HydrogenOne Capital Growth (HGEN) has just completed its Q2 investors’ update, in advance of its forthcoming interim results. The general tone of the update is one of positivity, as HGEN’s holdings begin to deliver strong revenue growth as the trust starts to mature.
- HGEN generated a NAV growth of 4% year on year, and 0.4% between Q1 and Q2 2023. Investors can expect a detailed breakdown of the NAV growth and its drivers in the interim results. One factor in determining HGEN’s recent NAV valuation has been the slight increase in the discount rates applied to the strategy, which were slightly increased over 2023.
- The most striking change for HGEN has been the rapid revenue growth of its invested companies. Eight out of its ten holdings are now generating revenues, with aggregate revenues up 170% year on year, at £112m. One example of this extreme revenue growth has been Sunfire, a German industrial electrolyser producer, which has produced ten times revenue growth since HGEN’s initial investment in October 2021.
- Given that this revenue growth reflects strong fundamentals, the team believes that it will also feed through to parts of HGEN’s valuations, whereby its companies have increasing order book backlogs, which will reduce the risks associated with revenue forecasts.
- A major reason for this revenue growth is the maturing profile of HGEN, with the company making its last investment as early as end 2022. While the team only invests in companies with tangible operations, they believe that they are now entering a phase of high revenue growth, as they expect the companies to increasingly deliver on their investment thesis. As such the HGEN team foresee two to three years of continually strong revenue growth before it tails off.
- The team also foresees the potential for their companies to be purchased by trade or industry peers in 2024, with some of the investments already appointing advisors just in case. The team will only entertain a purchase offer if it represents a return on investments of two to five times. They note that there has been a recent IPO in Thyssenkrupp’s hydrogen division, a close comparator to HGEN’s Sunfire, valued at €2.5bn, many multiples above what Sunfire is trading on – which highlights both HGEN’s conservative valuations and the upside potential of their investments.
- Despite the resilient NAV and strong revenues, HGEN continues to trade at a wide discount of 51%. The team do not foresee any near-term share buybacks, as given the growth potential of their holdings, they have deployed capital into profitable investments, with insufficient remaining to commit to a buyback programme.
QD comment: [“Good news from HGEN it seems, given the huge revenue growth we have seen. We do note that large percentage figures do not necessarily mean substantial nominal amounts, but it is a sign of maturing companies and tangible earnings. This is something that investors may have been holding their breath to see as the hydrogen sector lacks few mature companies, both listed and unlisted, compared to other energy sectors. We do note that this is only an indicative announcement, and we look forward to HGEN’s interims, which will give more granular detail.
One thing that this update does give us hope for is a catalyst for the HGEN’s discounts to narrow. HGEN is operating in a relatively immature but fast-moving industry, so by providing colour on the prospects of their underlying holdings, it may provide a strong impetus for increased shareholder confidence. We do note that Seraphim Space, which also operates in a similarly cutting-edge industry, has generated impressive share price performance in the short-term.”]