ADS-TEC Energy — Serving the energy transition

ADS-TEC develops, manufactures and markets intelligent battery storage-based energy platforms and associated services. These enable the provision of high-quality power (voltage and consistency), which is an increasing challenge due to rising demands on the ageing grid infrastructure at the same time as an increasing use of intermittent renewables such as wind and solar. The primary use at present is for buffered fast charging systems for EVs for the specialist element of the commercial charging infrastructure sector, rather than the commodity domestic charging segment. The secondary market is the commercial sector for power storage to provide continuity and price arbitrage. ADS-TEC operates an assembly model, with hardware sales also offering service, maintenance and software opportunities. The primary market is Europe, to be followed by the US, supported by a new assembly facility in Alabama which is under construction. Management estimates that the total addressable market for Europe and the US is worth €80bn for more than 725,000 units for the group’s EV charging units alone.

The company has provided summary FY23 numbers. Q423 was encouraging, with revenue of €50.3m and EBITDA of €4.9m. This underpins our expectation for the group to be EBITDA positive in FY24 (as per management guidance) and EBIT positive in FY25 (small EBIT loss in FY24).

The group had €29m in gross cash at end FY23 (full financials and balance sheet will be available with the detailed SEC filing expected to be released in late April). The company is in the ramp-up stage (management’s expectation is for sales to increase from €107m in FY23 to €200m in FY24), which may require additional working capital. Our view is that the company may need c €10m-€20m in additional capital, which could come from working capital finance, further promissory notes or additional equity as interest appears positive, and we note the €9m raised from a single new investor in December 2023.

Our DCF, assuming a cost of capital of 12% and a terminal growth rate of 2%, comes to $12.80 per share. ADS-TEC Energy’s key peers are part of larger international groups (eg Elli owned by VW) limiting any meaningful comparative valuation. The sector is also in ramp-up mode providing mixed financial results. Alfen being one of the more advanced companies demonstrates the growth and profitability potential of the sector.

The key market at present is for buffered EV charging. Key therefore is the speed of adoption of EVs and establishing charging infrastructure in the company’s key European and US markets. To a degree this is a ‘chicken-and-egg’ situation, hence the number of companies, including the likes of Shell, investing in EV charging networks. The speed of roll-out of these companies, including the availability of finance, will be critical. Alongside this is the potential for government regulation and funding, along with the potential for technical standards to emerge. The grid storage side of the business will depend on the rate of adoption of renewables and the grid’s ability to handle the higher demands and increased variability of power supply. The key internal sensitivity is likely to be the company’s ability to ramp-up production. As an assembler, with the primary facility established and in production, the supply chain perhaps provides the greatest risk to deliveries.

The green agenda will see significant growth in demand for electricity (see our battery energy storage report), while sectors such as transport will require a completely new support (recharging) infrastructure. At the same time, electricity generation will shift to renewables, which tend to be more geographically dispersed and bring greater fluctuation in output. Both of these will put significant demands on the grid, beyond current capabilities. ADS-TEC is looking to the commercial opportunities that this dislocation of the grid will offer, in particular in vehicle charging as a leading protagonist in the new electrification world. The political agenda, with ambitious carbon reduction targets, is providing increasing legislation and financing to ensure capabilities, including infrastructure, are developed to deliver on these promises.

ADS-TEC develops, manufactures and markets intelligent battery storage-based energy platforms, which are positioned to play a key part in the decentralised energy networks of the future. These platforms provide the power storage or buffer systems to enable high power to be delivered to the requisite applications (eg EV fast charging) from a low-power grid. The storage capacity also assists in managing the variability in supply from solar and wind sources, while the flexibility and scalability is suited to the increasing geographical dispersion of such power generation. The systems use battery modules developed and built by ADS-TEC including integration technology and power management with internally developed inverter technology. While elements of this are patented, the key is arguably more in know-how than pure technology.

ADS-TEC’s platforms are designed to be integrated into decentralised energy networks created by customers that could be operators of charging infrastructure, energy suppliers or infrastructure providers. The platforms incorporate hardware, services and software, both proprietary and third party (eg grid management payments for EV charging). ADS-TEC is a key enabler for its customers, offering them standard or customised platform solutions for secure, cost-effective and efficient implementation of their business models.

ADS-TEC Energy was formed around 2010 as part of the ADS-TEC Group, a long-established family business in southern Germany. In 2018, Bosch acquired a stake in ADS-TEC Energy with the business subsequently listed on Nasdaq through a merger with European Sustainable Growth Acquisition Corp, a special purpose acquisition company, in 2021. There has been a further fund-raising, with Norwegian group Svelland Capital investing $10m for a c 3% stake in December 2023. Key shareholders are ADS-TEC Group with 34.9% and Robert Bosch with 20.7% (further details of major holders available on page 21).

ADS-TEC Energy is incorporated in Ireland and has research and administration operations near Stuttgart, Germany. The group has a major production facility near Dresden and is currently developing a production facility in Auburn, Alabama to serve the US market.

Governments have set clear commitments to decarbonise their energy systems, including the electricity grid and transportation sector:

These targets require significant changes and upgrades to the supporting infrastructure:

Along with the hardware investment are the additional software and services required to manage a smarter grid network.

ADS-TEC Energy’s platform technology combines hardware, software, services and in-house developed features, so can be used to create solutions for a range of applications. The platform also assists in monitoring, maintenance and utilisation of the equipment, while also assisting the company in offering extended warranty contracts including performance guarantees. ADS-TEC is targeting two markets: direct current (DC) based ultra-fast charging for EVs on power-limited grids and energy storage and management solutions for commercial and industrial applications.

EV drivers have long suffered from range anxiety, ie how far a vehicle can travel. Arguably, this has been addressed by improved battery technology and efficiencies to the point where the range differential between EVs and ICEs has been significantly reduced. However, range anxiety is being replaced by recharge anxiety due to the limited availability of public chargers and the queuing ritual brought about by long recharging times.

Recharging EVs requires a diverse national infrastructure. Traditional ‘at-home’ chargers running off the domestic low-power alternating current (AC) grid offer limited power and hence lengthy recharge times, providing a perfect ‘overnight charging’ solution. At the other end of the scale, on longer journeys, drivers want a fast charge as they have been accustomed to the relatively speedy refuelling associated with ICE cars. This requires ultra-fast chargers using direct current (DC) and higher power capabilities. Exhibit 1 highlights the categories of charging and their speed of charge.

Ultra-fast charging requires a high charging power of around 300kW. The local electricity grid may not have the capacity to deliver this level of power and will therefore require upgrading. Attaining such an upgrade from the local utility can be costly (up to $1m per MW) and time consuming. The alternative is to deploy a battery-buffered charging point. The battery storage system charges slowly from the low grid power available and stores the energy. When an EV is being charged, the power available from the local grid is supplemented with power from the energy storage system to achieve the maximum charging power needed to fully charge the EV in a few minutes. A second reason to use battery buffering is economic. The system can be charged at off-peak times and then utilised at peak hours, providing a direct price arbitrage.

Exhibit 2 highlights the growth in public charging points expected in Europe. Forecasts inevitably vary. A 2020 report by the European Federation for Transport & Environment forecast 2.9m public charging points by 2030, while a 2022 McKinsey report suggests that even in the most conservative scenario, the EU-27 would need at least 3.4m public charging points by 2030. On the other hand, ChargeUp Europe, an EV charging industry body, forecast 1.8m units by 2030.

The fundamentals are clearly positive. From a legal perspective, 2023 witnessed significant strides, with the EU having adopted legislation requiring that electric charging points for cars with a minimum 400kW output will have to be deployed at least every 60km along core Trans-European Transport Network routes (c 106,000km) by 2026, with the network’s power output increasing to 600kW by 2028. For trucks and buses, charging stations are to be every 120km by 2030, with up to 3,600kW capacity. These stations must include super-fast chargers (more than 150kW). The charging network will clearly also develop beyond the primary network. Supporting this, the European Automobile Manufacturers’ Association (ACEA) reported EV growth of 37% in 2023 to 1.5m units, a market share of 14.6%, which it forecasts will increase to c 20% in 2024, suggesting around 2m units.

President Biden has committed to building a national network of at least 500,000 public chargers by 2030. Rather than legislation, the approach to date has been through funding. Key to this has been the Infrastructure Investment and Jobs Act in 2021, which allocated $7.5bn funding to support the build-out of a national public EV charging network, $5bn of which is for building a ‘backbone’ of high-speed chargers spaced no less than every 50 miles along America’s major roads, freeways and interstates. Note that the funding requires the manufacture of equipment in the US.

A recent report by the NREL, which is part of the US Department of Energy, suggests a significantly greater market including, of particular note for ADS-TEC, 182,000 fast charging points. Note that the Department of Energy stated that there were 170,000 public EV charging points at the end of 2023.

Importantly the market for EVs continues to grow strongly, with US battery EV sales of 1.2m in 2023, growth of c 30%, accounting for 7.7% of the market, up from 6.7% in 2022.

Clearly, strong growth is anticipated in both Europe and the US. It is worth noting the current situation in China, the world leader in EVs with c 58% of global car parc. In 2022, China had 1.8m public charge points and 10.7m battery electric vehicles (BEVs), plus a further 3.1m hybrids. As part of its Sustainable and Smart Mobility Strategy, the European Commission envisages 30m zero-emission cars on the roads by 2030. Similarly, a report by the Edison Electric Institute in the US forecasts 26.4m EVs on the road in the US by 2030. Assuming a rate of one public charge point per 10 BEVs on the road, below the current situation in China, which is also the most advanced large market, would translate to three public charge points in Europe or, assuming 20% of these are fast charging, 600,000 fast charging points compared to 70,000 in situ in 2022. Clearly, this would require an acceleration in current installation rates of c 25,000 a year. It also worth noting the higher proportion of fast chargers in China, supplied exclusively by local manufacturers, which suggests that this market is likely to outgrow the overall charging market.

Clearly there is a ‘chicken-and-egg’ relationship between EVs and the charging infrastructure. The growth in EVs is critical to the long-term financial returns from investing in the charging infrastructure, hence EV sales rates can be expected to have an impact on the investment approach to infrastructure. In the 11 months to end November 2023, BEV sales increased 48.2% to 1.4m vehicles, accounting for 14.2% of the market, up from 11.1% in 2022 (source: ACEA), albeit there has been a reduction in growth rates recently, providing some concerns over the growth rates in 2024. S&P Global Mobility projects battery electric passenger vehicles of 13.3m units worldwide in 2024, growth of 28%.

Management’s review in the recent capital markets presentation identified a total addressable market (TAM) of $80bn for ChargeBox and ChargePost (ie ultra-fast storage with battery buffering) in the US and Europe. Our analysis would support these estimates purely from public charge station infrastructure expectations.

ChargeBox is ADS-TEC’s flagship product. It can dispense 320kW of power from a single dispenser or 160kW from two dispensers and is certified for use in mainland Europe and the US. It can dispense sufficient charge for a typical EV to travel more than 100km (60 miles) in the time it takes to fill the petrol tank of a conventional car. ChargeBox is designed for installation with limited space as the footprint of the storage unit is only 1.3 x 1.3m and the charge dispensers have a footprint of 0.4 x 0.4m. Importantly, the charge dispensers, one or two per storage unit, can be located up to 100m from the charge storage unit, giving additional flexibility for use in smaller spaces. The product is almost silent, making it suitable for installations in residential areas and therefore attractive to facilities managers of apartment blocks. Servicing and maintenance are carried out remotely by ADS-TEC via its Big-LinX Energy cloud-based energy management system. Big-LinX also monitors the charging process, alerting the operator of any issues, and enables new charging stations to be brought into operation quickly. ChargeBox is targeted at service stations, operators of vehicle fleets, logistics companies and public transport operators.

ChargePost was launched in December 2022. It is currently available in Europe and will be available in the US H125. Like ChargeBox, one charge storage unit can supply one or two charge dispensers. It can dispense 300kW of power from a single dispenser or 150kW from two and the footprint of the charge storage unit is 1.3 x 1.5m. The most obvious difference is that ChargePost charge storage units are offered with the option of one or two 75-inch ultra-HD displays, which enable customers to generate an additional revenue stream from advertising. Also, the associated energy management system means that ChargePost not only stores energy, which may have been generated on site from renewable sources, but can also feed energy back into the grid, thus supporting grid services like frequency management. The ability to return stored energy bidirectionally to the grid opens up entirely new business models for charging point operators.

ADS-TEC does not compete in the provision of domestic charging units for EVs. It is firmly positioned in the in-transit, grid-connected charging market, focused on the lower power connectivity segment where battery-buffered solutions are becoming the commercial solution of choice. As highlighted in Exhibit 7, this is the lowest volume but highest value end of the market. It also offers differential through software, integration and services as opposed to a simple ‘buy-and-fit’ system for domestic chargers.

Competitors include Elli, which is owned by the Volkswagen Group, FreeWire Technologies (US private equity backed), mtu (part of Rolls-Royce Group) and Powerstar (UK based, acquired by SCF Partners in 2023). The bias towards Europe highlights the state of the market, with Europe developing ahead of the US. Elli is the most interesting competitor in terms of funding and market presence which its parent provided, albeit ADS-TEC has a partnership with Porsche, another Volkswagen subsidiary.

Companies offering non-battery buffered fast charge equipment include large industrial groups specialising in power management, including ABB (ABBN.SW), EV-Box (part of Engie, ENGIE.PA), and Schneider Electric (SU.PA) along with Tesla (TSLA.US) as part of its network strategy. There are also a number of focused start-ups such as Pod Point (PODP.LN), Beam Global, Tritium and Zaptec. Non-battery buffered ultra-fast chargers are more economic than battery-buffered ones at locations where the local grid can provide sufficient power. They may also be more economic at locations like central charge parks or motorway service stations if the number of drivers paying for fast charges throughout the day is sufficient to cover the cost of a grid upgrade. ADS-TEC believes there is a significant opportunity in providing ultra-fast charge points in locations such as commercial and industrial premises, delivery fleet depots, car dealerships and apartment blocks, where high charge rates are not required continuously.

These are more basic charge units operating at lower voltage and power applications. Companies offering EV charging points for commercial and residential use include Alfen, Wallbox EV-Box and Pod Point, although there are many other companies in the market, for example lighting specialist Luceco acquired Sync EV in 2022, reflecting the lower technology hurdle yet volume scale of the opportunity.

The electricity grid has to deal with fluctuations in demand through both a normal daily cycle and seasonally through the year. Traditional sources of power like coal-fired stations are relatively inflexible, operating best at high load factors 24 hours, seven days a week. Hence, there was a requirement for storage capacity to regulate power into the grid to match demand. The move towards gas increased the flexibility of production and reduced the requirement for storage. The move to renewables, with low and unpredictable output, along with the reduction in fast-response, gas-fired power stations as the power sector decarbonises, is once more increasing the importance of storage to manage and balance power availability in the grid.

As discussed in our thematic report, energy storage systems based on batteries are key to governments across the world realising their commitments to reaching a net-zero grid by 2050. The European Commission expects renewables to account for 69% of electricity production in 2030, up from 40% in 2022. Fossil fuels remain the largest source of electricity generation, albeit on a par with renewables in Europe and the UK.

The shift to renewables will see a significant reduction in fossil fuels, including phasing out coal. For example, the National Grid expects gas usage in the UK power sector to not exceed 2% by 2035, while wind and solar will provide 78% of electricity output. Renewables bring significant balancing issues to managing the grid. For instance, in 2021 the capacity factor in the US was 24.4% for photovoltaic solar and 34.4% for wind, with no correlation between load factor and demand patterns. At present, this misalignment is largely managed through gas-fired power plants which can be quickly brought on stream. The alternative is storage, which will have to perform this task as fossil fuels are phased out. There are numerous options including pumped hydro, compressed air, flywheels, batteries and thermal energy storage, as well as new technologies under development. At the moment, pumped hydro is the dominant technology followed by batteries, as highlighted by US storage capacity in 2022: hydro 70.0%, batteries 28.2% and other 1.8%. Batteries are seen as the preferred technology for numerous reasons. First, they are quicker to install, requiring less permitting and construction, and second, they are more flexible and can be deployed in multiple sizes in different locations and therefore closer to the power source, which is important in the increasingly geographically dispersed generation market.

The market for grid batteries has been growing rapidly, as shown in Exhibit 9. A report by the International Energy Agency( IEA) calculates that installed grid-scale battery storage capacity will need to expand to 680GW by 2030, with installations averaging more than 80GW per year over 2022–30 compared to the 11.2GW added in 2022.

Governments are introducing legislation to support investment in battery energy storage capabilities and projects. In the US, the Bipartisan Infrastructure Law has introduced the $10.5bn Grid Resilience and Innovation Partnerships programme to enhance grid flexibility and improve the resilience of the power system against the growing threats of extreme weather and climate change. The 2022 Inflation Reduction Act included investment tax credits for standalone energy storage for the first time, promoting 'hybrid' wind projects coupled with batteries and standalone batteries with separate grid connection points. In May 2022, the EU launched REPowerEU, which set out pathways to reduce dependence on Russian gas. The report acknowledged that battery energy storage systems (BESS) will be required, and the EU has since made recommendations at a national level, although there is no overarching legislation for financial subsidies available.

In addition to the grid requirements are private non-grid opportunities. These systems are used for storing self-generated renewable power, for instance from a solar array, or simply to acquire power at lower-priced, off-peak times to use during more expensive tariffed peak hours. They offer greater security of power, particularly in areas where grid connectivity is poor, as well as a measurable financial return on capital.

ADS-TEC’s PowerBooster product series is a cloud-connected battery storage solution with an integrated inverter and energy management system (EMS). It is designed for use outdoors and can store up to 643.5kWh. PowerBooster is targeted at users in the commercial, industrial, agricultural and photovoltaic power generation sectors, particularly those who consume more than 100,000kWh of energy over more than 2,500 hours. ADS-TEC units range from 85kWh to 129kWh of capacity operating at 75kW of power and can be upgraded through multiple units operating in series. The PowerBooster can be used as an emergency or back-up power supply, for charging EVs, to store surplus electricity generated on site from photovoltaic cells for use later on site and for peak shaving, where an enterprise can purchase lower-rate electricity and store it for use later in the day when the price of electricity is higher. Customers can also store energy when their demand is low (load shifting), saving it so that the amount they need to draw from the grid at times of peak demand is lower, thus avoiding the higher rates associated with consumption spiking into an expensive high-usage tariff. Similar to the ChargeBox and ChargePost products, servicing, ADS-TEC carries out maintenance and monitoring remotely by via its Big-LinX Energy cloud-based EMS. ADS-TEC provides customised interfaces connecting between the PowerBooster’s EMS and a customer’s own EMSs, potentially supporting additional applications like grid frequency regulation.

There are numerous companies offering BESSs for commercial and industrial applications. These include ABB, Afren, Eguana Technologies, Fluence (a Siemens subsidiary), Invinity Energy Systems, Largo Clean Energy, Powin Energy, Tesla and Varta. NeoVolta is focused on the residential market, Entech Smart Energies on storage for micro-grids and Mitsubishi Power on grid-scale applications. ADS-TEC is focusing on those applications in which it believes it has a competitive advantage because of the overall platform integration accompanied by digital and physical services. There are other start-ups such as Connected Energy.

ADS-TEC serves the charging market through direct sales channels, building partnership-style relationships with key customers that value input as they build out their networks, or through resellers. The customers are engaged at different points in the EV charge network supply chain: project developers, charge point operators, installation and infrastructure service providers, energy companies and site owners. Recent sales partnerships and key announcements include:

ADS-TEC has been focused on the European market (more than 99% of sales in FY22), reflecting its home market, partnerships and the more advanced nature of the market than other developed regions. The other key open market for advanced EV charging is North America. As part of its strategy to develop its presence and comply with the ‘Made in America’ requirements of the Inflation Reduction Act, which is essential for customers to access this key funding programme, ADS-TEC is investing US$8m to establish its first dedicated facility in Auburn, Alabama. The new site will house the assembly, warehousing, sales and service functions. Management expects the new site to be fully functional during 2024.

Founder and CEO Thomas Speidel joined the family-owned ADS-TEC Group after completing his studies in electronic engineering at the University of Stuttgart. He took over from his father as CEO in 1998. His father had founded ADS-TEC in 1980. Thomas founded ADS-TEC Energy in 2010, initially as part of the ADS-TEC Group. He is also president of the German Energy Storage Systems Association (BVES Bundesverband Energiespeicher Systeme) in Berlin and a member of the Fraunhofer ISE Board of Trustees.

CFO Wolfgang Breme has held his position since July 2022. He has extensive international experience in the financial management of technology-oriented mechanical and plant engineering companies, working as CFO at AIXTRON (AIXA.FSE) for almost a decade. He also held CFO positions at technotrans (TTR1.XETRA), AVENTICS (formerly Bosch Rexroth Pneumatics, now part of Emerson) and the Skeleton Technologies Group, which is involved in graphene-based supercapacitor and battery energy storage.

The key sensitivities as we see them are:

The company released preliminary figures for FY23 on 8 February, with full results due to be released in late April. The headlines numbers are as follows:

Management’s outlook for FY24 was maintained at €200m in sales ‘underpinned by strong order intake in early 2024’.

The group operates an assembly model rather than being a vertically integrated manufacturer. This limits the equipment requirements and hence capex needed to expand production capacity. In addition, the group has a substantial production facility in Germany, 8,500 square metres, which management believes offers sufficient capacity to support group revenue of €1bn (we estimate 6,000–7,000 units). Investment in the small US assembly facility has been estimated at €8m, which will continue through FY24. Overall, we expect capex to be relatively limited though the ramp-up stage.

We therefore expect working capital to be the main determinant of cash requirements. Our review of larger European engineers/electrical groups suggests a working capital to sales ratio of 0.22. Smaller companies are unlikely to be afforded the same credit terms, hence, we assume a ratio of 0.3 reducing to 0.25 as the business becomes more established. This suggests a working capital requirement of €25m per €100m of additional revenues. In the short term, the group has excess inventory to utilise and short payment terms with key customers, which will fund much of the expected growth.

Our cash flow forecast suggests €26m in cash outflow in FY24 before the group becomes cash positive in FY25. With gross cash of €29m but obviously requiring some cash on hand, this would suggest a further c €10m-€20m may be required. At this stage of ADS-TEC’s development, traditional bank finance is unlikely to be available. We see a number of avenues to bridge this relatively small funding gap.

Exhibit 13 highlights the warrants currently outstanding. The most significant tranche, the December 2026 warrants, are currently out of the money. However, the four smaller tranches are in positive territory, hence could provide €33.8m of additional financing if fully converted.

ADS-TEC raised $10m in December 2023 via a share placing with Svelland Capital at $7/share. Other significant equity holders or partners such as Bosch might also be interested in such financing. This suggests that the company could access additional equity if required.

ADS-TEC’s current operating performance is unlikely to prove sufficiently robust to satisfy the covenants required for traditional bank debt. The group raised $12.875m in promissory notes in May 2023, with a coupon of 10% plus associated discounted warrants. The primary investors were Lucerne Capital and entities affiliated with UFO Holdings, a Norway-based family office.

As previously discussed, the key demand for financing is expected to come from working capital to support sales growth. Purchase order financing or invoice discounting may be available. To an extent, this may depend on the strength of the customer base, with many EV grid companies also in the start-up phase.

Our forecasts suggest a €26m outflow in FY24 before becoming cash positive in FY25, leaving little headroom from the current €29m of cash. However, as a fast-growing company, ADS-TEC inevitably requires capital to expand and an acceleration of the top line or increased expansion/infrastructure in the US could require additional funds. We see a number of avenues open to management including equity and note the December raise from a new investor, suggesting there may be interest in any equity issue, which would bring only limited dilution to holders.

We expect the EV charging business to be the key driver of growth in the short term, supported in the medium term by the commercial business, while residential remains small as it is not a key focus of the business, generally lower capacity and therefore less suited to ADS-TEC’s products. The market is expected to grow at a CAGR of 25% in Europe. We have factored in faster growth than this in the short term, 85% in FY24 (in line with management guidance for €200m in revenue), falling to 56% in FY25, 43% in FY26 followed by market CAGR of 25%.

Service revenue reflects the increasing installed base of equipment. Equipment is normally sold with a maintenance and service package worth 3–4% of the overall purchase price.

Management’s target is for a gross margin of 35%, compared with the 33% projection for FY25 included in the original prospectus. This is relatively low for a manufacturing business but reflects the model of an assembler rather than a vertically integrated manufacturer, hence higher COGS and lower gross margin. We note that such a strategy requires significantly less capital investment, while permitting ‘best-of-breed’ components to be used. As sales increase and products mature, pricing may come under pressure (we have modelled flat pricing, ie sub-inflationary pricing), but we expect this to be offset by the volume benefits assisting both operational gearing and improved component purchasing terms. Exhibit 15 highlights the gross margin of peers. We note the spread in gross margin being reported. Three of the largest peers, with the exception of Tritium, reported a gross margin of more than 30%, which provides support for management’s target as ADS-TEC reaches scale.

As is typical for a fast-growing manufacturing company, we expect central function costs to rise more slowly than sales, providing leverage at the operating level. This is highlighted by the growth in personnel we are forecasting within SG&A functions relative to the manufacturing side (see Exhibit 16) and the decline in SG&A relative to sales which we expect over time (see Exhibit 17).

We expect the volume growth to leverage both the gross margin and SG&A, generating a steady improvement in EBITDA margin. Note that we do not expect the Q423 9.7% to represent a run rate for FY24, but assume a lower yet positive result. In the medium term, we see the EBITDA margin trending to the mid-teens. We believe this is supported by Alfen, which reported an EBITDA margin of 18.0% in FY22, albeit it declined to 11.3% in FY23 due to destocking.

Further detailed forecasts including balance sheet and cash flow available in Exhibit 24.

Exhibit 21 provides a summary of our DCF valuation based on the discount factor and terminal growth rate.

Given the stage of the group’s development, we would expect a high beta (we use 1.75), an equity risk premium of 5.0% and risk free rate of 3.0% (10-year eurozone government bond) suggesting a cost of equity of 11.75%. Using a 12.0% discount rate (rounding up) and long-term growth rate of 2% provides a valuation of $12.80 per share. As the company develops and its risk profile reduces, so the cost of capital should reduce, promoting the valuation. This does not take into account any potential additional funding mechanisms which may be required, albeit our expected requirement of €10m would be expected to lead to limited dilution.

Larger industrial competitors like ABB or Volkswagen (Elli’s parent) offer little assistance from a valuation perspective given the limited importance of their charging businesses. The peer table is split by activity. Infrastructure plays, including those which manufacture their own hardware, provide an interesting comparison but have a different business model. The recharging hardware and battery storage companies are arguably the closest peers but they are generally focused on the more commodity domestic market. In addition, the quoted peer group is largely in ‘ramp-up’ mode and profitability is therefore somewhat mixed. Hence, Exhibit 22 is interesting but arguably more of a sense check than valuation tool.

We see the DCF calculation as the most appropriate valuation with our value of $12.80 per share. The peer group offer limited comparisons given the activity profiles although we point to Alfen as being one of the more progressed peers.