Loop Energy — Commercial orders underway

Loop Energy is a Canadian listed company, headquartered in Vancouver, which develops and manufactures hydrogen fuel cells. It is focused on driving growth through the return to base fleet market where fuel cells offer better range, payload capacity and refuelling times than the battery powered alternatives, which is most prominent for medium and heavy-duty segments. The company asserts that its proprietary patented PEM fuel cells have an unmatched combination of fuel efficiency, power density and durability, resulting in an attractive total cost of energy compared with other fuel cell producers (see ‘16-90-10’ advantage in Technology section), which gives Loop Energy a significant competitive advantage. The benefits of the technology have been demonstrated by the company’s recent first commercial order with British electric truck maker Tevva, won through a competitive tender process.

Loop Energy’s existing product range comprises 30kW, 50kW and 60kW modules and it is developing a 120kW module, which is scheduled for launch during the IAA Transportation conference in Hanover, Germany on 20–25 September 2022. These products are in the sweet spot for fuel cell range extenders for BEVs or battery fuel cell (BFC) hybrids) in Loop Energy’s targeted return to base fleet market. If more fuel cell dominant BFC hybrids prevail as the electric vehicle (EV) market for heavier commercial vehicles develops, then larger heavy-duty trucks could require fuel cells of c 300kW. Loop Energy’s product is modular, so it should be relatively easy to scale its product range should the market need arise. The same is true for other future potential markets such as marine and aerospace. To support an increase in volumes, it is expanding its manufacturing capacity, with facilities in Canada and China, as well as business development offices in the United States, Asia and Europe. It has recently announced it is setting up a facility in the UK.

Loop Energy has a focused product range and is targeting disruptors and first movers in road transport. We believe this is a sensible strategy that could enable it to ramp up sales quicker than some peers. It is more cost efficient than creating a broad product range and targeting big corporates, many of which will move slowly to avoid cannibalising existing sales. In this report, we focus purely on the truck and bus markets (we use ‘trucks’ to represent both medium and heavy-duty trucks) and believe there is significant potential for Loop Energy to reach economic-scale volumes by the mid-to late 2020s. Loop Energy is also targeting the light commercial vehicle (LCV) market, however, we do not include it in our base case as we believe that truck and bus sales potential is sufficient to reach economic scale sales. Any traction in the LCV market provides additional upside.

We do not consider other potential markets such as marine, aviation and long duration energy storage, which will likely develop slower than road transport. By driving costs down through ramping up volumes for road transport, Loop Energy will be in a strong competitive position to expand its product range and penetrate these other markets as they start to build momentum.

Many countries are setting into law net zero emissions targets for 2050. This will completely transform the global energy complex, including road transport. We note that countries and regions such as the European Union, the UK and China have regulation in place banning the sales of pure internal combustion engine (ICE) vehicles by the end of the 2030s. We focus on trucks and buses because hydrogen fuel cells are better suited to heavier vehicles, particularly with heavy loads and for longer distances. We have set up a market model for trucks and buses (as well as LCVs), which is based on the International Energy Agency’s (IEA’s) projections for EV penetration by 2030, and assuming BFC hybrids, or fuel cell electric vehicles (FCEVs), are used in 50% of EV buses and 30% of EV heavy-duty trucks (increasing to 50% by 2050), equates to US$4bn by 2030 and c US$60bn by 2050. We assume an average sale price of c US$225/kW (real) in 2030 and c US$100/kW (real) by 2050. We assume average fuel cell range extender size of 60kW in 2030, increasing to 80kW in 2050. These market sizes would be considerably larger if more fuel cell dominant solutions prevailed, particularly in heavier trucks, where fuel cells of c 300kW could be used. This could increase the market size for BFC hybrid (or FCEV) trucks and buses to above US$10bn in 2030. Any traction in the LCV market would provide additional upside.

We are conservative in our valuation as we assume Loop Energy only commands a 10% market share in 2030 (c 30,000 units) and a 5% share in 2050 (c 375,000 units), reflecting potentially increased competition. We believe that given its competitive advantage, Loop Energy could command a considerably higher market share. We note that Tevva alone could support 30,000 units in 2030. Tevva has an ambition of more than 100,000 Tevva vehicles in service before the end of this decade.

The fuel cell sector has seen a rollercoaster in share price performance since 2019. Loop Energy’s closest PEM fuel cell peers (Ballard Power, PowerCell Sweden and Proton Motor Power Systems) saw share price increases of 12–19x between 2019 and January 2021, which is the sector’s recent peak. A month after this, on 25 February 2021, Loop Energy floated at C$16/share; since then its shares have fallen to a low of C$1.52 in June 2022 before recovering to C$2.12, which is 87% below the initial public offering (IPO) price. Over the same period its peers’ share prices have fallen by 50–73%. Loop Energy’s relative underperformance is despite significant commercial progress, which should de-risk its investment case, and is possibly due to Loop Energy’s smaller market cap and lower liquidity.

We value Loop Energy using a DCF analysis over the period 2022–50, followed by a terminal value with a 3% terminal growth rate (TGR). In our view, this better reflects the long-term value and growth prospects of the company. Adopting a cost of capital (CoC) of 15%, we arrive at a valuation of C$4.5/share, which is more than double the current share price (C$2.12). Our valuation is highly subjective, due to the early stage of the company, absence of track record and nascent nature of the fuel cell market, thus we provide a detailed sensitivities analysis in this report. As Loop Energy ramps up volume sales, improves profitability and de-risks, one could expect our valuation to increase in multiples. For example, assuming a CoC of 13%, just 2 percentage points (pps) below our 15% base case, would more than double the valuation to C$9.9/share, which is more than four times the current share price. A CoC of 10% would increase the valuation to C$29/share, c 14 times the current share price.

Most peer valuation metrics are not meaningful as none of the pure play fuel cell developers are making an operating profit, and unsurprisingly therefore they are all recording negative operating cash flow. However, on an EV/sales basis, Loop Energy is significantly undervalued compared to its closest peers. Based on 2024 consensus sales (from Refinitiv), Loop Energy has an EV/sales ratio of 0.9x compared to Ballard Power’s 6.5x and PowerCell Sweden’s 17.8x.

In our base case, Loop Energy has just sufficient capital to fund its plans for FY22. However, it will need additional funding for FY23. Along with its Q222 results, the company announced it is filing for a base shelf prospectus that will allow it to raise up to C$100m, in any number of tranches, at short notice, over the next 25 months. We expect Loop Energy to become operationally cash flow positive in 2027 and assume that it will be able to raise debt capital to fund growth from 2028. Until then we estimate the company will require c C$250m in equity funding, on top of its net cash of c C$40m at the end of H122 and C$9.75m grant received from the Canadian government. This is required for working capital and increasing factory capacity to deliver on strong long-term sales growth projections.

Loop Energy is an early-stage company in nascent markets with high long-term growth potential. It has no track record of profitability or cash flow generation. Thus, our forecasts are highly subjective and sensitive to numerous assumptions. As such we provide a detailed quantitation sensitivity section towards the end of this report. Other key risks not addressed in that section are:

As discussed in our report The hydrogen economy – decarbonising the final 20%, fuel cells bring about a controlled reaction between hydrogen and oxygen to form water, electrical energy and heat. Because hydrogen and oxygen do not spontaneously react, the electrochemical reaction is effected by bringing them together in the presence of a catalyst such as platinum or heating the gases to a high temperature, in which case the stack (of individual fuel cells), which is where the electrochemical process takes place, must be made from specialist materials. As individual fuel cells produce relatively small amounts of power, they are typically grouped together (often in series) into a fuel cell stack.

Fuel cell types: PEMFCs preferred for transportation applications

The two most widely used types of fuel cells are proton exchange membrane fuel cells (PEMFCs) and solid oxide fuel cells (SOFCs). PEMFCs use a platinum catalyst to enable the reaction between hydrogen and oxygen to take place at a relatively low temperature. SOFCs do not use a platinum catalyst and depend instead on high temperatures to get the reaction going, which means that the fuel cells typically are made from exotic and expensive materials, which can be quite brittle (Ceres Power being a notable exception). It takes up to an hour to get an SOFC up to temperature, while PEM cells can start up in less than minute. In addition, while a single cell of a PEMFC and of an SOFC are similar in size, a typical PEMFC module is smaller than an SOFC module delivering the same power output. For these reasons PEMFCs are preferable to SOFCs for transportation applications, though they are used for stationary power generation applications as well. The other types of fuel cells are not very common.

Loop Energy’s PEM cells differ from typical PEM cells from Ballard Power or Plug Power in that the cross-section of the channel across the fuel cell plate along which the oxygen (and coolant) passes and the channel that the hydrogen (and coolant) passes through both get narrower the further the channel is from the input, instead of being the same width all the way through. The narrowed geometry means that the gaseous fluids are squashed into a smaller volume and have to speed up as they pass through the plate, so although some of the oxygen and hydrogen molecules are removed en-route as they react to generate electricity, the absolute number of oxygen or hydrogen molecules passing over a unit of active area (where the reaction takes place) per second is constant across the fuel cell plate. We note that the team developing and testing Loop Energy’s technology includes automotive fuel cell engineers previously employed at Ballard, Daimler, Ford, General Motors and Mercedes Benz.

The more hydrogen and oxygen molecules reacting in a unit area per second, the more electricity is produced per unit area per second, so the current density is higher and more water is produced. This limits the current density that can be achieved in conventional cells, because at higher levels there is so much water that it floods the catalyst, restricting the rate at which the oxygen reacts with the hydrogen. This does not happen in a Loop Energy eFlow cell because the gas is flowing more quickly, sweeping the water molecules away before they can accumulate on the catalyst. This means a stack of eFlow cells can generate more power per kilogram of hydrogen than a similar sized stack made from conventional fuel cells and requires up to 16% less hydrogen to deliver the same power output (see Exhibit 5). This equates to lower operating costs.

Loop Energy is currently targeting the ‘return-to-base’ fleet market, where the up to 16% fuel saving would translate to hundreds or thousands of dollars in savings for each vehicle in a fleet over a vehicle lifetime. It also results in higher operational uptime and a wider radius that can be served. Alternatively, the efficiency gain could be used to design a smaller, lighter and cheaper fuel cell module capable of providing the same output. Reducing the weight of the motive element gives more capacity for payload.

Since eFlow cells do not have the same current density limitations as conventional fuel cells, the amount of gas reacting can be increased so the same sized stack can generate up to 90% more peak power than conventional stacks (Exhibit 6). This offers greater versatility to the OEMs and operators. Vehicle designers thus have the ability to almost double the power output to meet seasonal, terrain or payload related increases in drive cycle kWh/km energy requirements, without resorting to a larger fuel cell stack. Loop Energy’s T600 60kW unit is 75–100kg lighter than most alternatives.

As noted above, Loop Energy’s channel designs means that the absolute number of oxygen or hydrogen (and coolant) molecules passing over a unit of active area per second is constant across the fuel cell plate. Consequently, the amount of oxygen and hydrogen reacting per unit of active area per second, which is measured as current density, is almost constant across the fuel cell plate. In contrast, in a conventional fuel cell there is a lot of oxygen and hydrogen (and coolant) passing over a unit of active area per second in the area where the gas first enters the plate, but by the time the gas reaches the end of the channel at the other end of the plate, most of the oxygen or hydrogen has been used up and there is much less gas passing over a unit of active area per second. The difference between maximum and minimum current density is 43%. This matters because the area near the gas inlet, where there are many reactions of oxygen and hydrogen per second (ie the current density is high), gets much hotter than the area near the outlet, where there are fewer hydrogen/oxygen reactions taking place. The temperature differential and variation in concentration of water puts stress on the fuel cell membrane. Since heat and water are produced in a uniform fashion across the fuel cell plate in Loop Energy’s design, there is less stress on the membrane and the fuel cells have higher operating up-time, require less maintenance and last longer. This results in lower maintenance costs and higher reliability.

The channel design enables Loop Energy to achieve superior performance to conventional fuel cells while using the same materials such as membranes. This means it is able to take advantage of existing supply chains, which have already achieved reductions in the costs of materials and manufacturing through economies of scale. It also means that, while conventional fuel cell manufacturers have to design different membrane electrode assemblies (MEAs) and plates for applications requiring widely different power outputs, Loop Energy can use the same MEAs and plates in modules intended for applications with widely differing power requirements. This should enable Loop Energy to achieve cost reductions arising from economies of scale more quickly and to reduce the amount of design time required to create modules for new markets.

Loop Energy is not the only fuel cell company to create a mechanism to provide uniform delivery of gas to the active surface to improve cell performance. Toyota is also working on a solution, although this involves adding a titanium layer to the MEA, incurring extra cost.

BEVs are several years ahead of FCEVs in terms of maturity because of their lower costs: £49,995 and upwards for the Toyota Mirai versus £29,790 and above for a Nissan Leaf. In addition, the infrastructure for charging cars (but not heavy-duty vehicles) is readily available, while the infrastructure for distributing hydrogen for FCEVs is not. Given the level of investment in battery powered passenger cars, it is not clear whether fuel cell technology will be able to take a material share of this market segment. Loop Energy is not addressing this market. However, there are other segments of the transportation sector where the superior range and refuelling time offered by fuel cell technology makes it a viable alternative to battery powered vehicles. This is summarised in the report Driving Change: How Hydrogen Can Fuel A Transport Revolution from the Centre for Policy Studies thinktank published in June 2020. This states ‘If the UK is to succeed in complying with its ambitions for decarbonising transport, and cleaner air, another solution will be needed for heavier forms of transport. And the most obvious contender – indeed, the only realistic one – is hydrogen.’

The reason for this is that the practical range of a BEV is limited by an effect termed ‘mass compounding’: for every kilogram of battery mass added to increase range, the size and weight of other vehicle components must also be increased to maintain the performance and safety of the vehicle, and then additional batteries are required to shift the additional mass The mathematics around range is particularly compelling for larger vehicles like heavy goods vehicles. For example, the Mercedes eActros 300 has a range of around 185 miles and is equipped with three battery packs with a total capacity of 315kWh, which we estimate weighs around 2 tonnes. The gross vehicle weight is around 27 tonnes with a payload of 17.7 tonne. The longer-range version, the eActros 400, has a range of up to 250 miles, which is achieved by adding a fourth battery pack, taking the total capacity to 420kWh. The gross vehicle weight remains 27 tonne, but the maximum payload is reduced to 16.6 tonne. Tesla is now taking orders for a semi-truck, which is fully loaded at 37 tonnes, has a range of up to 500 miles and can recover 70% of range by charging for 30 minutes. Range is also an issue for buses, even those covering short routes in urban areas. Depending on topography and weather conditions, battery powered buses can currently drive around 225 miles per charge. This means they have to re-charge about once a day on a shorter route in a dense city. Standard depot-based charging systems for heavy-duty vehicles such as buses cost around US$50,000, while en-route ones can be two or three times that, excluding the cost of the land. This adds to the TCO. In contrast, extending the range of an FCEV only requires the hydrogen tank to be enlarged, not the fuel cell, thus adding significantly less weight per kWh of stored energy. This means that FCEVs typically offer a substantially higher range than BEVs. For example, Loop Energy’s first customer, Tevva, has fuel cell truck will have a range of up to 280 miles.

Refuelling time is also an area where FCEVs score more highly than BEVs. The Mercedes eActeos’s four battery packs take 100 minutes to charge. FCEVs can be fuelled eight to 10 times faster than BEVs. For example, the hydrogen tanks of a Tevva truck can be refilled in 10 minutes. This has significant economic implications for fleets of buses or delivery trucks as the asset cannot be used while it is being charged. In densely packed urban centres, movements inside bus depots have to be tightly orchestrated to accommodate charging. Bus companies also have to consider how to get the electricity to their charging stations, which may require conversations with utilities on costly grid upgrades. The Mass Transit journal calculated that a bus carrying 320kWh of energy would need recharging with approximately 250kWh of energy over a two- to four-hour period depending on chemistry. Most buses are out of service at night for six to eight hours. A 100-bus fleet would therefore require a minimum power requirement of 5MW, ideally 10–15MW to allow adequate flexibility in charge routines. The alternative would be to distribute 14 to 16 fast charge stations along bus routes. Neither option is simple to execute nor cheap.

While the purchase price of a fuel cell truck is higher than that of a comparable diesel vehicle, DHL calculated that the TCO of the two types is similar. This is because the operating and maintenance costs of hydrogen trucks are lower and the service life is longer. According to Loop Energy, this means that heavier duty FCEVs can in future be economically viable without recourse to subsidies, although clearly the presence of subsidies should accelerate adoption.

Loop Energy’s customer adoption cycle comprises three stages: pilot ‘1’ phase, scale up ‘10’ phase and full production ‘100’ phase. There are currently 14 OEMs in the first phase, two in the second phase and one in the final phase.

Tevva is Loop Energy’s most advanced customer, having recently entered the full production phase. The multi-year supply agreement, which has committed volumes exceeding US$12m till end-2023, was won following a competitive tender process. Initially, Loop Energy and a number of other leading fuel cell manufacturers were selected for a pilot phase in Q421. Loop Energy emerged as winner of the process with a scale-up sized order in April 2022. This was progressed to a full production sized order in July 2022. This not only demonstrates the superiority of Loop Energy’s product, and with a customer that markets its zero-emissions trucks based on TCO, but also the speed at which potential customers can move from pilot to full production phases.

Tevva is a zero-emission truck developer, founded in 2012. It is a private company based in the UK. It has raised US$108m since November 2021 (in two tranches) to commence production of its trucks in 2022. It offers both shorter range pure BEVs and longer-range battery vehicles with a fuel cell range extender (BFC hybrids). The BEVs have a range of up to 250km and a payload of 2.9 tonnes for a 7.5 tonnes truck. According to Tevva, TCO parity is achieved after 35,000km pa. They have a charge time of five hours. The BFC hybrids have an increased range of up to 450km and with a similar payload to the BEV (despite the increased range). The charge time for the hydrogen range extender should be c 10 minutes. Tevva expects first deliveries of its trucks in Q322, and that the volumes should ramp up very quickly. It plans to produce 3,000 trucks pa by 2023 for domestic and international markets. It has a long-term goal of more than 100,000 Tevva vehicles in service before the end of this decade.

Skywell is the parent company of Nanjing Golden Dragon Bus Company. It is based in Nanjing, where the municipal government is planning to switch its battery electric bus fleet of c 7,000 vehicles to BFC hybrids. In April 2020, Loop Energy announced the start of a long-term commercial agreement worth c US$15m over a three-year period. Initially, Loop’s 50kW fuel cell is being used as a range extender. Skywell started scaling up the order in June 2021. Since then, there have been delays to the roll-out of hydrogen infrastructure in Nanjing, as Skywell applies for a longer-term permit to replace its temporary permit, which recently expired.

NGVI is South Korean based company specialising in compressed natural gas (CNG) fuel storage and supply system modules for vehicles. It is also exploring fuel storage and supply system modules for hydrogen vehicles. Its major shareholders include some of Korea’s largest bus fleet operators. It thus has a unique level of appreciation for the impact of TCO on the speed of adoption of hydrogen technologies. It has a multi-year agreement with the Ulsan Metropolitan City for the supply of hydrogen electric transit buses. In the first phase, Ulsan is expected to invest US$2m by 2024 in testing and certification of hydrogen bus technologies. Ulsan plans to replace 40% of the city’s c 950 buses and establish 60 hydrogen refuelling stations by 2030, so one could expect a significant uplift in volumes once the slow-burn initial phase is complete. There is also potential to expand sales into the capital area, where Seoul Bus Company and TCHA Partners are expected to own more than 2,000 buses by 2023 with demand of more than 200 buses a year.

M&I recently progressed into the scale-up phase with an order for 10 fuel cell systems to meet the growing demand for its hydrogen electric city bus. Loop is providing 30kW fuel cell systems for the single-decker buses. M&I believes it now has the opportunity to deliver the bus to some of Europe’s largest and most progressive markets following significant interest in a recent European tour. Throughout the tour, the bus had demonstrated increased fuel efficiency, allowing it to achieve further range with less onboard fuel storage. This has been a standout feature for fleet operators looking for a zero-emissions solution to electrify transit bus fleets.

Italian company Morello is a global leader in extra heavy-duty equipment. It is targeting a possible scale-up phase by end-2022. In addition, Slovenian company Ecubes is currently in a pilot phase but has stated there is potential to increase orders to more than 50 fuel cell modules by H123.

In anticipation of a significant uplift in orders, Loop Energy is investing in manufacturing facilities in Canada (British Columbia) and China (Shanghai). The facilities currently each have targeted capacity of 1,000 modules pa. Due to the larger floor space of the Shanghai facility (93,355 sq ft), compared to 35,250 sq ft currently used, there is potential to increase capacity to c 2,400 modules pa. This would bring total manufacturing capacity to 3,500 modules pa, which is enough to satisfy our base case volume sales forecasts until 2026 (see Financials section). In addition, the company has recently announced that it is expanding into the UK, in a location next to a growing group of manufacturers helping decarbonise road transport, including major customer Tevva. Loop has not yet specified the size of any potential production facility.

Loop Energy is primarily targeting the return to base fleet market, which comprises buses, heavy duty trucks (HDTs), medium duty trucks (MDTs) and light commercial vehicles (LCVs). LCVs comprise vans and pick-ups. Collectively, we refer to HDTs and MDTs as trucks. Total vehicles sold across all of these segments increased to a combined c 26m in 2021, up from c 25m in 2020, however, still below pre-COVID-19 levels of c 27m in 2019. Trucks and buses account for c 20% of these volumes (or c 5.3m units). The delivery truck market alone is worth US$100bn, according to zero emission truck manufacturer Tevva. Battery technologies are generally more advanced and command a c 2% market share of the combined truck and bus market. Fuel cells are mostly still at an early non-commercial stage and account for just c 0.1% (equating to c 2% of EV sales).

Regulatory developments in road transport are driving a shift from ICE vehicles to EVs. As discussed above, batteries are better suited to lighter vehicles, particularly for shorter distances while fuel cells are better suited to heavier vehicles, particularly with heavy loads and for longer distances. Hybrid BEVs with a fuel cell range extender (BFC hybrids) are another solution, particularly for long-distance commercial vehicles. According to Tevva, hydrogen and batteries are not alternatives to each other but partners in achieving an ideal solution. Batteries are the most efficient, lowest cost and lowest carbon option, but they are heavy and relatively slow to re-charge. Hydrogen is less cost efficient and less carbon efficient, but extremely lightweight and fast to replenish.

Transport accounts for roughly a quarter of global carbon dioxide emissions, with road transport contributing approximately 75% of these emissions. Although trucks and buses account for only 5–6% of annual vehicle sales, they are responsible for more than one-third of road transport emissions, based on data from the IEA and the International Organization of Motor Vehicle Manufacturers (OICA). This disproportionately high contribution means that they are an important area for decarbonisation.

Under the Paris agreement, global leaders have agreed to limit global warming to well below 2 degrees, while striving for 1.5 degrees. This requires country-level emissions reduction targets and regulation to ensure a credible pathway to net zero by mid-century. Over 125 countries have set or are considering net zero emissions targets. To help achieve this, governments are phasing out the sale of ICE vehicles over the next couple of decades or so. For example, the UK is phasing out new pure ICE cars and vans (up to 3.5 tonnes) sales from 2030, and other heavier ICE commercial vehicles between 2035 (3.5t to 25t) and 2040 (>26t). The EU commission has proposed only zero-emission new cars and vans (and not hybrids) can be sold from 2035, although the proposal has received some resistance from a few countries. The EU is currently reviewing existing regulations on heavy duty vehicles. A White Paper by the International Council on Clean Transportation (ICCT) suggests that all new heavy-duty vehicles should be zero-emission by 2040. China plans to make all new vehicles sold ‘eco-friendly’ by 2035, corresponding to 50% of new vehicles being BEVs, FCEVs or plug-in hybrids (BEV plus ICE range extender) and 50% being hybrids (ICE plus electric boost). Although the US does not yet have federal regulation, a MOU signed by 17 states, the District of Columbia and Canadian province, Quebec, commits to 30% of new MDT and HDT sales to be zero emissions by 2030 and 100% by 2050.

Based on scenario analysis by the IEA, current regulation and pledges by countries relating to vehicles emissions reduction is insufficient, on a 2030 timeframe, to put transport emissions on a pathway towards net zero by 2050. Thus, more needs to be done to accelerate the roll-out of zero-emissions vehicles if humanity is to comply with the Paris Agreement.

As a result of the tightening regulatory environment, many commercial vehicle OEMs are now exploring both BEVs and FCEVs and/or BFC hybrids. However, we note that they are more likely to move slowly in the development to avoid cannibalising sales of new ICE vehicles (until those sales are banned). We have reviewed over 100 commercial vehicle manufacturers, including both existing ICE OEMs and new EV OEMs, and found that more than 90% of them are developing BEVs and more than 50% are developing FCEVs and/or BFC hybrids. Importantly, the existing (ICE) top 10 truck OEMs and top 10 bus OEMs are all developing both BEVs and FCEVs and/or BFC hybrids. Despite this, there appear to be differences in strategies and visions between the OEMs. For example, Volvo believes that both battery and fuel cell technologies have a place in road transport. It has set up a fuel cell joint venture (named cellcentric) with Daimler Truck, which aims to have heavy fuel cell trucks on sale in the second half of the decade. It suggests that these trucks could use 300kW fuel cells and carry 65 tonne loads for distances of c 1,000km, with refuelling taking less than 15 minutes.

On the other hand, Traton, which is owned by the Volkswagen (VW) Group and whose brands include Scania and MAN, appears to be betting more heavily on battery technologies. In June 2022, MAN announced that it will be investing €100m over five years and plans to mass-produce high voltage batteries for electric trucks and buses from 2025, with targets of over 100,000 battery systems per year. The company suggests an electric MAN truck could have a range of over 1,000km from 2026 based on next-generation battery technology. Although Traton is also ‘quietly’ exploring fuel cell technology, its public stance is aligned with the rest of the VW Group with batteries as a key focus. The outgoing CEO of VW, Herbert Diess, recently suggested that his firm could overtake Tesla as the world’s largest BEV manufacturer from 2025. Stances of other leading truck and bus OEMs appear to fall somewhere in between Volvo and VW Group.

As mentioned above, the market for commercial vehicles was 26m units in 2021, with trucks and buses accounting for c 20% or 5.3m units. Loop’s current target market is a function of growth in these units, penetration of zero carbon vehicles and the proportion of these that are BFC hybrids (or FCEVs), along with pricing trends for fuel cells. In our base case, we consider only the truck and bus markets. In addition, we estimate the market size for fuel BFC hybrid LCVs, which would provide upside to our valuation if there is traction in this segment. We make the following assumptions:

Exhibit 10 shows our estimate of market sizes for trucks and buses. Our base case is represented by output at 60kW per unit at c US$225/kW, which equates to a market size of c US$4bn in 2030. We note that if a fuel cell dominant solution becomes prevalent in BFC hybrid trucks then our estimated market size for trucks and buses increases to c US$17bn. This further increases to c US$24bn if pricing increases to US325/kW (and fuel dominant solutions prevail).

Exhibit 11 shows our estimate of market sizes for LCVs at different prices per kW and BFC hybrid’s share of the EV market in 2030. Our market size estimates range from c US$5bn at US$175/kW and 10% share to c US$50bn at US$325/kW and 50% share. Any traction in this potential market for Loop Energy would provide upside to our valuation of C$4.5/share.

We have identified more than 20 PEM fuel cell developers, some of which are competitors of Loop Energy. Others are focused more on other sales channels or are at an earlier stage. Globally, in our view, the two main competitors for Loop Energy are Ballard Power and Hyundai. Currently Ballard Power is the dominant market leader in buses, with c 80% share in North America and Europe and a c 40% share in China (according to Ballard’s May 2023 corporate presentation). In addition, it has a European partnership with Mahle and 50% of vehicles on the road globally have a Mahle component (according to Ballard Power). However, volumes are not currently at commercial levels, with the BFC hybrid/FCEV truck and bus market in aggregate of the order 1,000 units pa in 2021. We believe that Loop Energy’s product differentiation and targeting of early movers and disruptors should see it gaining significant market share in the coming years. We also note that some of its competitors’ key relationships are with large ICE OEMs or component providers, which are lacking motivation to move rapidly due to the potential cannibalisation of existing sales.

Kent Thexton (chair and director): Kent Thexton joined Loop in June 2022 as board chair and director. He previously spent 16 years at Sierra Wireless, as director and chair of the board for 13 years, followed by three years as CEO and president. Kent has also contributed to the boards of several public companies, including Redknee Solutions, now known as Optiva, a Canadian provider of telecommunication operations software and services, and O2, a British telecommunications company. Kent also has extensive experience leading Canadian capital venture companies, including as the managing director at OMERs Ventures and the founder of ScaleUP Venture Partners.

Ben Nyland (CEO and director): Ben Nyland was appointed president of Loop in 2015 and chief executive officer of Loop in 2016, following more than three years as the company’s vice president, operations. Prior to joining Loop, Mr Nyland spent over 10 years in a variety of senior management positions, including as president of Rampworth Capital Services, JBN Developments, Exro Technologies and Maclean Group Marketing. He holds a bachelor of science in computer engineering from the University of Alberta.

Damian Towns (CFO and Corporate Secretary): Damian Towns joined Loop in 2021 as chief financial officer and brings over 25 years of experience in progressive and rapid-growth companies, with 15 years leading at executive level. Mr Towns joined Loop Energy from Photon Control, where, as the CFO and corporate secretary, he guided Photon’s exponential growth and maximised shareholder revenue through its acquisition. Prior to his role at Photon Control, Mr Towns served as an executive director, CFO and corporate secretary at Liberty Defense, and spent over 12 years as CFO and corporate secretary at Marimaca Copper, formerly Coro Mining. He is a Canadian CPA and holds a first-class honours degree in accounting and finance from the University of Otago, New Zealand.

George Rubin (CCO): George Rubin joined Loop in 2020 as managing director, commercial strategy, and then as chief commercial officer. Mr Rubin was previously co-founder, vice president and subsequently president of Day4 Energy, where he helped grow company operations from a research and development start-up in 2003 with a total of five staff, to 265 employees and sales in excess of US$350m in seven years. As CEO of Heliotrope Technologies, Mr Rubin developed a minimum viable product strategy, early adopter customer base and ultimately a sales pipeline in excess of US$40m in under two years.

Daryl Musselman (COO): Dr Musselman joined Loop in 2020, bringing over 30 years of experience from the renewable energy and automotive sectors. Dr Musselman was VP, operations and engineering and VP, manufacturing operations at Svante, where he successfully delivered a world-first point source carbon capture plant removing 30 tons of carbon dioxide per day. As VP, engineering at Endurance Wind Power, Dr Musselman and his team designed, installed and maintained approximately 700 new turbines in the UK with an estimated combined installed cost in excess of £250m. His other executive roles include COO at Bionic Power, and VP, engineering and technology development at Xebec Adsorption. He began his career in the automotive industry at General Motors of Canada Co. and led advanced engineering efforts for motorsports company Multimatic. A registered professional engineer, Dr Musselman has bachelor of applied science and master of applied science degrees in mechanical engineering from the University of Waterloo, a PhD in engineering science from Western University, and has completed the Executive Development Course at McGill University.

We value Loop Energy using a DCF analysis, which reflects the long-term value and growth prospects of the company. A peer valuation analysis is not meaningful as Loop Energy’s peers are all loss-making. Our DCF approach suggests a valuation of C$4.5/share, which is more than double the current share price (C$2.12). Our valuation is highly subjective, due to the early stage of the company, absence of track record and nascent nature of the fuel cell market, thus we provide a detailed sensitivities analysis.

Key assumptions and drivers for our cash flow model are as follows:

The valuation is significantly more sensitive to CoC than TGR. This is due to our long explicit forecast period of 2022–50. As Loop Energy de-risks, one could expect our valuation to increase in multiples. For example, assuming a CoC of 13%, just 2pps below our 15% base case, would increase the valuation by more than 2 times to C$9.9/share, which is more than four times the current share price. A CoC of 10% would increase the valuation to c C$29/share, c 14x the current share price. We show numerous other valuation sensitivities in the Sensitivities section below.

We have identified 12 listed peers for Loop Energy. These companies are pure-play fuel cell and/or electrolyser manufacturers, with various fuel cell technologies including PEM, solid oxide, alkaline, methanol and molten carbonate. Most peer valuation metrics are not meaningful as none of these companies is making an operating profit, and unsurprisingly therefore they are all recording negative operating cash flow. However, on an EV/sales basis, Loop Energy is significantly undervalued compared to its closest peers. Of the 12 peers, three of them are PEM fuel cell producers: Ballard Power, PowerCell Sweden and Proton Motor Power Systems. Plug Power and ITM Power also have PEM technologies, however, they are more focused on PEM hydrogen electrolysers. We also note that the stationary segment is proving the most important for Proton Motor Power Systems, which has developed an electric fuel cell hybrid system that combines a standard PEM fuel cell module and an energy storage system. This leaves Ballard and PowerCell Sweden as Loop Energy’s two main listed competitors, although PowerCell Sweden has an exclusivity deal with Bosch in Europe, so they are unlikely to cross paths in competitive tenders there. As shown in Exhibit 15, based on 2024 consensus sales forecasts, Loop Energy has an EV/sales ratio of 0.9 compared to Ballard Power’s 6.5x and PowerCell Sweden’s 17.8x.

It is also worth highlighting share price performance over the last few years. We consider the closest four PEM peers below, however, similar trends are noticeable amongst the wider fuel cell/hydrogen peer set. Shares in fuel cell/hydrogen stocks made sharp upwards moves between 2019 and January 2021, which resulted in Ballard Power’s, PowerCell Sweden’s and Proton Motor Power’s share prices increasing by 14, 12 and 19 times respectively. These share price gains started to reverse from the end of January 2021, with a mostly downwards trajectory since then until the last month or so when share prices have started slight recoveries. Ballard Power and Proton Motor Power’s shares have lost c 80% since peak and PowerCell Sweden has lost c 65%.

Loop Energy floated on 25 February 2021, roughly a month after the fuel cell sector’s recent peak. We compare its price performance relative to its PEM peers in Exhibit 17. Loop Energy’s share price has lost 87% since IPO, which is far more than its peer group, whose share prices have lost 50–73% over the same period. This is despite Loop Energy making significant commercial progress, which should de-risk its investment case, and is possibly due to Loop Energy’s smaller market cap and lower liquidity.

As mentioned in the Valuation section, we have prepared a financial model for the period 2022–50 to sufficiently reflect the growth prospects of Loop Energy, as road transport transitions from ICE to EVs as part of a global objective of net zero emissions by 2050.

We make the following assumptions:

In our base case, we expect Loop Energy to generate a positive gross margin from 2025. We estimate that the gross margin will decrease from 28% in 2025 to 22% in 2035, as volume sales ramp up and manufacturers seek to improve competitiveness by reducing prices. We estimate the company becomes operationally profitable from 2028, with EBIT margin increasing to 13% in 2030 and 15% in 2035, despite prices and gross margin trending downwards. This is due to a reduction of operating costs including depreciation as a percentage of sales from 12% of sales in 2030 to 7% in 2035 as volume sales grow by a CAGR of 27% over the same period.

In our base case, Loop Energy has just sufficient capital to fund its plans for FY22; however, it will need additional funding for FY23. Along with its Q222 results, the company announced it is filing for a base shelf prospectus (BSP) that will allow it to raise up to C$100m, in any number of tranches, at short notice, over the next 25 months. We expect Loop Energy to become operationally cash flow positive in 2027 and assume that it will be able to raise debt capital to fund growth from 2028. Until then, we estimate the company will require c C$250m in equity funding, on top of its net cash of c C$40m at the end of H122 and C$9.75m grant received from the Canadian government.

Loop Energy is an early-stage company in nascent markets with high long-term growth potential. It has no track record of profitability or cash flow generation. Thus, our forecasts are highly subjective and sensitive to numerous assumptions. We test some of these sensitivities in this section.

In our base case, we assume Loop Energy commands just a 10% share of the combined BFC hybrid truck and bus market in 2030. This equates to sales of c 30,000 units. Of course, the market might not grow as rapidly as we are projecting (based on the IEA’s 2030 Actual Pledges Scenario), in which case Loop Energy’s implied market share (at 30,000 units) would be higher. Assuming the market grows as we are projecting, if Loop Energy’s 2030 share is 17.5% (equating to 52,500 units), our valuation would increase by 88% to C$8.6/share. Conversely, if its market share is 2.5% (equating to 7,500 units), our valuation would at first glance reduce by 100% to C$0.0/share. However, this may correspond with a scenario where the market takes off slower than expected, such that 7,500 units is a sizeable share of a notably smaller but promising market. Under this circumstance, one might appreciate that Loop Energy’s investment case has de-risked, and we note that for CoCs of 13% or lower, the shares would still provide significant upside. Likewise, for the other market share inputs the investment case would have de-risked by 2030 and in scenarios with a lower CoC, our valuation would be multiples of the current share price under most shown variations.

We also perform sensitivity analysis on when we expect Loop Energy to become operational cash flow positive under each scenario and the required equity capital to get there. If the company achieves c 7,500 units sales by 2030, then we believe it will become operationally cash flow positive in 2030, c 15,000 units and c 22,500 units correspond with operational cash flow positive in 2028, whereas c 30,000 or more units equate to operational cash flow positive in 2027. The reason higher unit sales beyond 30,000 units do not imply earlier operational cash flow break-even is due to the ramp up in sales being skewed towards the late 2020s. For instance, our volume sales growth profile for 52,500 units requires c 3,750 units in 2026 (and 7,260 units in 2027). This is similar to the profile for 30,000 units, which requires c 3,100 units in 2026 (and c 5,500 units in 2027). The difference in unit sales and operational cash flow generation becomes more pronounced towards 2030. The reason equity requirements are similar and there is no particular trend across the sensitivities is due to the differing working capital and capex requirements of each growth profile, offsetting the increasing trend in operational cash flow (as units sales increases).

As we are conservative in our base case, and in recognition of potentially increasing competition, we assume that Loop Energy’s market share decreases to 5% by 2050. If this reduces to 2% market share, our valuation would reduce by 54% to C$2.1/share. Conversely, if it were to increase to 8% market share, our valuation would increase by 36% to C$6.2/share. Again, we note the investment case would have significantly de-risked by 2050 and that in scenarios with a lower CoC, our valuation

In our base case, we assume 50% penetration by BFC hybrid (or FCEV) trucks and buses of the EV market by 2050. Of course, this would imply a much lower penetration of the EV market for all vehicles (including cars and LCVs). If we reduce our assumption to 35% penetration, our valuation reduces by 30% to C$3.2/share. Conversely, if it were to increase to 65% penetration, our valuation would increase by 26% to C$5.7/share. We note the investment case would have significantly de-risked by 2050 and that in scenarios with a lower CoC, our valuation would be multiples of the current share price under most shown variations.

In our base case, we assume that the average size of units sold increases from 50kW in 2025 to 60kW in 2030 and then further to 80kW in 2050. We believe this is conservative as it assumes only BFC hybrids with relatively small fuel cell range extenders are used rather than fuel cell dominant solutions. The latter could require significantly larger modules of up to 300kW for the heaviest trucks. Furthermore, it likely under-appreciates penetration of larger trucks. Tevva’s 7 tonne trucks are using a 60kW range extender, so one can envisage its planned 12 and 18 tonne trucks perhaps using 100–150kW range extenders. If average unit size were to increase to 110kW, our valuation would increase by 44% to C$6.6/share. Conversely, if average unit size decreases to 50kW, our valuation would decrease by 44% to C$2.5/share. Again, we note the investment case would have significantly de-risked by 2050 and that in scenarios with a lower CoC, our valuation would be multiples of the current share price under most shown variations.

In our base case, we assume that production cost per kilowatt is 30% above that projected by the US DOE in 2030. We are comfortable with this as there are large sensitivities in the DOE’s own workings. In its most recent published analysis in 2021, it increased its previous cost per kilowatt projections for 2025 by c 70%. We trend our cost per kilowatt assumptions to match the DOE’s ultimate cost per kilowatt projection by 2045. If we assume that Loop Energy’s cost per kilowatt is 60% above the DOE’s in 2030, our valuation increases by 27% to C$5.8/share. The reason it increases is that we apply the same price mark-up assumptions across all sensitivities, as we do not vary our volume sales forecasts as a function of price per kilowatt. Of course, in practice, if the price point is too low, Loop Energy would potentially lose market share (and experience decreased volumes). Conversely, if we assume that Loop Energy’s cost per kilowatt is the same as the DOE’s in 2030, our valuation decreases by 28% to C$3.3/share, subject to the above-mentioned limitations in this sensitivity analysis. We note the investment case would have significantly de-risked by 2030 and that in scenarios with a lower CoC, our valuation would be multiples of the current share price under most shown variations.

In our base case, we assume that capex per kilowatt of annual manufacturing capacity decreases from an estimated c C$350/kW for existing capacity to C$100/kW once capacity reaches 10,000 units pa then further decreases (by 20%) to C$80/kW for 100,000 or more units pa. If capex for 100,000+ units pa increases to C$110/kW, then our valuation decreases by 82% to C$0.8/share. Conversely, if capex decreases to C$50/kW (at 100,000+ units pa), our valuation increases by 82% to C$8.3share. We note the investment case would have significantly de-risked when volumes reach 10,000 units pa and then even further by 100,000 units pa and that in scenarios with a lower CoC, our valuation would be multiples of the current share price under most shown variations.

In our base case, we assume that operating costs grow at 5% pa over 2026–50 to reflect our strong long-term growth projections. If they were to decrease to 2% pa, then our valuation increases by 28% to C$5.8/share. Conversely, if operating costs increase to 8% pa, our valuation decreases by 42% to C$2.6/share. We note as the investment case de-risks, scenarios with a lower CoC imply a valuation of multiples of the current share price under most shown variations.