Scharfsinn86
Investment thesis
As the EU energy crisis becomes ever more permanent, the desperation to speed up the green transition, which is touted as a simultaneous way to reduce energy import dependence, while fighting climate change, is getting more and more pronounced. Fusion Fuel (NASDAQ:HTOO) is the perfectly timed startup operation within this context. It comes not only within the context of the energy crisis triggered by the Russia-Ukraine war and our resulting proxy war but also within the context of the 2021 energy crisis that preceded it. A massive, sustained shortfall in wind power generation in 2021 made it more clear than ever that wind & solar power will have to be produced and then stored for a prolonged period, far beyond what lithium batteries, water lift, and other short-term solutions can offer. A grid that is mostly run on green energy, with wind & solar power dominant will need to cover shortfalls that may last for months. Fusion Fuel’s HEVO units are an ideal solution for most of the Southern part of the European continent in terms of renewable energy conversion to green hydrogen.
Solar power that is converted to green hydrogen, which can be stored, then used in turbines that can serve as a backup to the grid, will be needed in massive volumes. Recent EU estimates are that green hydrogen will need to make up about 13-15% of its total energy consumption mix by 2050 in order to meet all its green energy and energy security goals, which is something I covered more extensively in a prior article.
EU and national government subsidies are currently taking care of a significant portion of the capital spending that Fusion Fuel is deploying as it ramps up its operations. Further down the line, the EU is set to impose tariffs on non-green hydrogen imports, which will eliminate the threat of being outcompeted in a fair market competition with hydrogen derived from natural gas, which tends to be cheaper, especially when it is produced by net natural gas exporting countries like Russia, Qatar, or Iran. Fusion Fuel has all the right policies falling into place for its further development and expansion, just at the right moment, making it one of the most intriguing investment opportunities in Europe this decade.
Fusion Fuel is still a pre-revenue-producing startup, with multiple projects in the pipeline and growing market interest for its HEVO units.
There is yet to be a quarter where we can clearly ascertain what Fusion Fuel’s revenues, earnings and other aspects of its financial performance will look like once it actually produces its own hydrogen plants and also sells its HEVO units to third parties. We will have to wait a while for that. What we do know is that it is currently expanding its production infrastructure with much help from government grants. The latest is a 36 million euro grant from the Portuguese government, with most of it going towards Fusion Fuel’s efforts to build up its HEVO-SINES hydrogen production plant, which is estimated to produce a maximum of just under 9,200 tonnes of hydrogen/year once it is fully ramped up
The much smaller HEVO-Industria project is set to produce 764 tonnes of hydrogen will require 25 million euros in capital spending and is set to enter production next year, which will be the first glimpse we will have into certain aspects such as operating costs that will come in addition to the initial capital costs involved. Fusion Fuel hopes to achieve total hydrogen production of as much as under 62,000 tonnes by 2026. For reference, estimated green hydrogen market costs are forecast to be around $4,000/tonne in the next few years, therefore Fusion Fuel is set to see an initial revenue stream of about $3 million/year once its first mini project will become fully operational, not including any other sources of revenue, such as HEVO unit deliveries to third parties that may occur in the next few years. Once the much larger HEVO-SINES project as well as others will come online, we should see an almost 100-fold increase in revenues and we will have a very clear view in regard to profitability. It is expected that its HEVO units will also be sold to third parties, but that is an unknown variable at this point in terms of how much extra revenue it might bring in.
For reference, the company’s current market cap is about $75 million. Assuming that perhaps a hypothetical 10% profitability will be achieved from its operations, at its current market cap Fusion Fuel Green PLC would have a P/E ratio of about 3 by 2027 on the basis of its hydrogen production projects alone. In other words, in such a scenario this company would have more than grown into its current market cap by then. It goes without saying that once we reach that milestone, the market will be looking forward to where the company may be headed next in terms of ramping up hydrogen production as well as sales of its HEVO units to third parties. Based on these assumptions, it is reasonable in my view to see this company trading at a much higher market cap than it currently does by around 2027.
In terms of what this all means for investors, it can be assumed that continued EU and national subsidies will help Fusion Fuel to ramp up its operations, without having to excessively dilute its stock or take on massive debt. Based on the latest quarterly results, the number of shares outstanding increased by about 2.5% in Q3 compared with Q2. There is stock dilution taking place, but it is not taking place at a pace that I see as detrimental to current investors. Perhaps at this pace, the number of shares outstanding might double every seven years or so, but assuming that this company will just keep growing for the foreseeable future, it should see its market cap grow at a much faster pace than that if everything will go well.
EU policies all but guarantee green hydrogen’s future, while Fusion Fuel’s ramp-up timing is impeccable. At the same time, overreliance on policy rather than market economics does come with some risk.
The somewhat unexpected decision to include tariffs on non-green hydrogen exports to the EU, combined with the continued heavy support that the EU and national governments provide to this emerging industry will all but guarantee the success of a green hydrogen revolution in the EU. There can be a great deal to be said in regard to the arguably flawed approach of the EU in economic terms, such as the folly of picking winners & losers instead of allowing for market forces to decide the path forward. The investment argument in favor of Fusion Fuel within the context however is hard to dismiss.
A cautionary note in regard to the bullish thesis I am laying out in favor of this company is the fact that its greatest strength, namely EU support for this emerging industry is also its greatest potential source of risk. As we all know, government policies can always turn on a dime. There is no guarantee that a sweeping political shift within the EU will not erase all the EU and national government support that Fusion Fuel and the entire green hydrogen industry are relying on. The ongoing energy crisis could in theory derail the EU economy and such subsidies may be deemed to be not critical in nature when faced with immediate, pressing social needs. It is also possible that the EU’s attempt to introduce an emissions tariff will be met with excessive global opposition and it will be forced to backtrack under intense pressure. In that case, hydrogen supplies produced from cheap sources of natural gas may flood the EU market, and it could outcompete green hydrogen producers. Such is the nature of an industry that is not entirely free market competitive.
There are other players ramping up green hydrogen projects, with Shell (SHEL) being arguably the undisputed leader with its wind-to-hydrogen strategy in Europe. But Shell comes with a lot of legacy baggage, not least a shrinking upstream oil & gas segment, which it hopes to partly offset with its green hydrogen investments. Unlike Fusion Fuel, Shell’s hydrogen strategy is not so much a growth strategy, but rather a strategy meant to try to avoid shrinking as a company in terms of its revenues, profits, and market cap, while simultaneously trying to appease the green lobby. The best comparison in terms of the investment choice between these two green hydrogen players in Europe is the decision faced by the market in regards to EVs about a decade ago, after the Tesla (TSLA) IPO, whether in hindsight one would have been better off investing in Tesla or a legacy car manufacturer. In hindsight, the choice seems obvious. The emerging EU hydrogen policy and the emergence of Fusion Fuel right at the most opportune moment can arguably be seen as a repeat of investors facing a very similar choice.
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