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Participating in the green energy revolution

2G Energy 24 May 2018 Update
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2G Energy

Participating in the green energy revolution

Advanced materials technology

Scale research report - Update

24 May 2018

Price

€21.6

Market cap

€96m

Share price graph

Share details

Code

2GB

Listing

Deutsche Börse Scale

Shares in issue

4.4m

Last reported net cash
as at end December 2017

€9.8m

Business description

2G Energy is a leading international manufacturer of highly efficient combined heat and power plants (CHP). These are deployed in the housing industry, agriculture, commercial and industrial companies, public energy utilities and municipal and local government authorities.

Bull

Decentralised CHP solutions reduce CO2 emissions by improving conversion efficiency.

Remote control capability improves service margins and supports flexibilisation.

Remote control capability aids integration into virtual power plants.

Bear

Uptake affected by green regulation eg termination of waiver of EEG levy.

Economics depends on spark spread.

Low free-float (46.7%).

Analyst

Anne Margaret Crow

+44 203 077 5700

2G Energy continues to diversify its activities, expanding export markets and developing service revenues, so that it is less exposed to changes in the regulatory environment for renewables and CHP in Germany. This supported a 9% y-o-y increase in FY17 sales to a record €189.4m, and EBIT margin rise from 3.2% to 3.9%, both ahead of management expectations.

Export growth drives record sales in FY17

Group sales increased by 9% y-o-y to a record €189.4m, beating management guidance of €180m. This was driven by exports and services revenues and improved project management, which led to faster throughput and a high level of CHP completions at the year-end. Exports rose by 34% y-o-y to represent 42% of all CHP sales. Services grew by 13% y-o-y to 34% of total sales. Personnel costs rose in line with sales, reflecting an increase in service staff in Germany. Other operating expenses increased by 11%, reflecting higher logistics costs associated with exports and higher sales commissions. The improvement in EBIT margin also beat management’s guidance of 3.0-3.5%. Management proposes raising the dividend by 5% to €0.42/share. Net cash increased by €5.8m to €9.8m, despite the €3.7m investment in CHP plant for use by the in-house leasing operation and c €1.0m in the vehicle fleet and purchase of tools and IT equipment.

Strong start to FY18

New order intake during Q118 rose by more than 90% to €54.7m, resulting in a €130.5m order book at end Q118 (€106.0m at end Q117). This includes sales for natural gas systems for France, Japan and Italy. Management noted it is “very confident” of achieving €180-210m sales during FY18 at an EBIT margin of 3.5-5.5%. This margin uplift is attributable to rising proportions of Service revenues and process improvements arising from the “Lead-to-Lean” initiative.

Valuation: Fairly priced following recovery

The share price dropped to a low of €17.30 at the end of December due to investor concerns about the impact of having to pay the full EEG levy in Germany from January 2018. The size of the order book, supported by exports, has helped to allay those concerns and the share price has returned to its June 2017 peak. A comparison against established boiler manufacturers shows 2G Energy trading at a small discount to the mean for the sample with respect to EV/EBITDA multiples (6.1x vs 7.5x year 1 mean) and a small premium with respect to P/E ratios (14.7x vs 14.5x year 1 mean) suggesting that the shares are fairly priced at current levels.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

174.3

5.4

0.40

0.40

54.0

1.9

12/17

189.4

7.2

1.11

0.42

19.5

1.9

12/18e

196.7

9.6

1.47

0.41

14.7

1.9

12/19e

207.3

11.6

1.78

0.43

12.1

2.0

Source: Company data, Bloomberg

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

FY17 financials demonstrate benefit of strategy

Internationalisation delivers FY17 revenue growth

Group sales increased by 9% y-o-y to €189.4m. Exports rose by 34% y-o-y to represent 42% of all CHP sales and 35% of total sales, putting the company on track to be a global supplier of CHP systems and solutions. This substantial increase is the consequence of expanding the direct sales network, for example opening an office in France during FY16, supporting distribution partners through the my.2-g.com portal and investment ensuring that 2G’s CHP plants are compliant with the environmental and operating standards in place in its target geographies. The strongest performers were the US at €17.0m sales and the UK at €12.7m, although here sales declined year-on-year because of the reduction in feed-in tariffs in March 2017.

The importance of developing international sales was highlighted by the 7% y-o-y reduction in German CHP sales. Demand for natural gas systems was severely affected, first by the uncertainty regarding the tendering process for 1-50MW systems, which was not resolved until the second half of the year, and then by uncertainty regarding the waiver of the EEG (Renewable Sources Energy Act) levy. Until the end of 2017, operators of CHP plants only had to pay 40% of the EEG levy (ie 6.9c/kWh) on self-generated electricity. This exemption terminated at end-2017. Discussions are currently taking place between the Federal Ministry of Economics and the EU, with the German government aiming to bring most of the old regulation back into force. Meanwhile, although CHP plants are viable without the subsidy, the economics are less favourable. There was a pick-up in sales of biogas plants related to “flexibilisation” projects facilities, but this was insufficient to make up the shortfall. “Flexibilisation” is the term for replacing older biogas plants which operate at a fairly constant output with higher output plants that can produce a variable output to balance any shortfall in electric power generated from wind or solar sources, which are inherently variable. While the replacement plants have a larger nameplate capacity, they are not always running at this level, so the total amount of power they output over an extended period will be the same as the plant they replace. The German Biogas Association notes that 248MW of capacity related to flexibilisation was installed during 2017, a 35% uplift on the previous year. 2G significantly expanded its share of this market segment (from 17% to 26%) because it already has a large installed base of older plants that need upgrading, plus the control systems embedded in its CHP generators are highly suitable for flexible operation as part of a network of generation options.

Revenues from the services and spare parts business were 34% of the total (33% in FY16). These revenues are linked to the size of the installed base, giving additional protection from potential downturns in demand for CHP equipment in Germany. They also provide a mechanism for removing some of the seasonality in sales.

Favourable outlook supported by order book

New order intake during Q118 rose by more than 90% to €54.7m, taking the Q118 order book total to €130.5m vs €106.0m in Q117. Most of the orders in Germany relate to biogas-fired CHP plants. Elsewhere, 2G is beginning to receive orders for natural gas installations as the markets, where initially demand was only for biogas plants, mature. For example, during FY17 2G received its first major order for natural gas project in France worth c €3.5m, for completion in H218; its first order for a natural gas system in Japan, €2.0m for a 4MW output installation and its single largest CHP order to date from Italy, which is for a 1.2MW natural gas-fired CHP plant.

Progress against strategic objectives

Product development

2G continues to develop differentiated product. For example in August it introduced ultra-low emission variants of systems ranging from 20kWe to 240kWe which emit 90% less nitrogen oxide (NOx) than the standard accepted limit of 500mg/Nm3 @ 5% O2. This is important, as although diesel-powered vehicles are generally the focus of media attention, emissions from power generation equipment also contribute to the air pollution problem and operators of CHP plants are obliged to turn off generation equipment if it is not compliant with local emissions legislation. The new variants meet the stringent requirement of the TA Luft air pollution control regulations in Germany and the limits set by both the Building Research Establishment Environmental Assessment Method (BREEAM) and the new Greater London Authority (GLA) Sustainable Design and Construction guidelines. They are also in accordance with the UK Code for Sustainable Homes and the Clean Air Act.

In FY17 2G started work on the QUIRINUS virtual power plant project in the state of North Rhine-Westphalia. The transition to a decarbonised economy is also a transition to a decentralised generation model, where large centralised power plants are replaced by multiple biogas plants, wind turbines and solar installations, some of which may only be roof-sized. QUIRINUS connects the multiple generation sources to a central location which analyses the data provided by each individual generation source, calculates the total electricity supply and matches it to electricity demand by bringing additional generation sources onstream as required. The project runs for three years and has a budget of c €6m. Half of the budget is being provided by the participating companies including utility companies Infrawest, regionetz and RWE Power, network operator New Netz and energy storage provider Stornetic and half from the EU and North Rhine-Westphalia.

Digitalisation

2G launched an online replacement parts shop ‘shop.2-g.com’ earlier this year marking a further stage in management’s Digitalisation project. This portal offers customers a large selection of original and manufacturer-tested replacement parts. The 2G shop is freely accessible in Germany and Austria, including to customers that have not operated 2G CHPs to date. Another aspect of the digitalisation strategy is the power plant interface associated with each CHP system. This sends real-time data on operating parameters to the company’s central service centre in Germany. The information enables engineers to deal with around 70% of all error messages generated by the equipment without having to send a field engineer to the site. This helps get CHP equipment back in operation more quickly and saves costs. The ability to provide service remotely is particularly important as 2G expands its international footprint.

Lean philosophy

As part of its ‘Lead to Lean’ lead project, 2G has worked with an external consulting firm on a "Terminleitstufen" (deadline guide steps) concept over the past months with the objective of improving all purchasing and production processes and reduce seasonal peaks and troughs in production. The new processes will be gradually implemented during 2018. Further lean philosophy measures have also been initiated to improve production processes, enabling shorter delivery times, cost reductions and quality enhancements.

Peer valuation

A comparison of prospective peer multiples for companies providing equipment for generating renewable energy yields limited information because few of the companies have reached commercial revenues and even fewer are generating meaningful profits. 2G Energy is trading on multiples that are lower than our sample mean, which is to be expected given that it has been generating substantial revenues and profits for several years.

The share price dropped from a peak of €22.96 in June 2017 to a low of €17.30 at the end of December 2017 because of investor concerns about the effect of the EEG levy. The size of the order book has helped to allay those concerns and the shares are trading at levels close to their previous peak. At this level, a comparison against established boiler manufacturers shows 2G Energy trading at a small discount to the sample mean for year 1 and year 2 EV/EBITDA multiples, a slight premium with respect to the year1 P/E sample mean and a small discount to the year 2 P/E sample mean. This suggests that the shares are fairly priced at current levels although we note potential for an uplift if management is able to raise EBIT margins above the levels shown in the consensus estimates so they are closer to those for Generac Holdings. We note that management raised the dividend by 5% to €0.42, representing a 1.9% yield at current levels.

Exhibit 1: Peer multiples

Name

Market cap (€m)

EV/Sales FY1 (x)

EV/Sales FY2 (x)

EV/EBITDA FY1 (x)

EV/EBITDA FY2 (x)

P/E
FY1 (x)

P/E
FY2 (x)

EBIT margin FY1

AFC ENERGY

45

7.9

2.6

-

-!

(10.0)

(12.5)

-

BALLARD POWER SYSTEMS

478

4.4

3.5

(96.1)

83.0

(41.6)

(225.7)

-

CERES POWER HOLDINGS

168

26.7

19.1

(13.6)

(16.4)

(16.1)

(18.1)

-

ELECTRO POWER SYSTEMS

107

4.5

2.8

27.1

11.7

92.2

21.5

8.0%

ENERTIME

7

1.3

0.7

(23.5)

-

(13.8)

(29.6)

-

FUELCELL ENERGY

131

2.4

1.7

(10.9)

(18.1)

(2.8)

(4.2)

-

HYDROGENICS CORP

108

1.8

1.3

(110.6)

19.1

(34.6)

63.1

-

ITM POWER

137

33.5

9.0

(12.8)

(20.8)

(21.8)

(41.1)

-

NORDEX

1,037

0.5

0.4

10.0

7.1

(49.4)

83.4

-

PLUG POWER

386

3.3

2.5

(36.9)

71.0

(9.4)

(15.4)

-

REDT ENERGY

58

4.1

0.9

(6.7)

9.5

(6.2)

(26.9)

-

SENVION

762

0.5

0.4

9.1

5.4

(1,300.0)

14.3

2.0%

SFC ENERGY AG-BR

83

1.3

1.1

23.8

11.7

51.4

20.2

3.5%

VESTAS WIND SYSTEMS A/S

12,454

0.9

0.9

6.8

6.6

15.8

15.0

10.3%

Renewable energy equipment mean

2.7

3.4

15.4

10.2

53.1

36.2

DEUTZ AG

951

0.5

0.5

5.3

4.8

17.8

13.0

3.9%

GENERAC HOLDINGS

2,598

2.2

2.1

11.3

11.0

13.2

13.0

16.2%

RAFAKO

110

0.3

0.2

6.0

4.5

12.4

8.4

3.6%

Conventional boilers mean

1.0

1.0

7.5

6.8

14.5

13.0

2G ENERGY

97

0.4

0.4

6.1

5.2

14.9

12.3

5.1%

Source: Bloomberg. Note: Prices at 18 May 2018. Grey shading indicates exclusion from mean.

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