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.

Disclaimer:
All content provided on Shrey’s Notepad is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.

The owner of Shrey’s Notepad will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, financial or otherwise, injuries, or damages from the display or use of this information.This article does not constitute financial advice in any way, shape or form.

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

 

Blue Prism and the rise of robotic process automation

One company that caught my attention recently is Blue Prism (LON: PRSM). Listed on the Alternative Investment Market (AIM), it creates robotic process automation (RPA) software. This essentially automates manual data entry, which is both low return and high risk to a firm. I invested in the company (on a virtual portfolio) at 877p a share, and since then it’s returned around 80%, with (in my opinion, at least) further potential to grow. Much of this return has come over the past two days, where the share price has gone up around 30% off the back of impressive FY2019 results. Major highlights include 83% higher revenue, allaying concerns that the business could not scale significantly enough to justify its valuation.

RPA is of course an industry that is in vogue, however beyond the media hype there is a significant reason why the sector, including companies such as UiPath and Automation Anywhere, is so highly touted. The market for RPA is set to reach $3.11bn by 2025, at a CAGR of 31.1%. Businesses from small shops to the largest multinationals could see significant efficiency gains from implementing such technology, and moreso save on the salaries of individuals employed for such a function. It fills a gaping lacuna in the centre of firms’ back office functions, doing so in a way that is both cost effective and that minimises errors.

It comes as no surprise, then, that PRSM’s revenues would see an uptick. However, in addition to this, I find a number of green flags in its most recent report. In addition to customers rising by more than two thirds to 1,677, its customer retention rate sat at 96%. This implies to me that a large proportion of revenue is “sticky”, and the products offered are clearly satisfying clients. Hence the fact that losses more than trebled to £80.7m, from £26m the previous financial year, is not a significant factor given the investment undertaken through the year.

Initially, I invested in Blue Prism as it traded on around 10 times the year’s expected revenue. Compared to its peers UiPath and Automation Anywhere in the same industry (based on estimates as these companies are private and venture-capital backed), their sales multiples are 25 to 30-times, a massive premium to Blue Prism. Analysts at Shore Capital, having done similar calculations, came to an even bolder conclusion: ‘Taking the average of the recent private equity valuations for UiPath and Automation Anywhere implies a short-term fair value for Blue Prism of $2.4bn (or £27 per share).” I see no reason for this to have changed in light of the recent rise in share price (although am eager to hear opinions to the contrary!)

Given that the business assuages a fundamental need across industries, the company should definitely continue to increase revenues (and, eventually, profits), with contained variation due to the business cycle. If I am right (hopefully!) then over a number of years revenue will continue to grow at a fast clip as the company matures and ventures into profitability.

An interesting question, however, is the impact of RPA on the economy in general. There is no doubt in my mind that the technology has the potential to make redundant the most vulnerable in society. With the continuing trend of automation this threat was always going to get larger as we move into the 20s. Hence, for policymakers, a challenge is faced on a level not really seen since the Industrial Revolution. To me, the solution lies in state-funded re-training programs to make the labour market more flexible. In addition, a universal basic income as proposed by Andrew Yang in the Democratic primaries makes a great deal of sense to me as automation progresses, because primarily it gives workers the flexibility to retrain and prepare themselves for the long-term.

Overall, then, to me Blue Prism is a solid investment in a truly exciting growth company. Robotic process automation is a great example of creative destruction, however in a broader sense policymakers need to consider certain impacts of this technology. Questioning themselves on how to avoid a sustained rise in the unemployment rate may lead to some off-the-beaten-track initiatives, which have the potential to safeguard the most vulnerable while ensuring firms continue to increase efficiency and the economy continues to grow.

Disclaimer:
All content provided on Shrey’s Notepad is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.

The owner of Shrey’s Notepad will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, financial or otherwise, injuries, or damages from the display or use of this information.

This article does not constitute financial advice in any way, shape or form.

I currently hold shares in Blue Prism (LON: PRSM).