Edison Research upbeat on AFC Energy's low alkaline fuel cell potential

Edison Investment Research is upbeat on alternative energy company AFC Energy’s (AIM: AFC) prospects, envisioning an lucrative global market for the company and a significant revenue stream in the next few years, as it has already proven its low cost technology as a viable fuel cell system with its first major customer AkzoNobel.

AFC Energy develops low alkaline fuel cells, targeting industries that produce large amounts of hydrogen as a waste or by-product which can be used for fuel cells. Edison said the company was the only business attempting to address the demand for electricity in the chlor-alkali market, which could be a buyer of the electricity as well as a supplier of hydrogen and where hydrogen by-products could produce electricity worth EUR275 million annually.

There are currently 78 chlorine plants with an annual production capacity of 13 million tonnes in 23 countries throughout Europe, but Edison pointed out that AFC had global potential, noting that current global chlorine production amounted to 55 million tonnes, which could be used by AFC to produce EUR882 million of electricity per year based on the average prices in 2007-2008.

AFC’s current market cap of £16 million was one of the smallest in the sector and “a fraction of the potential market size” for its products, according to Edison’s analysts. While seeing potential for early sales of 3.5kW and 50kW fuel cell systems, the research firm said it expected “significant sales revenue” in 2011-2012, while profits were not expected to realise sooner than in full year 2012. There was potential for the stock to rally prior to this as projects in the chlor-alkali and waste-to-energy industries are announced, Edison said in its note.

AFC has a licensing and supply agreement with waste-to-energy company Waste2Tricity, which will pay it £1 million after securing an initial funding of £2 million, having already made a proposal to the London Waste and Recycling Board. AFC had £3.6 million in cash after raising £4.4 million through a share issue and £500,000 tangible assets at the end of 2008. With the current cash reserves and the rate of cash burn, the company is funded to mid-fiscal 2010.

Possible sources of income for the company could include sales, license agreements as well as the equity market, which, however, will be kept to a minimum until monetization of its fuel technology, said Edison.

The company has already delivered, installed and tested its first 3.5kW system for chemical giant AkzoNobel and plans the development of a larger system of 50kW capacity, which is expected to trial in Q1 2011.

AFC’s share price has increased dramatically over the past 6 months, going from 2 pence to the current 13 pence.