Setting The Table For Success, Thoughts On Latest Quarter

Summary

• Hydrogenics reported a blistering Q4 revenue number that missed eps because of non-recurring and non-operational items.
• Set conservative $55 million 2018 revenue guidance which still implies 15% growth while analysts think 44%.
• Guidance assumes full year EBITDA profitability.
• China infrastructure does not concern management.
• Multiple still absurdly cheap vs. Ballard.

Much has happened over this past year for fuel cell stocks and Hydrogenics (NASDAQ:HYGS) in particular. After completing 2016 with $28.99 million in revenues, HYGS finished 2017 with 48.1 million (65.9% growth) in revenues and achieved EBITDA breakeven in Q4. Further, the company for the first time put out 2018 guidance of $55 million.

I had a chance to speak with CFO Bob Motz after the call and wanted to share my thoughts regarding the call, the quarter, and the outlook for 2018. Some interesting observations to note, that Bob was kind enough to point out, was the $600k EPS charge for marking to market of RSU and DSU stock. This resulted in $0.0394 of a hit to the EPS. So what looked like a miss, excluding this non-operating metric would have actually been a beat. The company also experienced a $500k charge associated with a bad European debt obligation which is believed to be non-recurring and resulted in a $0.0328 per share of a hit to earnings. Also, the company increased its research and development expense by $1.0 million or $0.0656 per share in one-time charges in order to roll out its Enbridge (ENB) site. Backing out these charges would have taken HYGS from a $0.07 per share loss to a $0.0678 per share gain.

I also wanted to ask him about China and the infrastructure concerns raised by the vocal bears on the China fuel cell opportunity and potential bottlenecks. He pointed out that buses and trucks are fueled at depots that have large fueling capacities and that they already exist and are being built such that he didn't share the concerns expressed by the recent skeptics. He felt that the infrastructure would be and is being built to match the demands of the customers and integrators.

In laying out the 2018 $55 million guidance, he understood why the analyst community was ahead of the company's more conservative guidance and outlined many ways the analyst community could be more accurate than the more conservative approach outlined today. If the company's more conservative $55 million is achieved, this will equate to 15% year-over-year growth. If the analysts are correct, the growth rate will be 44%. It should be noted that the company believes that its $55 million contains 50% cash and 50% LCs, so it is revenue that is considered to be "in the bag." Regardless of whether it is $55 million, $69 million, or $100 million in revenues, it appears that HYGS is poised to deliver its first full year EBITDA profitability in the most conservative of assumptions.

Despite having fallen over 50% from its recent fall highs of $6, BLDP still trades at 4.13x this year's expected sales. HYGS trades at only 1.86x this year's analyst sales estimates.

With China policy ramping and now clear, and the rest of the world adopting fuel cells and hydrogen architecture, I continue to believe HYGS is both cheaply and perfectly positioned to benefit from this secular shift that is in its very early stages.

Analyst’s Disclosure: I am/we are long HYGS.

I am long HYGS and plan to trade it actively

Comments

[The Opportunist]

Of course I’m interested in the results

[The Opportunist]

Wow, Australia to build 50 mw hydrogen stations using electrolyzers from wind and solar farms. Wonder if hygs can grab some of this.

[eenmakkie]

I did sent them this in december : http://bit.ly/2DeI5x3
If they will not be part, we can scrap the H2 stations from their list also as pipeline .

I am traveling to Belgium again next month. Maybe we can ask for an investor visit at their electrolyser factory and I ask some questions there.
Let me know if you are interested in this .

[eenmakkie]

The wind is changing direction!
It gets boring for investors to hear about the shortcomings of China for months !

We had all strong sells now calculated in the news. All the rest will be surprises to the upside .

When the big financial as Bloomberg and Reuters set a new news trend, expect all the small ones to follow the new direction !

Here you go about China:

China's War on Pollution Will Change the World https://bloom.bg/2DfG9V0

Beat that headline !
CNBC will follow soon on it...

Take profits on short sale before they evaporate in the open gaps. Long know the feeling...

[Yeong-shinn Wang]

The beauty of hydrogen is distributed energy buffer. Hydrogenics can benefit soon from its electrolyzers. These can be locally generated. Right now, China has abundance of H2 as industrial byproduct. Current dispensing locations are close to H2 sources. This alone is more than sufficient to support current demand.

In near future, when China needs LH2, China can do exactly like Japan, just buy from Australia. China and Australia are tight. I think this is obvious. Australia can easily make H2 from solar or coal. The worry of no LH2 is non existence.

[Henrik Alex]

On-site generation using electrolysis is quite expensive, in fact. On-site generation using steam reformation isn't green at all.

Only LH2 transport is sufficient for distributing meaningful amounts of Hydrogen.

Japan's LH2 bulk imports from Australia are still years in the future.

[The Opportunist]

Which of course misses the point and the opportunity. Read the bnef report from the fall that discusses the fact that producing hydrogen from curtailed wind capacity in places like China (where they have 20 percent excess) is more economical than producing gasoline or diesel. That is cheaper and greener and it makes your analysis wrong.

[Henrik Alex]

I only know about the pilot project in Hebei province using technology from McPhy (France). To my knowledge these P2G-Systems are used for energy storage and the hydrogen gets transformed back into electricity when needed.

NEL / ProtonOnsite also have a deal with Synergy for the delivery of 13 onsite hydrogen generators. So far, 4 systems have been delivered with the remainder expected to follow over the cours of this year (was originally expected to be completed in May 2018).

Generating hydrogen in large amounts off-site would require liquefaction to LH2 to allow for economic transportation.

Again, I have no doubt that China will resolve the current issues over time, but not within the next few months. These are complex problems that require substantial time and investment to be resolved.

[Yeong-shinn Wang]

Do you know chairman Xi will remain in power life long?

Do you know chairman Xi is pro carbon reduction and New Energy strategy?

Do you know China has 12 operational H2 refueling stations now and 32 stations total by the end this year?

Do you know diesel delivery vans cannot enter major Chinese city centers during most of day time?

Chinese will plunge into FC and H2. China will soon be the lead country for hydrogen economy. US and EU can complain about FC dumping just like solar panels in a few years.

[Henrik Alex]

Well, tell me how many FCEVs these stations will be able to support with very limited liquid hydrogen supply currently available in China? Most of them have tiny storage capacities suitable only for refueling a handful of FCEVs per day.

I have no doubt that China will catch up on liquid hydrogen production and infrastructure over time but these issues will not be overcome within months.

[Henrik Alex]

While I would agree with the author about Hydrogenics looking cheap relative to Ballard Power, I would urge investors to read the conference call transcript once it becomes available and also have a look at the company's earnings presentation to get a better impression of what is currently going on at Hydrogenics, particularly in China.

I would further advise investors to read Plug Power's most recent conference call transcript to get better insight into the real issues behind the slow build out of hydrogen infrastructure in China as the country is currently not capable of producing meaningful amounts of liquid hydrogen.

As for the $55 million FY18 revenue "guidance" - this is no formal guidance, this is just the company's current backlog of orders anticipated to turn into revenues over the next 12 months. Hydrogenics has provided this number each quarter for several years now.

For example, the number was $38 million at the end of Q4/2016 and the company actually finished 2017 with $48.1 million in revenues, a more than 25% upside as Hydrogenics was able to acquire some short-term business over the course of the year.

Assuming the company's additional business delivered over 2018 will match the 2017 number, 2018 revenues would come in at $65 million, not too far away from current consensus estimates.

Ballard Power discloses the same 12-month-backlog metric and actually expects to generate an additional roughly $30 million in short-term revenues in 2018.

That said, Q4 orders from China were lower than expected due to uncertainties about policy changes and Alstom has delayed purchase orders for their commuter trains.

In sum, I continue to like the company despite FY2018 potentially unfolding somewhat slower than expected. Hydrogenics uses a multi-faceted approach in China and also has a promising power-to-gas business.

Valuation remains cheap compared to Ballard and margins look ok - moreover, I do not expect liquidity being an issue in 2018.

While 2018, clearly, will not be the eagerly awaited breakout year for fuel cell companies, I fully expect the China opportunity to develop over time, most likely picking up speed around 2020.

[The Opportunist]

Henrik, I specifically asked him on China infrastructure concerns and gave you his answer. Separately you make a good distinction about the revenue visibility potentially being low vs what they might actually do.

[Henrik Alex]

Look, obviously there's only very limited liquid hydrogen available in China currently. Without the ability to produce liquid hydrogen, China can't support the ramp of infrastructure and FCEV deployments.

[The Opportunist]

You keep saying that and referencing a site that shows a fraction of the existing and planned refueling stations. Bldp said currently 13 ramping to 30 by year end and hygs also doesn’t think an issue. Bldp will produce 3k vehicles w their 6k stacks and hygs another 1.2k. Shanghai thought that 3k vehicles could be supported by 5-10 refueling stations. I

[The Opportunist]

My pleasure.

[Analyst X]

Thanks for sharing your conversation with Bob Motz. Very interesting about the one time charges impact on EPS, and more significantly the views on China infrastructure.