I’ve coated Plug Energy Inc. (PLUG) beforehand, so traders ought to view this as an replace to my earlier articles on the corporate.
Following the corporate’s annual enterprise replace name on Tuesday, beaten-down shares of struggling gasoline cell methods, electrolyzer options, and inexperienced hydrogen supplier Plug Energy Inc. or “Plug Energy” staged a 30% rally on huge quantity as market members cheered a lot of perceived constructive developments.
Progress on Division Of Vitality (“DOE”) Title XVII Mortgage
On the decision, CEO Andy Marsh introduced that the corporate finalized time period sheet negotiations with the DOE for a $1.6 billion mortgage facility with funding at the moment anticipated within the third quarter:
We have been notified yesterday that the applying has been submitted to the Credit score Evaluate Board for his or her ultimate concerns and issuance of a conditional dedication.
This funding, when obtained, will assist the growth building and possession of as much as six hydrogen manufacturing amenities, considerably advancing inexperienced hydrogen deployment in the US.
Nonetheless, the mortgage nonetheless must be authorized by the DOE’s Credit score Evaluate Board and even when a conditional dedication will probably be offered, funding normally takes a number of months and even quarters.
However at this level, Plug Energy doesn’t also have a conditional dedication at hand and given the corporate’s execution observe file and dismal monetary situation, I might anticipate the DOE, amongst different issues, to require Plug Energy to boost further fairness.
For example, in late August, aspiring zinc-based vitality storage options supplier Eos Vitality Enterprises, Inc. (EOSE) or “Eos Vitality” was offered a conditional $398.6 million mortgage assure dedication by the DOE however the firm nonetheless hasn’t glad all situations for closing the mortgage.
With Plug Energy’s mortgage utility being 4x bigger and overlaying as much as six completely different inexperienced hydrogen vegetation, I might anticipate evaluate and funding to take even longer. In truth, I wouldn’t be shocked to see closing being delayed past the U.S. presidential elections.
With simply $140 million in unrestricted money left within the financial institution on the finish of This fall, the corporate will seemingly must make the most of its new $1 billion ATM facility aggressively to be able to fund operations over the subsequent few quarters.
First Liquid Inexperienced Hydrogen Plant Lastly Coming On-line
After lacking a number of deadlines over the previous 12 months, the corporate’s first liquid inexperienced hydrogen plant in Woodbine, Georgia lastly commenced manufacturing of liquid inexperienced hydrogen. In keeping with administration, it’ll take “about three or 4 weeks” for manufacturing to achieve the plant’s 15 tons per day nameplate capability.
As well as, administration claimed the corporate’s new liquid hydrogen plant in St. Gabriel, Louisiana is on observe for a launch in Q3. Please observe that this plant is a part of a three way partnership with Olin Company (OLN) or “Olin” and makes use of by-product hydrogen from Olin’s chlor-alkali manufacturing.
In keeping with administration, each vegetation will probably be producing liquid hydrogen at 1/3 of the price of present third-party provide even with out potential manufacturing tax credit thus positively impacting fueling margins over time.
Furthermore, the corporate’s present liquid hydrogen plant in Tennessee which reportedly was closed final summer season “to scrub up contamination” is anticipated to return again on-line within the close to future. Nonetheless, the plant was initially anticipated to restart operations final month already.
Firm Concentrating on 70% Money Burn Discount in 2024
Primarily based on 2023 money utilization of roughly $2 billion, administration’s said goal would translate right into a projected 2024 money burn of $600 million.
In 2024, we’re focusing on to cut back the money burn by over 70% from ’23, with decrease CapEx, no funding in working capital, and improved margins. We’re additionally focusing on to leverage these enhancements to attain a constructive money stream run charge within the subsequent 12 months. These initiatives will imply slower income development within the close to time period in comparison with our prior historical past, however we predict this paradigm shift is vital and crucial given the market situations.
On the decision, administration outlined a lot of initiatives to enhance margins going ahead:
- pursuing “important” value will increase throughout all choices, together with tools, service, and gasoline
- implementing a hiring freeze and utilizing attrition to decrease payroll price
- decreasing lease financing to prospects
In truth, service and fueling margins are actually anticipated to achieve constructive territory within the fourth quarter.
Fairly frankly, I’m fighting these statements as fueling and upkeep/companies are normally offered below multi-year fixed-price contracts which has resulted within the requirement to accrue substantial quantities for anticipated future losses below these contracts.
Nonetheless, below U.S.-GAAP, the corporate is precluded from recording related provisions for contracts which might be a part of its huge leasing (“PPA-“) phase.
So even when the corporate opts for a clear sweep within the service phase by rising the availability for loss contracts even additional thus benefiting reported gross margins going ahead, leasing margins will proceed to be impacted by closely backed legacy fueling and repair contracts.
Whatever the accounting remedy, these losses are actual and can proceed to impression money flows for years to return.
Please observe that elevating costs throughout the board is more likely to impression the worth proposition of the corporate’s choices considerably, notably for potential new prospects.
The identical goes for the proposed discount in lease financings which have been the important thing development driver for the fabric dealing with enterprise lately.
Consequently, administration expects development to decelerate this yr. Primarily based on the preliminary This fall revenues of “simply over $200 million“, the corporate’s annual development charge in 2023 was roughly 24%.
Whereas every materials dealing with website deployment supplies further recurring revenues, the value will increase are more likely to impression new gross sales throughout the board this yr however administration expects giant electrolyzer contributions to make up for a few of the headwinds, as outlined by CEO Andy Marsh throughout the questions-and-answers session:
I might anticipate that the electrolyzer enterprise will probably be, name it, 30% to 40% of our enterprise this yr. It’s actually one among our more healthy segments.
Assuming 10% development in 2024, administration’s steering would translate into as much as $400 million in electrolyzer gross sales this yr, considerably above the corporate’s backlog on the finish of Q3/2023.
Primarily based on these numbers, the remaining enterprise would endure an roughly 25% decline in 2024.
Even assuming simply $300 million in electrolyzer gross sales would nonetheless calculate a significant discount within the legacy enterprise.
On the decision, administration additionally outlined expectations for electrolyzer gross margins to leap to close 30% by This fall:
Our electrolyzer enterprise is anticipated to achieve constructive gross margins within the latter half of 2024, contributing to money flows all through 2024. Preliminary excessive stock prices and early underpriced offers will impression gross margin within the first half of the yr, however pricing was adjusted within the second half of 2023, which can enable this enterprise to attain anticipated gross margins close to 30% by the fourth quarter of 2023.
Given very weak electrolyzer market situations with funding selections pushed out throughout the globe, I simply don’t see how the corporate would have managed to promote a considerable quantity of electrolyzers at a lot increased costs in current months.
As normal, it’s troublesome to make sense of administration’s projections, notably in gentle of the present working atmosphere given the truth that This fall revenues will probably be lacking implied steering by greater than 60% and even the already vastly lowered analyst consensus by nearly 50%.
Trying extra particularly at This fall 2023, we had shared beforehand that we thought a variety of these components would end in ultimate gross sales coming in decrease than anticipated. However the market dynamics have been much more unfavorable of their impression than we anticipated within the fourth quarter of 2023.
Because of this, it seems just like the gross sales for fourth quarter will are available in at simply over $200 million. And we’re nonetheless closing the outcomes and we’ve a variety of new buyer preparations and new merchandise which might be advanced, however that is our present estimate.
Please observe the references to “new buyer preparations” and “new merchandise which might be advanced” as a warning that auditors may need a distinct view on income recognition, just like final yr when ultimate This fall revenues got here in 15% under the preliminary quantity offered by administration on the January 2023 enterprise replace name.
Whereas there’s been essential progress, preliminary funding will take not less than a few quarters thus seemingly ensuing within the requirement to boost further fairness sooner relatively than later. Please observe that the mortgage nonetheless requires approval and may include some robust situations together with a possible fairness elevate.
I might certainly anticipate the corporate’s money burn to return down considerably this yr principally primarily based on considerably decrease capital expenditures and potential working capital reductions. Nonetheless, decreasing money utilization by a whopping $1.4 billion seems to be an excessively aggressive goal.
Whereas fueling gross margins ought to profit from Plug Energy’s personal liquid hydrogen manufacturing over time, I don’t anticipate them to return even remotely near break-even ranges by year-end merely due to the corporate’s multi-year contracts with prospects.
Identical goes for the service and leasing segments. Even assuming a GAAP accounting profit for the service phase, this isn’t going to vary the truth that Plug Energy has dedicated to long-term service contracts effectively under prices and consequently is more likely to endure outsized losses for years to return.
Electrolyzer gross sales of as much as $400 million and phase margin steering of “close to 30%” by the top of this yr look like essentially the most aggressive projections made on the decision. Given persistently weak market situations, it’s onerous to think about the corporate coming even shut to those numbers. Please observe that administration has missed its projections for the electrolyzer phase by a large margin in every given yr.
Plug Energy preannounced abysmal fourth quarter outcomes and made some main modifications to its enterprise method to enhance margins and decrease money utilization going ahead.
On a extra constructive observe, the corporate’s new inexperienced hydrogen plant in Georgia lastly commenced operations and Plug Energy made essential progress on its mortgage utility with the DOE.
Nonetheless, with the potential mortgage not anticipated to shut anytime quickly and simply $140 million of unrestricted money left on the finish of This fall, the corporate will seemingly must make the most of its new $1 billion ATM facility aggressively to be able to bridge the funding hole.
As normal, I’m struggling to make sense of administration’s projections on the decision, notably with regard to electrolyzer gross sales and margin contributions.
As well as, I wouldn’t be shocked to see revenues reducing year-over-year as in comparison with administration’s expectations for continued development.
Whereas market members cheered the perceived excellent news, I don’t anticipate analysts to comply with swimsuit as vastly lowered development expectations will outcome within the requirement to regulate fashions and lower cost targets even additional.
With markets close to all-time highs, momentum may persist for an additional couple of classes however I might anticipate the inventory to surrender a lot of the good points over the approaching weeks as merchants transfer on to assumed greener pastures forward of an anticipated abysmal This fall report subsequent month and open market gross sales kicking into excessive gear.
Consequently, I’m reiterating my “Promote” ranking on the shares.