Alfen stock is a very interesting proposition given it is operating in a very hot environment, namely renewable and charging systems in Northern Europe. I’ll do a stock price overview so that we have something to compare the value to, a business overview, financial analysis, stock valuation and finish with a risk and reward investing conclusion.
This Alfen stock analysis is part of my full analysis of every stock traded on the Amsterdam Stock Exchange. My goal is to find stocks to invest in that offer 10-bagger potential, so as would Buffett say; I start with the As.
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As expected, Alfen stock did really well over the last 12 months given the exuberance related to renewables and EV charging infrastructure following the Covid-19 standstill.
But the fact that a stock is up 4 times doesn’t have to mean much for our current investing perspective. Sometimes when a stock is up, it just means it is a great business, but sometimes it just means there is a lot of exuberance.
We have to look at what is the value now and compare it to the current price. Maybe it will not be an immediate opportunity, but when you have a valuation, it is easier to make investing decisions.
Plus, given the market capitalization of just 1.4 billion EUR and the fast-developing environment, there might be much more room to run for businesses like Alfen.
What I like about the Netherlands and also a reason why I am researching the stock market there, is how it is one of the countries where business people are not afraid to jump into new opportunities. When I researched the Austrian stock market, it was mostly about old legacy businesses and growing on that, but when it comes to the Netherlands, it is much more about innovation. Adyen stock analysis gives another example of that.
So, just by looking at the first slide of Alfen’s stock market presentation, you get the business orientation is on renewables, battery and charging systems.
Alfen’s business is divided into 3 segments:
The core of the business are the smart grid solutions. Growth in the segment was a bit subdued due to Covid but backlog is up 27% so we could see a return to growth.
Their focus is on producing transformer substations for mostly smaller projects.
Their focus on micro projects, so they likely have an advantage compared to big transformer producers. However, a transformer is just a transformer, and it is a cyclical industry. When demand is high and producers can’t deliver fast, margins and profits are high, but if there is a slowdown in demand, prices fall sharply. Plus, input costs price volatility has to be kept in mind, copper prices are sky high now which should presume margins down the road.
The next sector, and probably sexier that old boring transformers are storage systems.
Revenue growth has doubled, but is still just at 6.8 million EUR for the quarter. This segment falls into the ‘investing into the unknown’ category. We don’t know how big will storage systems become in the future, will those ever be profitable and we still don’t know what will the predominant technology be in 5 to 10 years. Plus, Alfen has to buy the batteries and instal them, so they are just the hands there and don’t have a special advantage.
On charging points, they installed 20,800 of them in Q1 2021 and revenues were 19.3 million EUR. That is about 927 EUR per charging point.
One of the above was installed at my mother’s house as the company they are working for hired Alfen for more installations as they want to have more EVs for their employees. However, there is already talk in the Netherlands that hydrogen might be the future, not EVs.
To estimate Alfen’s growth potential, we have to estimate the growth potential of EV’s and the above related in Northern Europe.
2020 was a booming year for EV sales in the Netherlands but 2021 didn’t start well where there has been a 50% decline on lower subsidies, but plug-in hybrids did grow much better at 50%.
But, by 2030 it is possible only electric cars might be sold in the Netherlands and thus we could see demand growing fast for charging stations as one can also expect to see at least 1.5 stations per car installed.
With approximately 400,000 new cars per year in the Netherlands, I would assume the need for approximately 600,000 new charging stations per year. Of course, there is also Germany and Belgium etc., but there is also competition there.
Given that Alfen already installed 20,000 stations only in Q1, we might be in for slower growth ahead as the competition intensifies and there is plenty of time till 2030. But, let’s say the business can reach double the revenues by 2025. Something similar can happen for grids and batteries. Let’s see how it fits the financials.
Revenue growth has slowed down over the last quarters which is something to keep in mind. As Alfen is just the installer, EBITDA margins are not high and around 13%.
Their expected growth is around 20% on 2020 sales.
Another check I have to make is what are the real earnings. Alfen shows only EBITDA and those are defined by Charlie Munger as ‘bullshit earnings’.
Alfen had a net profit margin of 3.9% in 2019 and 6.3% in 2020. I don’t think the profit margins in such a competitive environment will ever be stable, but we can take a conservative average of 4% for our valuations.
The balance sheet looks ok, especially after the 51 million EUR share issue in 2020.
Let’s make a valuation.
If I assume growth of 20% ahead, on a 6% net profit margin and a 10% required investing return, things don’t look good when compared to the current price. If I would use the above 4% estimated cyclical average net profit margin, things would be even worse.
Valuation template – Source: Comparative stock list of publicly analyzed stocks by Sven Carlin – free download
Earnings per share for 2020 were 0.56 EUR per share. 2021 will likely be 20% higher on a positive assumption, we get to 0.70 per share in 2021. Given the company needed to issue shares for 51 million to finance growth ahead, I don’t assume the growth will come cheap, so I have assumed that there will be no dividends and all the earnings will be used for growth ahead. This is why I don’t calculate the present value of the earnings in my valuation, I include that in the growth rate.
With growth of 25% over the coming 5 years and 10% subsequently, Alfen’s intrinsic value expecting a 10% yearly return is 14.47 EUR. In a more exuberant scenario with a higher valuation I get to 28 EUR per share. So, that is in line with the IPO levels the stock has been trading around before the 2020 renewable boom.
I know the current PE ratio is above 100 on exuberance, but there are still transformer businesses in Europe trading with price to earnings ratios of 10. So, as I see Alfen as a mere installer of technology, without any specific advantage, I would not be as exuberant as the market it.
Of course, given it is a renewable stock, it might get picked up and pushed higher by related index funds but if that happens, the management will simply issue more shares to get new capital and finance future growth on the cheap. Further, when they reach substantial EBITDA they will likely sell the business at 12 times EBITDA as it often happens in the Netherlands. So, there is some margin of safety above, but I am a value investor looking for absolute returns, I don’t like making bets on what might happen. For now, I have better businesses in the Netherlands, much better.
Even by comparing to other Dutch exuberantly stocks, Alfen seems more expensive than Adyen and ASML.
If you wish to check my best Dutch business which I still consider a strong buy, check my Stock Market Research Platform.