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by Debra Fiakas CFA
Fuel cell developer SFC Energy,
A.G. (F3C.DE) recently came calling on money managers in New
York City. The company’s chief financial officer Steffen
Schneider wants U.S. investors to know SFC has more going for it
than simple fuel cells. True enough the company sells fuel
cell components, but it is also capable of delivering complete
off-grid energy solutions and integrating full systems.
Schneider talks up SFC’s sterling customer list, including
Volkswagen, Siemens, Schlumberger, Shell Oil, Arch Coal,
Conoco-Phillips, and other industrial users. Then there are
government agencies such as NATO, the FBI in the U.S. and the
Israeli military as well as SFC’s home country of Germany. It
appears customers have been doing more than just sampling.
Over the last five years sales have increased four times, reaching
Euro53.6 in fiscal year 2014. That translated to about US$75.0
million at currency rates at the end of the year.
A little over half of SFC’s business is with customers in the oil
and gas industry, where production and distribution facilities are
often located far away from electrical grid connections. Local
energy sources are vital for power controls, data acquisition
equipment and other mission critical systems. Harsh weather
conditions often preclude the effective use of solar or fossil
fuels. SFC estimates the opportunity for off-grid oil and gas
facility power sources is valued at US$11.5 billion, of which US3.7
billion in located in the U.S.
Other industries need power in remote locations as well, such as
telecommunications, agriculture and agriculture. Wind and
solar energy producers also need power solutions for facility
control functions. Then there are the remote activities of the
military and law enforcement where power is need for communications,
computing and monitoring equipment. SFC is prepared to build
custom engineered solutions, but some customers can choose standard
units such as the EFOY ProEnergyBox or EFOY ProCube. There are
also the EMILY and JENNY mobile solutions that give the military or
government agencies lightweight and reliable energy packs for
personnel deployed in remote locations. The military and
industrial markets represent just over a third of total sales.
The balance or about 8% of
total sales is to consumers. There is growing demand for power
sources for recreational vehicles, boats or homes located far away
from power lines. SFC offers standard solutions it calls the
EFOY Comfort and EFOY GO to provide lightweight, portable units for
SFC stands out among fuel cell developers. The company’s fuel
cells use direct methane technology rather than relying on hydrogen
reformed from natural gas. SFC says this feature improves the
return in investment for their fuel cell solutions, since methane is
easier and cheaper to handle than hydrogen.
Besides its product technology SFC has been shrewd about its
competitive positioning, using acquisitions to bolt on complementary
technologies to further distinguish its power solutions. In
2013, SFC acquired Simark Controls Ltd., a provider of
instrumentation, automation power solutions for the oil and gas
industry. Based in Calgary, Alberta, Simark is well entrenched
in Canada’s oil and gas industry. Its rich experience in
custom engineering is now giving SFC an edge in pitching customers
in the oil and gas industry. In 2011, the PBF Group B.V. was
acquired for its electronics technology that has been critical in
helping SFC properly integrate its fuel cells into established
conventional electronics infrastructure and devices.
SFC has not been as successful in building profits as it has
sales. The gross profit margin has shrunk to 29.2% in 2014
from 39.1% just two years earlier. Unfortunately, the trend
has continued in the first half of 2015. The company has yet
to achieve profitability, but generated positive cash earnings in
2014, as measured by EBITDA. The company had US$4.3 million in
cash on its balance sheet at the end of June 2015, and US$11.6
million in working capital to support operations.
U.S. investors who have an interest SFC will need to acquire shares
on a Germany’s Frankfurt exchange. SFC has not registered its
shares in the U.S. That should not be a particular problem for
the investor who is willing to do a bit of work. SFC Energy is
fully reporting, providing German authorities with the same sort of
disclosures required in the U.S. SFC Energy even provides
English translations of its financial reports on the corporate
website. For U.S. investors an interesting feature of European
financial reports is the Forecast Report section, which details
management’s projects for the next fiscal year sales and earnings.
Shares of SFC Energy have drifted down over the last year after
experiencing a dramatic increase in value in 2014. The stock
fell through its 50-day moving average near the beginning of the
current year and has failed to lift above it since. Dwindling
trading volume suggests that the current weakness in the stock has
been more the result of limited demand rather than a rush to the
Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.
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