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Every investor hopes to find the next 5x or 10x opportunity and to do that, investors need to spot winners early and invest in them when they are much smaller and early stage companies. This usually involves much higher risks and sometimes can be more speculative in nature than larger market capitalisation companies but as a professional who manages institutional portfolios, I think that individual retail portfolios should also include an allocation to smaller market capitalisation companies that have higher growth opportunities, but also higher risks.
Advent Technologies (NASDAQ:ADN) in my view is a very promising small and early stage company. It recently listed on the Nasdaq in February of 2021 and currently has a market capitalisation of $186 million as at time of this initiation article. As such, Advent is considered a micro cap company and as highlighted could provide 5x or even 10x returns in the long term but could be rather volatile and risky and thus are more for those with higher risk tolerance or for the higher risk part of portfolios.
Investment thesis
My investment thesis for Advent includes the following:
1. Advent’s HT-PEM fuel cell offerings and MEAs have a significant competitive advantage to peers and its next generation MEA could see much more significant improvement from current MEAs.
2. Advent has executed synergistic acquisitions which helps to improve its capabilities and expand its technical team.
3. Advent is seeing growing traction in interests, agreements with potential customers, distributors and enter partnerships with the US Department of Energy to develop next generation MEA with huge step-up benefits.
My base case target price for Advent of $17 implies a 5x upside potential at current levels while the optimistic upside scenario of $34 implies 10x upside potential from current levels
Overview
Advent is an early stage company that develops, manufactures and assembles both complete fuel cell systems as well as the critical components that drives the performance of hydrogen fuel cells as well as other energy systems.
Advent specialises on the development and manufacturing of high temperature proton exchange membranes (HT-PEM) as well as fuel cell systems (More on HT-PEM below). In terms of the markets the company focuses on, they currently focus on the off-grid as well as portable power markets, with plan to further penetrate into the mobility market. Specifically, Advent has successfully installed the Advent fuel cell system in telecom towers, energy infrastructure where Advent’s products help the oil and gas industry reduce methane emissions, and portable power for demanding situations like defense personnel or emergency response units.
Advent currently has a headquarters in the US, where it is also developing an R&D facility as well as product development facility that will open in 2022. It also has MEA fabrication and system production facilities in the US, Germany, Denmark and Greece.
The goal of Advent is to be a leading provider of HT-PEMs, HT-PEM based membrane electrode assemblies (MEAs), fuel cell systems and other applications like electrolyzers and flow batteries.
Advent’s strategy is to scale up in the US and Europe markets, and prioritise investments in scaling up MEA volumes, new product developments and to optimise production to improve unit economics.
Advent’s core products
Fuel cell systems currently form the majority of Advent’s revenues. These fuel cells are for portable and stationary applications with a range between 20W and 20kW. As highlighted earlier, these fuel cells are used in telecom towers, defense and energy infrastructure.
In addition, Advent’s next generation fuel cells have a range of 15kW to 1MW, which will focus on targeting the mobility segment, like heavy duty vehicles, marine, aerospace, amongst other applications. Advent plans to enter agreements with Tier 1 suppliers and OEMs to bring its HT-PEM fuel cells to the mobility segment. Advent also will be a provider of MEAs and core technology, primarily through licensing.
Lastly, Advent develops and manufactures the MEA, which is a critical component of the fuel cell. Advent’s MEA enables a robust, long lasting, and low-cost fuel cell product, relative to LT-PEM technologies. On top of offering MEA through its own fuel cell systems, it also offers MEA to third party manufacturers or fuel cells. Advent expects that the MEA market will grow rapidly more third party fuel cell manufacturers produce more fuel cells, especially for the mobility market.
Competitive advantages of Advent’s HT-PEM offering
When comparing Advent’s HT-PEM offering to LT-PEMs, the advantage of Advent arises from the development of its own products and technologies through the principle of “Any Fuel” and “Anywhere”.
When comparing to LT-PEMs, which needs high purity hydrogen to work, Advent’s HT-PEMs does not have this restriction. This is because Advent’s HT-PEMs allow for the use of “Any Fuel”. As such, Advent’s products are able to utilise hydrogen carrier fuels that are lower cost and much more abundant, including methanol, natural gas, liquid organic hydrogen carriers, as well as dimethyl ether and renewable biofuels. In turn, these hydrogen carrier fuels do not need new, expensive infrastructure, but rather can utilise the existing available infrastructure. This is a competitive advantage in Advent’s HT-PEM which enables the use of existing infrastructure without the need for an expensive build out of new ones and thereby reducing the transport cost of hydrogen. I think that the key strength this will bring to Advent is that its technologies and systems can be rolled out today as compared to other LT-PEM peers which need to roll out 5 to 10 years down the road due to the need to build and expand new infrastructure like extensive hydrogen networks, storage infrastructure. Furthermore, after looking deeper into some of the alternative hydrogen carrier fuels Advent systems can use, I find methanol to be an increasingly significant role as a cost competitive, scalable and near term low carbon alternative.
Another competitive advantage of Advent’s HT-PEM fuel cells is that they have the ability to be operated in a wide range of geographies, weather or temperatures, which Advent terms “Anywhere”. LT-PEM fuel cells are known to experience performance loss due to carbon monoxide, where levels as low as 10 ppm can cause performance degradation. However, Advent’s HT-PEM fuel cells can withstand 1% to 4% carbon monoxide levels, which adds up to it being able to work well at 20,000 ppm of carbon monoxide. In addition, Advent’s HT-PEM can operate in temperatures as low as -20°C and up to 55°C, and in humid, polluted environments as well. However, LT-PEM fuel cells tend to perform worse in high temperatures, dry climates, polluted environments.
Furthermore, HT-PEM fuel cells have better heat management than LT-PEM fuel cells. Advent’s next generation MEA-based fuel cells can operate between 80°C and 240°C. With a larger temperature differential with the external environment, only a small radiator is needed. However, for LT-PEM fuel cells, they run at under 85°C, and as such require a larger radiator to maintain necessary operating temperatures for operation of the LT-PEM fuel cell.
Advent currently has 190 patents across the US and internationally, with a large number of patents focused on membranes, MEAs and electrodes which are part of its own products. Some of its patents highlighted in its SEC filings which I will highlight is within the MEA segment, Advent has exclusive rights to use “TPS®”, which was obtained through patents filed by Advent’s founders, as well as “PBI” technology, which Advent is a “selective licensee” and has the exclusive rights for commercial sale of MEA using PBI technology.
To date, more than 300,000 TPS® and PBI MEAs have been sold for a wide range of applications like defense, mobility, telecom, among others, which shows a positive early stage adoption of Advent’s offerings. I am of the opinion that these patents could provide Advent with the necessary competitive advantage to subsequently win larger commercial contracts.
Synergistic acquisitions
Advent acquired UltraCell, the fuel cell division of Bren-Tronics in February of 2021. As highlighted by UltraCell, it is a market leader in the lightweight fuel cells for the portable power market and currently has working products and leading technology. UltraCell’s products are the only NATO approved fuel cell products that are US made and its products are deployed by both the military as well as security agencies. Of note, there are 3 other NATO allies currently in the testing phase for UltraCell’s systems.
Following the UltraCell acquisition, Advent also made an acquisition of SerEnergy A/S and fischer eco solutions GmbH (FES). SerEnergy is a leading manufacturer of HT-PEM fuel cells globally with more than 15 years of experience in shipping thousands of systems, and it has facilities in both Denmark and Philippines. With its focus on off grid fuel cell systems, SerEnergy is thus a great fit for Advent’s current portfolio.
FES, which was under the fischer Group is in the business of fuel cell stack assembly and testing and the manufacturing of critical fuel cell components like MEAs, reformers etc.
Interestingly, based on my checks on the filings on Bloomberg, the Fischer family took up a 10% stake in Advent, which to me, further gives me confidence in Advent’s future potential.
Furthermore, the General Manager of fischer Group had this to say about Advent and the acquisition of FES.
The Fischer family is pleased with the merger and the cooperation with Advent. From the start we were aware of Advent’s strong technology, and during the past months we have gotten to know the people who drive the company. They are uniquely qualified to take the fuel cell business to the next level. Advent is already a key player in the decarbonization of energy and now, with this merger, the company is ready to move forward fast. As a major shareholder, the Fischer family is excited to share in that growth potential.”
I think that these acquisitions are made rather strategically to enhance the overall offerings and capabilities of Advent. With talented and innovative team and improved manufacturing capabilities, I can see the great synergies from the acquisitions of UltraCell, SerEnergy, and FES.
Commercial partnerships, progress and agreements
First, Advent announced that its two projects, The White Dragon and Green HiPo projects, which involves its innovative fuel cell technologies, were approved after evaluation by a special Interministerial Committee of Experts and the government in Greece.
The goal of these two projects was really to replace the largest coal fired plants in Greece. Through the use of large scale renewable solar energy, the project aims to produce green hydrogen via electrolysis and to use Advent’s HT-PEM fuel cells to then generate clean electricity and heat. Since Advent’s fuel cells is able to generate both electricity and heat, these 2 projects aim to produce 4.65 GW of green hydrogen as well as fuel cell heat and power production of 400 MW. These projects that have just been approved will then next move on to the EU level for approvals.
Second, Advent announced an agreement with Daiden to accelerate distribution of methanol based fuel cells in Malaysia. Daiden’s intention is to be distributor of Advent’s fuel cell offerings in Malaysia. I think that although this does not lead to a concrete customer, having a distributor in an international market helps Advent penetrate into Malaysia’s telecom as well as utility operators. Furthermore, Advent could also look to incorporate its own fuel cell systems into Daiden’s existing portfolio of equipment and systems.
Daiden’s director emphasised on the attractiveness of methanol based fuel cells:
The global emphasis on achieving net-zero emissions by 2050, combatting climate change, and promoting clean power generation sources, will lead to the gradual replacement of diesel generators and internal combustion engines with renewable and clean power generation alternatives, such as fuel cells, solar panels, and wind turbines. We believe that methanol-based fuel cells are the ideal solution for replacing diesel-driven power generators. Methanol-based fuel cells ensure low carbon emissions, are safer to handle than hydrogen fuel, and can be easily deployed to site.
Third, Advent announced its involvement in a project to power the ferry service between the Danish island of Læsø and Frederikshavn with a low carbon propulsion system, and this could then be a solution extended to 53 other ferry routes in Danish waters. The goal for partners in this project is to identify alternative fuels to replace diesel, and one of the proposals was the use of methanol based fuel cells.
Fourth and most importantly, Advent just announced it entered into a fuel cell technology assessment, sales and development agreement with Hyundai, one of its largest potential customer yet. This could potentially see Hyundai sign an agreement to purchase Advent’s proprietary MEAs for its mobility segment. Although nothing is definitive yet, this is a breakthrough for the Advent team as it demonstrates the huge interest from large multinational companies in Advent’s products, which demonstrates Advent’s unique competitive advantage.
Lastly, Advent is partnering with US Department of Energy’s Los Alamos National Laboratory, Brookhaven National Laboratory, and National Renewable Energy Laboratory, where it has created a next generation Advent MEA. Based on first year milestones achieved, this next generation HT-PEM MEAs produced more than 5x improvement in lifetime and 2x to 3x more power density increase compared to the current HT-PEM MEAs.
Valuation
Under my base case scenario, I model in an expectations of 2025 capacity of 2.3 GW of capacity, with EBITDA margin assumption of 22%, and 23x 2025F EBITDA, my base case target price is $17, implying 5x upside opportunity at current levels.
Under my optimistic upside scenario, this assumes Advent captures market share of 10%, assuming a longer term investor focus on TAM of 1,300 GW in 2040, and assuming 20% EBITDA margins, and 47x 2025F EBITDA, discounted at discount rate of 10%, my optimistic upside target price is $34, implying 10x upside opportunity at current levels.
Risks
Early stage development and execution risks
As highlighted at the beginning, due to the micro cap nature of Advent, there are many uncertainties including its execution capabilities, management team strength and the company’s ability to tackle early stage company challenges in meeting production targets and achieving successful ramp up or acquiring new customers.
Commercialisation and customer risks
As Advent is an early stage company, with a unique proprietary MEA technology, its success depends on the market adoption of its new technologies and the transition towards hydrogen fuel cell systems in the first place. As such, there is a risk that there are other alternative technologies that comes out into the market.
Vertically integrated customers risk
Over time, there may be interest especially in well established players to build their own in-house fuel cell and MEA production capability that might risk competition from its own customers, should this happen.
Conclusion
All in all, I think that Advent provides relatively interesting returns from here. This is due to Advent’s competitive advantage in its own HT-PEM fuel cell offerings, its synergistic acquisitions made to improve its production capabilities and expand its technical team, its growing traction in acquiring interests, agreements with potential customers, distributors and enter partnerships with the US Department of Energy to develop next generation MEA with huge step-up benefits. My base case target price for Advent of $17 implies a 5x upside potential at current levels while the optimistic upside scenario of $34 implies 10x upside potential from current levels
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