AKCCF - Aker Carbon Capture: Proof-Of-Model Starts Late 2023 (Rating Downgrade)

2023-07-18 04:00:39 ET

Summary

• Aker Carbon Capture provides carbon capture engineering and procurement services to customers who can benefit from obtaining carbon credits.
• They got a major order from Ørsted which has almost tripled backlog, and some of the projects to initiate CCaaS start at the end of 2023.
• Modular and standardised carbon capture units could be attractive for leasing companies to take on as assets.
• For now, the revenue is still all from EPC which is not expected to be a margin contributor.
• Given that we still don't know exactly what the economics will look like, Aker Carbon Capture stock is expensive at more than 6x P/S.

Aker Carbon Capture ( OTCPK:AKCCF ) is a pureplay carbon capture proposition from Norway. They have a couple of ongoing EPC projects for building and installing modular carbon capture solutions at several industrial plants. Currently revenues are from EPC contracts, but the future for Aker CC is when the installed facilities are operational and they are able to earn infrastructure economics off the installed base. While we believe in their model, especially as CCS is part of major efforts to reduce carbon emissions, the multiple looks somewhat rich considering that the first facilities will only be operational in late 2023 with more major projects coming in later. On the flip side, Aker CC has a lot of backlog thanks to a new win with Ørsted ( OTCPK:DNNGY ).

Latest Quarterly Breakdown

The major update is that Aker CC won a contract with Ørsted that has given a substantial boost to backlog coming up to 3.3 billion NOK.

None of this contract has been delivered yet, but since the EPC revenues are positive margin and Aker CC benefits from scale on mostly fixed costs related to R&D and marketing, the recognition of those revenue should start creating operating profit increases.

Most of the revenue is EPC right now, with some other stuff coming from grants related to studies that have the potential to create government sponsored business.

Currently the other projects are one for a Dutch company, which will be delivered later in 2023 and thereafter will start as generating higher margin aftermarket and licensing revenue, with the project for the cement facility in Brevik slated to come online in late 2024. The Brevik project is the more major one. Ørsted would come after, as well as emerging projects and financing opportunities that can be taken advantage of as a CC provider for the UK and other Nordic countries. They are negotiating government grants to conduct a CC projects with BP ( BP ) and SSE ( OTCPK:SSEZF ).

Once these projects are completed they'll provide licensing and key equipment which should produce revenues around 1/3 of a full EPC delivery , but at higher margin. Then there's aftermarket which will kick in as the installed base become a little more aged.

There are seven projects in the process of being delivered.

Bottom Line

The TAM is pretty big in terms of how much carbon there main be to capture annually at around 250 million tonnes. Even the company's own estimates of TAM have changed over the last couple of years, and they're already at 1 million tonnes of CO2. Over the next two years there will be a meaningful jump in that as new projects come online. The green agenda means there's definitely a market. Still, these projects need to be viable from a carbon accounting perspective at scale. Modularity in its solutions helps with that, and may even create a financial intermediary market. But many different solutions gain attention in the renewable sphere. For more than 6x P/S, this is all being priced in. While economics are primed to improve as fixed costs are spread out with new EPC engagements and eventually mix effects from licensing and other longer-term contract revenue which will be higher margin, it's not as if the company has been ignored.

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