Trash to cash?

Would you invest in a company that could turn trash to cash?

I have to make two apologies straight away here, the first of which is to my British readers for the Americanism, and the second of which is for generalising. Of course it would depend on whether another company could do it more cheaply, profit margins, and so on and so forth. The broad point stands strong, though: at first glance, it sounds like a business model with legs.

Recently, I’ve come about a company that does just this: EQTEC (LON: EQT). The Irish minnow specialises in gasification, a process that converts biomass to combustible gas, namely producer gas, or syngas. This is itself a fuel and can be used for a variety of applications, generating, for example, heat energy in the industrial sector. To me, the share price has a significant way to go from here on a relative value basis (compared to rivals such as PowerHouse Energy) and also of its own accord. This is because it has secured multiple projects and because its technology is proven to work and is already operational.

Their projects include one at Billingham, where it partnered with the energy company COBRA for the 25 MW £150-180m project. This looks to be a headline cash cow in the future. There also exists a proposed “1.18 MW net biomass gasification power plant project in Gratens, France”. All of this, of course, is in addition to their numerous Spanish projects, including Movialsa, that have already run for over 111,000 hours without major issue. Despite these developments, the market capitalisation remains at a measly £33.37m as of 13 August 2020!

Of course there has to be a reason for pessimists to justify the low valuation, and in this case it is the financials (mostly). The company is still loss-making, which may turn off some prudent investors. What I would say in response is that a recent equity placing to the tune of £10m leaves the company fully funded. Moreover, Align Research projects the company to reach profitability in FY2021, with a €5.39m pre-tax profit.

A caveat to this is that should the company not reach this optimistic projection, we as (hopefully!) diligent investors should not fret. This is, of course, so long as the company continues to expand its list of potential projects and memorandums of understanding, with significant signs of converting these leads to hard cash. I, personally, can stomach free cash flow a few more years into the future so long as it is worth the wait. After all, the world’s central banks seem determined on keeping that risk free rate as low as possible, so future cash flows are still highly appetising.

At a broader level the global waste-to-energy market is projected to grow by $12.26b from 2020 to 2024. Covid-19 is poised to turn the wheels of ESG revolution, which brings companies like EQTEC all the more to the forefront globally. Though the sector is growing and, in my opinion, will grow for a long time into the future, investors haven’t yet been too keen to agree with my prognosis. PowerHouse Energy, a waste-to-energy company with, to be kind, many fewer projects in action, is currently valued at a lofty £121.27m on the Alternative Investment Market. I believe EQTEC’s proven technology, strong deal flow, and cash at hand position it to close this valuation gap, and to grow as the market grows. It’s why I topped up on my initial position a few months ago.

Though I initially purchased at 0.18p, which looks like a downright steal today, it is my firm belief that EQTEC has much further to go, and for a 3-5 year investment (at least!) it presents an extremely strong investment opportunity. You don’t often see a green tech company’s potential pre-tax profit five years down the line exceed its current market capitalisation.

Of course, tailwind risks do include further dilutive equity issuance (although if this is to fund more projects you might even be grateful for it). In addition, EQTEC partners with China Energy for the Billingham project. If you’re of the persuasion that Western governments will rip off the China band-aid (or, to be more accurate, the full limb), you may have your reservations about this. EQTEC is also facing a lawsuit from Aries Clean Energy LLC in the US for patent infringement (though EQTEC has denied this in the strongest possible terms and I, personally, find it an opportunistic and baseless claim).

If you find yourself disappointed by the line of risks, it’s the reason why I’m remaining cautious with this investment (it doesn’t take up nearly as large a share of my portfolio as Seeing Machines, for example). AIM investing is a rollercoaster and it’s inevitable that you’ll sit through a few peaks and troughs trying to find the diamonds in the rough. But with EQTEC, a company that quite literally is the future, I’m willing to endure them.

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I currently hold shares in EQTEC (LON: EQT).