2G Energy — Continued internationalisation reduces losses

2G Energy (DB: 2GB)

Last close As at 21/11/2024

117.60

3.20 (2.80%)

Market capitalisation

528m

More on this equity

Research: Industrials

2G Energy — Continued internationalisation reduces losses

2G Energy has diversified 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 13.5% year-on-year increase in sales during H117 and a substantial reduction in operating losses. We note that the first half is typically loss making while 2G Energy works on CHP projects for delivery in the second half.

Analyst avatar placeholder

Written by

Industrials

2G Energy

Continued internationalisation reduces losses

Advanced materials technology

Scale research report - Update

09 October 2017

Price

€20.9

Market cap

€93m

Share price graph

Share details

Code

2GB

Listing

Deutsche Börse Scale

Shares in issue

4.4m

Last reported net cash as of 30 June

€11.0m

Business description

2G Energy is a leading international manufacturer of highly efficient combined heat and power plants. 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.

Economics depends on spark spread.

Low free-float (47.7%).

Analysts

Anne Margaret Crow

+44 203 077 5700

Roger Johnston

+44 203 077 5722

2G Energy has diversified 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 13.5% year-on-year increase in sales during H117 and a substantial reduction in operating losses. We note that the first half is typically loss making while 2G Energy works on CHP projects for delivery in the second half.

Exports drive H117 sales growth

Group sales increased by 13.5% year-on-year to €72.4m, supported by exports, which accounted for over half of CHP sales for the first time, and service revenues. A more favourable product and country mix resulted in higher gross profit, leading to a narrowing in EBIT losses from €1.9m to €0.5m. This was achieved even though personnel costs were 9% higher because of the French sales office and additional service and R&D engineers. Net cash increased by €7.0m to €11.0m, despite a €1.0m investment in CHP plant for use by the in-house leasing operation. Order intake during the first eight months of FY17 was ahead of the same period in FY16, resulting in an order book totalling €122.7m at the end of August. This has encouraged management to refine previous FY17 revenue guidance of €160-180m to the top end of that range.

Continued progress against strategic objectives

The H117 sales growth clearly demonstrates the importance of developing both export markets and the service offer. We note that in August 2G calculated its first licence fees for the use of the customer and partner portal, extending its service offer. It continued to develop differentiated product, recently launching the ultra-low emission aura range, which meets extremely stringent requirements such as the TA Luft air pollution control regulations in Germany.

Valuation: Potential for uplift as margins improve

A comparison with established boiler manufacturers shows 2G Energy trading at a discount to the mean for the sample with respect to EV/sales multiples (0.5x vs 1.0x year one mean), in line with EV/EBITDA multiples (7.5x vs 8.9x year one mean), at a premium to year one P/E ratios (16.5x vs 15.7x mean) and at a discount to year two P/E multiples (12.7x vs 15.9x mean). This indicates that the shares are fairly priced at current levels with potential for uplift as margins improve.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

152.9

4.6

0.59

0.37

35.4

1.8

12/16

174.3

3.6

0.40

0.40

52.3

1.9

12/17e

179.7

8.4

1.27

0.40

16.5

1.9

12/18e

189.7

10.8

1.64

0.41

12.7

2.0

Source: 2G Energy 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.

H117 financials demonstrate benefit of strategy

2G’s challenge is to maintain profitability despite major fluctuations in demand in Germany caused by legislation. The H117 results show that development of export markets and services has helped stabilise sales.

Exhibit 1: H117 revenue breakdown by segment

Exhibit 2: Order backlog breakdown, 31 August 2017

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 1: H117 revenue breakdown by segment

Source: Edison Investment Research

Exhibit 2: Order backlog breakdown, 31 August 2017

Source: Edison Investment Research

Internationalisation delivers H117 revenue growth

The H117 results are of limited value in indicating performance for the year as whole because CHP plants take several months to design, build and test. Typically 30% of the value of a CHP contract is payable in advance, 60% on factory acceptance prior to shipping and 10% on final acceptance. Since a high proportion of customers want their CHP systems delivered towards the year end (ie at the beginning of the period when most heating is required), sales and profits are typically skewed towards the second half of the year. While sales increased by 13.5% year-on-year to €72.4m, this reflects a higher proportion of manufacturing activity being deployed on projects where some revenues were recognised during the period rather than increased activity overall. H117 sales were flattered by the postponement of some projects, primarily ones in the UK, from H216 into H117. Total operating revenues, which include an element recognising work in progress, were very similar to H116 (€85.4m vs €85.5m). Nevertheless, some encouraging trends may be observed. 55% of the CHP system sales were to customers outside Germany. This 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. Revenues from the services and spare parts business were 44% of the total (H116: 43%). These revenues are linked to the size of the installed base, giving additional protection from potential downturns in demand for CHP equipment in Germany.

Decoupling 2G’s fortunes from demand in Germany remains important. German CHP sales declined by 22% year-on-year. There was a pick-up in sales of bio-gas plants related to projects making existing co-generation facilities more flexible, as 2G’s programme to help operators decide how to deal with the new legislative framework bore fruit. However, this was not sufficient to compensate for a dip in sales of natural gas plants related to uncertainty in the legislative framework, such as the tendering process for 1-50MW systems.

The cost of materials reduced by €3.8m, reflecting a more favourable product and country mix, resulting in a €3.8m improvement in gross profit. This was partly offset by a €1.3m increase in personnel costs related to increased investment in R&D, servicing support and expansion in France, so EBIT losses reduced by €1.9m to €0.5m. This result was in line with management expectations. As noted above, the first half is typically loss making. We await the full year results to see how the “Lean to Lean” programme is progressing. This aims to improve margins through organisational adaptation and adoption of software to standardise processes and make them more efficient.

Balance sheet and cash flow

The group was cash generative during the period. Operating cash flow of €9.2m benefited from a €6.7m reduction in trade receivables and a €2.1m increase in payables reflecting generally higher production utilisation at the end of the period. Investment in tangibles totalled €2.0m, double the prior year level, as €1.0m was invested in plants for the rental business to lease out. Net cash increased by €7.0m to €11.0m.

Favourable outlook supported by order book

During H117, new orders totalling €65.3m were received (H116: €61.7m) followed by a further €28.6m during July and August (€22.7m July and August 2016). The order backlog at end August 2017 was €122.7m (€127.2m at end August 2016). At the end of June the total order-book value of bio-gas fuelled plants in Germany was €53.7m, so a recovery in demand related to successful exploitation of the flexibilisation opportunity combined with export development is responsible for the healthy outlook. Management notes that this order level secures double shift working through to the end of Q118. It has encouraged management to refine previous FY17 revenue guidance of €160-180m to the top end of that range.

Valuation

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 prospective EV/sales 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, and on P/E multiples that are similar.

A comparison with established boiler manufacturers shows 2G Energy trading at a discount to the mean for the sample with respect to EV/sales, but in line with the sample mean for EV/EBITDA multiples, towards the upper bound of our sample with regard to year one P/E ratios and at a discount to year two P/E multiples. This indicates that the shares are fairly priced at current levels with 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.

Exhibit 3: Peer multiples

Name

Market cap (€m)

EV/sales 1FY (x)

EV/sales 2FY (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

P/E 1FY
(x)

P/E 2FY
(x)

EBIT margin 1FY

AFC Energy

50

8.5

2.6

-

-

-

-

-

Ballard Power Systems

722

7.3

6.0

1,374

181

-

-

-

Ceres Power Holdings

160

41.8

23.7

-

-

-

-

-

Electro Power systems

95

6.1

0.8

-

23.7

-

59.9

-

Enertime

6

0.8

0.7

-

-

-

-

-

Fuelcell Energy

91

2.9

1.8

-

-

-

-

-

Hydrogenics Corp

107

2.3

1.5

-

26.7

-

-

-

Intelligent Energy Holdings

4

0.5

-

-

-

-

-

-

ITM Power

134

12.4

23.4

-

-

-

-

-

Nordex

950

0.4

0.4

4.7

5.1

14.0

16.1

-

Plug Power

512

5.1

3.3

-

555

-

-

-

Redt Energy

78

5.2

1.7

-

108

-

-

-

Senvion

755

0.5

0.4

6.3

5.2

16.4

12.9

-

SFC Energy

43

0.9

0.8

82.2

30.4

-

-

-

Vestas Wind Systems

16,455

1.4

1.3

7.9

7.8

16.4

15.0

-

Renewable energy equipment mean

6.4

4.9

6.3

16.5

15.6

14.7

Deutz

818

0.5

0.5

4.4

4.8

15.2

17.0

6.3%

Generac Holdings

2,399

2.4

2.3

13.4

12.5

16.2

14.7

14.4%

Rafako

89

0.1

0.1

2.4

2.5

6.0

6.1

4.7%

Conventional Boiler mean

1.0

1.0

8.9

8.7

15.7

15.9

2G Energy

95

0.5

0.5

7.5

6.2

16.8

13.0

4.9%

Source: Bloomberg. Note: Prices at 28 September 2017. Grey shading indicates exclusion from mean.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

More on 2G Energy

View All

Industrials

2G Energy — Fifth successive year of growth

Industrials

2G Energy — Hydrogen ready

Latest from the Industrials sector

View All Industrials content

Research: TMT

XP Power — Entering the RF power supply market

XP has acquired Comdel, a US-based RF power supply company, for $23m/£17m. This marks the entry into a new market for XP and gives it the potential to expand the amount it sells to a sub-sector of its customer base. We have revised our forecasts to reflect both the acquisition and the strengthening pound versus the dollar. We increase our normalised EPS forecast by 1.2% in FY17 and 1.7% in FY18

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free