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Summary

  • Hexagon Composites soars on the back of new orders confirming strong marketplace for CNG.
  • CNG tank production capacity is being expanded and will effectively double revenue generating capacity from 2Q 2014 onwards.
  • Share price soars, but is still moderately priced on an absolute basis and when compared to peers.

Since my last Hexagon Composites (OTC:HXGCF) article was published on February 27 the company has issued two announcements about new orders. On February 27 Hexagon announced that the company is expanding into new bus markets and on March 10 an announcement was made that Hexagon Lincoln has recently received new orders for its TUFFSHELL® CNG fuel cylinders to support heavy duty and transit vehicles in North America, with a total value of approximately USD 15 million (around NOK 90 million).

February 27 Announcement

This announcement mentions that Hexagon Raufoss (a part of Hexagon Lincoln) has been awarded an order from Iveco S.p.A for the delivery of 350 CNG city bus fuel systems to Astana, Kazakhstan. I am not familiar with this specific CNG bus design, but based on other CNG transit buses I would expect 6-8 CNG tanks to be installed per bus, meaning this specific order would be for 2,100 - 2,800 Type IV CNG tanks.

The dollar value of this order is in itself not of great importance (I would estimate it to be approx. $7 million), but what is noteworthy is that we are talking about Type IV CNG tanks being introduced to a market and a region that has tremendous potential for follow-on orders. Hexagon Raufoss has previously been totally dependent on the European CNG car and bus market. This market is now expected to gradually improve, but it is encouraging to see CNG bus markets such as Turkey (specifically mentioned during the Q4 webcast) and Kazakhstan emerging, and that these markets are expected to make a meaningful contribution towards revenue in 2014. The Russian transit bus market is also a huge opportunity and a breakthrough here could quickly result in very large orders.

March 10 Announcement

The $15 million TUFFSHELL® announcement confirms a healthy demand for large CNG tanks for heavy duty NGVs.

This is the market Hexagon has been talking about for several years and to see it materialize as expected is reassuring. Hexagon Composites has traditionally had a conservative communication profile, and unless this has recently changed I would not expect the company to use pretty positive wording like;

….signals the marketplace is strong for CNG.

and;

It has always been the premise of Hexagon Composites that CNG (Compressed Natural Gas) is a great solution for transportation and storage of natural gas, and the marketplace continues to affirm this position.

unless the company is of the opinion that such wording appropriately depicts the ongoing and expected business environment.

This announcement is also a good confirmation that the first phase of Hexagon Lincoln's capacity expansion is progressing according to plan and is on track for completion by the end of March 2014, when its revenue capacity will effectively double. Revenue capacity is again expected to double from Q2 2015 onwards when the second phase of the expansion is completed.

The first phased has previously suffered some delays, but given no mention of further slippage, I take it the newly installed equipment is undergoing commissioning and will contribute to earnings no later than Q2 onwards. This recent article provides further confirmation that the expanded capacity is currently being phased in.

Valuation

Following the March 10 announcement, the Hexagon share price increased by more than 16% on close to record volume during trading in Oslo. However, the stock is still trading below its all-time high of NOK 32.30 and is, in my opinion, still moderately priced when looking at expected earnings per share for 2014, 2015 and 2016 of NOK 1.26, 1.98 and 2.78 respectively. More details can be found in my February 27 article

If we compare Hexagon Composites to Quantum Fuel Systems (NASDAQ:QTWW) with a simplistic comparison of market cap/expected 2014 revenue, then QTWW is currently trading at approx. 3.5 x expected 2014 revenue. Hexagon Composites, even after the recent run-up, is currently trading at approx. 2.3 x expected 2014 revenue.

Source: Hexagon Composites - New Orders Send The Share Price Soaring