As a company focused on power, AFC Energy (LSE: AFC) has seen a lot of energetic movement in its own share price over recent months. Unfortunately, it has mostly been in the wrong direction and AFC Energy shares have slumped 45% since February.
Still, they are 86% higher than five years ago. That reflects the growing enthusiasm some investors have had for renewable energy shares, even when the journey has been bumpy.
Today, the company published its interim results and they contained some promising developments. So with the AFC Energy shares selling for pennies, could this be a bargain buying opportunity for investors?
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Positive developments
Some of the good news from the recent six-month period included generating revenue from power towers leased to eight customer sites and the completion of a successful validation by engineering giant ABB of AFC’s S+ Series fuel cell stacks.
After the period ended, the business announced plans to partner with Speedy Hire to establish a generator rental joint venture.
All of these developments strike me as positive indicators that the company is moving forward in qualifying, validating and commercialising a product portfolio based on its promising hydrogen technology.
I also appreciate the fact that AFC increasingly seems to be working to identify specific use cases for its products based on industry needs. That could help its sales pitch to prospective clients.
Lots to do
Still, it is important to keep things in perspective.
Revenue actually fell compared to the same period last year and came in at only £0.2m. For a company with a market capitalisation of £113m, that is very small beer.
Meanwhile, although the loss was trimmed compared to last year’s interim results, it still came in at £6.3m. The operating loss was even bigger than that, but bank interest and tax benefits helped reduce the reported loss.
The company had cash and cash equivalents of £33m at the end of April, but continues to burn cash.
Prospects and valuation
AFC, then, is in the classic bind of many growth companies.
It has promising technology, is widening its customer base and is exploring ways to ramp up commercialisation. Indeed, it is working on a contract manufacturing strategy that could help the business manufacture at scale more easily than it could manage in-house.
However, as has long been the case with the company, there remains a lot of ‘jam tomorrow’ when investors would feel more reassured by jam today. Investors greeted the results coolly, with the shares down around 7% in early trading, as I write this.
I think AFC Energy shares could ultimately prove a bargain at today’s price if the company can improve its speed of execution and ramp up sales significantly. I believe it is making some smart moves to help this happen, like the proposed tie-up with Speedy Hire.
But for now, there remains a huge amount yet to be proven. I see risks including cash burn and an unproven business model at scale that could end up leading AFC Energy shares to fall further rather than recover lost ground.
So until there is much firmer evidence of a rapidly improving business and clear path to profitability, I will not be buying.
