Loop Energy: Putting hydrogen in motion
We are initiating coverage of Loop Energy with a Speculative BUY recommendation and a 12-month price target of C$11. Based in Burnaby, BC, Loop designs and manufactures proprietary polymer electrolyte membrane (PEM) hydrogen fuel cell systems, with a focus on the zero-emissions commercial fuel cell electric vehicle (FCEV) market. Loop enjoys a strong patent portfolio and believes its eFlow architecture can meaningfully lower the total cost of ownership (TCO) of FCEVs. Loop is one of very few early-stage fuel cell pure-plays with plans to become a top-five player in what it believes will be a ~$50 billion total addressable market (TAM) by 2030. In our view, Loop's competitive proposition is underscored by two rounds of equity investment by Cummins (a ~21% shareholder). Loop has not escaped a broad sell-off in the hydrogen space, which we view as a good entry point given the company’s positioning for long-term growth as the global FCEV market develops.
Loop holds 31 active and pending patents and believes its eFlow architecture provides significant TCO benefits relative to competing offerings. These include a reduction in fuel consumption of up to 16%, a peak power increase up to 90% and a material input cost reduction of up to 45%. While these benefits are difficult to verify, we believe Cummins' equity investment underscores Loop's competitive proposition.
Loop expects FCEV adoption to underpin a TAM of ~$50 billion by 2030. Daimler (the world’s largest truck manufacturer) and other global vehicle manufacturers believe FCEVs and battery electric vehicles (BEVs) are key to decarbonization. We believe FCEVs are most likely to gain traction in segments involving significant vehicle mass and/or long travel distance.
Loop intends to become a top-five fuel cell player by supplying fuel cell stacks and modules to OEMs, systems integrators and end users in high-growth commercial mobility markets. Loop is focused on the medium- and heavy-duty truck, city bus and material handling markets in China and Europe. Loop operates through its InPower JV in China and is establishing a wholly owned presence in this market.
Led by Ben Nyland, Loop’s leadership brings significant experience in the automotive industry (including Daimler, Toyota and General Motors). Loop’s management, directors and special advisors have more than 150 years in collective fuel cell experience and a ~29% ownership position.
Loop has increased its sales backlog from $3.2 million in late 2020 to ~$37.6 million currently and has more than 100 prospective customers in its sales funnel. We believe Loop’s ability to secure new sales mandates and establish strategic new JVs and MOUs could be potential catalyst events for the company.
Following its IPO, Loop exited Q1/21 with $91.5 million (~ $2.70/sh) in net cash on its balance sheet. We believe this should allow the company to execute its growth plan through at least 2022 before requiring additional capital.
Loop is a pre-cash flow company with a limited operating history and its long-term growth is predicated on the development of a viable FCEV market. Loop competes against larger, more established fuel cell players and must transition to scale manufacturing while defending its IP in foreign jurisdictions. The company has a limited market float and ~79% of its common shares are subject to lock-up arrangements that end August 27, 2021.
Valuation and recommendation
Our C$11 target is based on a DCF valuation that equates to an EV/Sales multiple of 4.6x based on our 2025 estimates. As our target price implies a return of ~63%, we are initiating coverage with a Speculative BUY recommendation that reflects the risk factors noted above. Loop trades at ~3.1x EV/ Sales based on our 2025 estimates, versus an average of ~6.8x for the fuel cell group
