Peel Hunt targets 195p for AFC Energy’s share price

AFC Energy’s share price has seen some upside so far this year as investors return to growth stocks. But the UK-based company, which designs and builds its own hydrogen fuel cell systems, has yet to turn a profit and is burning through cash. Nevertheless, broker Peel Hunt is optimistic about the stock’s future.

The AFC Energy [AFC.L] share price is up over 9% this year, closing Friday, 17 March, at 20.18p. However, the share price has been on a downward trend since early February, when the stock hit an intraday high of 33.02p. Over a 12-month timeframe, the AFC share price losses are over 46%, while the stock is well off an all-time high of 87.6p, hit in March 2021.

The fall in AFC Energy’s share price reflects last year’s move away from growth stocks, as investors de-risked their portfolios. Connected to this is cooling in the clean energy and renewable investment theme. According to our investment screener, the theme is down 11.88% over the past year. But as investor confidence returns, how much upside is there on AFC Energy’s share price?

Peel Hunt optimistic on AFC Energy share price

AFC Energy is burning through cash. According to interim results, revenue was £0.28m for the first half of 2022, up from £0.15m in the same period the previous year. The half-year cash balance stood at £48.6m, down from £61.3m the previous year. In 2021 operating losses were £10.4m, up from £4.1m the previous year.

The company enjoys a strategic partnership with Zürich-headquartered ABB [ABB] to test, design and integrate its alkaline fuel cell technology into ABB’s data centre system portfolio. This builds on a 2020 partnership to create high-power, sustainable electric vehicle (EV) charging solutions. Last year, it received its first commercial order of S Series liquid-cooled fuel cell systems, worth £4m, from ABB.

Peel Hunt is optimistic about the AFC share price, saying that feedback from Acciona [ANA.MC], Kier Group [KIE.L] and Mace-Dragados on the H-Power Tower has been good. The broker has a ‘buy’ rating on the AFC share price and a 195p target.

The hydrogen-powered H-Power Tower generator has seen increased use on construction sites, including HS2, while the lease on the H-Power Tower at the M621 highways project in Leeds was recently extended for six months. To date, its H-Power Towers have been leased for 7,000 hours in the UK and European construction market. 

Where next for AFC share price? 

The hydrogen fuel cell market is growing at pace. In 2021 the market was worth $5.64bn, growing to $8.63bn in 2022, a 45.8% compound annual growth rate (CAGR), according to a report from Research and Markets. In 2023 the market is expected to grow at 41.1% CAGR to $32.65bn. A separate report from Quince Market Insights reckons the hydrogen fuelcell market will register a CAGR of 23.65% between 2023 and 2032.

Driving demand is political pressure to reduce carbon emissions.Other growth drivers include rising demand for EVs, with many governments planning to ban combustion engine sales by the middle of the next decade.

After last year’s sell-off, AFC Energy’s stock could bounce back. But securing more contracts and getting costs down will be key to its longer-term investment case. Revenues for 2022 are forecast to rise 647% to £4.43m in 2022 and 143% to £11.01m in 2023, according to data from Yahoo Finance.  

The stock has a median 12-month price target of 108p. Hitting this would see a 435.2% upside on Friday’ s close. Investors will need to decide whether this is a realistic upside in a company that has yet to turn a profit.