration could bring greater awareness to the company, especially in the United States, and prove that its hydrogen technology can help decarbonisation efforts globally to reduce reliance on fossil fuels.

Another MoU signed was with Dannar, a company that is leading in production and batteries and storage systems, with an emphasis on mobile power. The partnership aims to help Dannar utilise Advent’s fuel cell technology to transform its mobile charging stations into one that has zero emissions.

I think that this will demonstrate the application of Advent’s next generation Membrane Electrode Assembly (“MEA”), which is currently under development within the framework of L’Innovator, to capture more market share in the power generation and mobility markets.

As Dannar has been known for producing mobile power stations for first responder teams, Dannar’s recognition and partnership with Advent to utilise clean energy brings additional evidence that Advent holds a leading position in the hydrogen technology and fuel cell market.

Next, Advent announced that they have signed a MoU with DEPA Commercial. This MoU signed with Greece’s leading pipeline gas and LNG importer seeks to collaborate on the production of green hydrogen as a fuel and to create a hub for the promotion of hydrogen technologies. This collaboration could help to diversify the energy mix in Greece and increase the energy security in the country to reduce reliance on natural gas, which we now know makes the country vulnerable to the external environment.

Technology assessment with global automakers and discussions with global conglomerates

As elaborated in my earlier article, Advent has previously announced that Hyundai was one of the global automotive manufacturers that has been going through the technology assessment phase with Advent. Based on the agreement, Hyundai hopes to use Advent’s next-gen MEA technology to decarbonize sectors with high carbon footprint.

As Advent has stated in the second quarter results, the technology assessment with Hyundai has completed the first phase and in the following phase, the two companies will be determining the appropriate milestones and targets as well as requirements for products that should be achieved.

In the investor day presentation, management also stated that other than this current partnership with Hyundai and a second global automaker, they continue to be in discussions with global conglomerates. The opportunity in these discussions are huge and span a wide range of sectors from aviation to marine.

Clear plans for 2022 & 2023, and an ambitious 2025 target

During Advent’s investor day, the company’s CEO explained the company’s near term strategy. In 2022, the focus is on engaging the market. With the announcement of availability of its next-gen MEAs earlier in the year, management has been focused on gaining traction and improving awareness of this next-gen MEA. As a result, the company managed to enter into technology assessment with Hyundai and another large global automotive manufacturer. On top of that, it signed multiple MoUs and also received notification of Euro 782 million funding for the HiPo project.

For 2023 and beyond, the priority will then be shifted towards the next phase of growth. Firstly, the company will be scaling up capacity in its markets in North America, Europe and Greece. Second, the company will commercialize its next generation MEA that it jointly developed with the US Department of Energy and aims to bring in more partnerships with regards to the new technology. Next, the company will focus on bringing in more joint development and collaborations with large global players as the market becomes more confident in the value add that Advent’s hydrogen technology can bring and potentially new strategic transactions as well.

In addition, I think this is the first time Advent is communicating a 2025 revenue target of $500 million. Given that Advent has only generated $7 million revenues in 2021, $23 million revenues expected in 2022, and will see significant ramp up in the years to come, this ambitious revenue target signals management’s intentions to grow rapidly as hydrogen adoption ramps up. This translates to a 20x growth in revenues from 2022 by 2025 if achieved. While not guaranteed, there is currently a pipeline of projects highlighted above to make this happen, and would imply that management is rather confident in one of its large automotive OEMs in technology assessment to convert to an actual sales agreement, in my view. Also, other ways to achieve this revenue target comes from targeting the stationary power market, mobility market, and importantly, the opportunity from green HiPo from fuel cells and electrolyzers.

Valuation

Although the global macroeconomic situation seems to be rather uncertain at the moment, I think that Advent could be one stock that could generate positive alpha given the potential catalysts that may materialize.

For my valuation model for Advent, I have used a base case scenario and an optimistic upside scenario for the company given the fluid nature of the upside Advent could capture in the years to come. Given that management has a target for 2025, I assume an 80% chance of that materializing and assume 2.4 GW of capacity and EBITDA margin of 21% by 2025. Furthermore, I lower my 2025F EBITDA multiple of 19x to 15x to reflect the multiple contraction we are seeing today.

As such, my base case target price is $11.50, implying 280% potential upside from current levels. I think that the base case is skewed toward a more conservative estimate and the stock could see further upside from this base case.

In my optimistic upside scenario, this assumes that management is able to meet its 2025 revenue target and focuses on the 1,300 GW of TAM in 2040 and assumed 20% EBITDA margins. Again, my 2025F multiples are lowered from 38x to 30x to reflect the multiple contraction we are seeing today. After discounting this to present value, my optimistic upside target price is $21.10. This implies an upside opportunity of approximately 600% if the optimistic upside scenario materializes.

Risks

Operational and execution risks

Advent is a relatively young and early stage company, with rapid scaling needed from now until 2025 needed if it were to meet its 2025 targets. As a result, there are execution risks that we need to be wary of. Is the management capable to scale up operations efficiently and according to the timeline specified? Are there are risks that their operational targets and timelines may fall short? These are questions that we need to ask as Advent needs to give investors confidence in their ability to execute.

Shortfall in funding

Although I do think that the company has sufficient cash for the next 12 months as the management has stated in the 2Q22 call and due to the significant funding that comes from the HiPo project notification recently, there are definitely still risks that the company may run out of cash it needs for its operations or to scale up. Further out after the next 12 months, should the operating environment turn for the worse or if capital and liquidity in the market dries up, this could increase the risk that Advent is unable to raise capital when it requires it. As such, this is a risk that needs to be monitored over time as the company expands and scales up its operations.

Concentration risks

As a relatively small company with minimal revenues due to its early stage, the 2 large global automotive companies that it announced were in the technology assessment phase are material to its business. If either one of them does not materialize or if they end up being an actual customer, this could bring significant downside and upside to Advent respectively. As such, due to the large nature of these two customers, they form some sort of concentration risk where the news flow from these 2 potential customers may drastically affect share price and sentiment.

Conclusion

Advent is seeing the stars align as it sees a huge opportunity from the Green HiPo project over the 6 year period, continued progress with its partnership with Hyundai and further upside from the second global automaker it is collaborating with along with other discussions with global conglomerates. Furthermore, the management has communicated a rather aggressive growth plan to achieve its 2025 revenue targets, which could bring a huge upside if materialized. As such, my base case target price is $11.50, implying 280% potential upside from current levels, and if things go really well for the company, there is further upside in the optimistic upside scenario. Given the potential for positive catalysts in the near term, Advent could be one stock that is able to generate positive alpha in an uncertain macroeconomic environment.