Readers of my previous work may already know, that I believe that hydrogen will play an increasingly important role as a source and storage of energy. Whatever the use case, the first step must inevitably be the production of hydrogen. And to produce hydrogen, an electrolyzer is needed. That is where thyssenkrupp Nucera GmbH & Co KGaA (OTC:THYKF) comes into play. Following, I will refer to the company simply as “Nucera” in the interest of brevity.
The company now trades about a third below its IPO price. At these levels, I believe that, patience and a certain risk appetite provided, the stock may be an interesting investment opportunity. Below, I will explain my thesis.
Nucera has only been a public company for a few months, but its history (under different names) dates back to the early 1960ies. Today, parent Thyssenkrupp AG (OTCPK:TYEKF;OTCPK:TKAMY) remains the majority shareholder, with a little over 50 percent. Industrie de Nora SpA (listed in Milan under the ticker symbol DNR) owns another 25.9 percent of the company.
Nucera employs two different production techniques: chlor-alkali electrolysis and alkaline water electrolysis. Chlor-alkali electrolysis is the more “traditional” way to produce hydrogen. Nucera has decades of experience with the process. Alkaline water electrolysis, on the other hand, is more environmentally sustainable. The IEA expects this technology to become the predominant method to produce hydrogen by the end of the decade.
Alkaline water electrolysis, in particular, displays explosive growth. As per Q3, the segment’s revenue increased elevenfold. The company expects financial breakeven of the technology by no later than 2025. The fast pace of growth means that the two segments are almost equal in terms of sales by now over the first nine months of the fiscal year (alkaline water electrolysis: €240 million; chlor-alkali electrolysis: €254 million), with the new technology on track to be the sales leader by the end of the twelve-month period (the company’s fiscal year ends September 30th). Overall, Q3 revenue grew 90 percent YoY. The existing order backlog alone hints at revenue tripling by 2025. On top of primary sales, every sold machine also offers to opportunity to generate service revenues over its lifetime. That business offers high margins as well as rather predictable revenue streams. Going forward, I expect this revenue stream to gain in relative importance, too.
Obviously, Nucera is not the only company offering electrolysis solutions. Besides large integrated companies such as Linde plc (LIN), L’AirLiquide SA (OTCPK:AIQUF;OTCPK:AIQUY) or Iberdrola SA (OTCPK:IBDSF), which have hydrogen divisions, there are also some pure play hydrogen businesses such as Nel ASA (OTCPK:NLLSF;OTCPK:NLLSY), Plug Power Inc. (PLUG) or McPhy Energy SA (OTCPK:MPHYF).
What sets Nucera apart is that it is highly specialized and, crucially, profitable. The company reported an EBIT of €20 million during the first nine months of the fiscal year. For comparison: Nel generated a net loss of NOK226 million (currently about $20 million) on revenues of NOK 405 million (a little over $36 million) during the most recent quarter alone.
Plug Power may even fight for its continued existence, requiring significant capital injections. Then again, Plug Power, while also offering electrolysis solutions, has a different focus (namely fuell cells) than Nucera anyway.
Moreover, the company’s coffers are handsomely filled (cash and equivalents of €268 million as of June 30th, that does not include IPO proceeds of €526 million), while financial debt is minuscule (€17 million as of June 30th). In my view, Nucera has the healthiest balance sheet among publicly traded pure-play hydrogen companies.
The global hydrogen industry in general and Nucera in particular benefit from significant political tailwinds. Governments all over the world are incentivizing the use and production of (green) hydrogen. Important examples are the US DOE’s Clean Hydrogen Strategy and the EU’s Hydrogen Accelerator program.
Nucera in particular profits from orders in connection with the world’s largest hydrogen project: the Saudi Arabia’s Neom. Saudi Arabia is, arguably, the perfect place to produce green hydrogen. It offers the ideal environment: ample sun-hours (= availability of cheap solar energy), generous space and pre-existing transport infrastructure that can be adapted for hydrogen. Also, there is the political will to make it work. Neom is a passion project of the countries de facto leader, HRH Crown Prince Mohammad bin Salman al Saud. The countries top-down style of government (I am aware that one might use a different set of words here, but I am writing from a purely economic perspective) reduces the risk of local opposition stopping or delaying ambitious projects. Nucera is in an excellent position to establish itself as the go-to supplier for Saudi hydrogen projects, since the countries sovereign wealth fund PIF is a 6 percent shareholder (through an entity called “Energy Solutions Company”).
Furthermore, the company may soon profit from lowered energy costs in Germany, following announced government measures to curb energy costs for industrial users.
Naturally, no investment is without risks. There is of course the general risk of the global shift to hydrogen not meeting expectations. There is no guarantee that the political and economic environment remains positive for hydrogen. Climate and emission targets are man-made, not laws of nature.
One specific risk that should not be underestimated in my opinion is Nucera’s reliance on PFAS chemicals (= per- and polyfluoroalkyl substances). There are currently discussions on the EU level on restricting or banning the use of these kinds of substances. An EU PFAS-ban might have a significant impact on Nucera’s product lineup and necessary adjustments could lead to painful costs and delays. Recently, there have been positive developments in that regard, but the risk clearly remains and should be considered.
Hydrogen being somewhat of a “hyped” business, there is also the persisting risks of relatively hefty movements due to news reports or surprising results by other companies operating in the broader space, even such that are not directly comparable (as demonstrated recently by Plug Power dragging down the likes of Nel and Nucera, despite major differences in terms of their respective business models). The relatively limited freefloat, may make these spikes (in both directions) somewhat more pronounced.
Lastly, one should be aware that Nucera’s legal form is that of a GmbH & Co. KGaA under German law. That is roughly comparable to a common law limited partnership with a corporation serving as its general partner. Consequently, shareholders have fewer voting rights. Given the ownership structure, the practical relevance of that issue is fairly limited, of course, but I still believe it to be worth noting.
Valuation and Conclusion
So what is Nucera realistically worth? The market for electrolyzers is expected to grow rapidly in the coming years. Estimates range from $23.8 billion by 2028 over more than $45 billion by 2032 to more than $78 billion. Let us assume a middle estimate of a global market volume of around €40 billion towards the end of the decade/early 2030ies. A ten percent market share would translate to €4 billion in revenue. Given Nucera’s decades of experience with the construction and installation of especially large projects, I believe this to be a very realistic, even conservative, target. Long term, a ten percent profit margin overall strikes me as realistically achievable. If one were to assign an earnings multiple of 7.5 to 10, that translates to a market capitalization of €3 to €4 billion, which equals a price of €19.90 to €31.69 per share ($21.27 to $33.87 at current exchange rates). That represents an upside of 40 to 123 percent on reasonably conservative assumptions. Nucera is definitely a long term investment that only makes sense with a long investment horizon. For the patient investor, however, I believe that Nucera is an interesting investment at the current price. While I would normally be tempted to assign a strong buy rating, I will stick to “only” a buy on account of the long time horizon of my thesis.
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