AFC Energy beginning to blossom

AFC Energy this week signed its biggest-ever contract, one of a pair of hugely significant deals in the lucrative South Korean fuel cells market. There's clearly a long way to go before the money starts rolling in, but this certainly looks like a watershed moment for the low-cost alkaline fuel cell firm.

"There's still lot of work to do to get agreement over the line, but we're very optimistic that this represents the start of something positive in South Korea and the rest of the world," chief executive Ian Williamson told Interactive Investor. "Pleased is an understatement."

And why shouldn't he be? The life of a small technology company yet to generate meaningful revenues is a precarious existence, so bagging two deals within days is worth shouting about.

Eighteen months after opening its first sales office in the country, AFC has signed a memorandum of understanding (MOU) with Chang Shin Chemical Co which could see AFC install and operate its fuel cell systems at the South Korean hydrogen supplier's sites. It will receive long term fees in return. And a second "breakthrough deal" with Daniel Inc might see AFC supply the power plant owner with systems worth $15 million (£8.76 million). A $1.25 million deposit is payable once a formal contract is signed.

"[We] believe that this is the first of many more orders to come from this country," said Mr Williamson in an official company announcement Thursday. That's more likely now that local investment bank Daewoo Securities has thrown its weight behind AFC. "We couldn't wish for a better partner in terms of credibility," Mr Williamson told us.

Much like Bloom Energy in the US which is part-funded by venture capitalists including Kleiner Perkin, AFC will get access to Daewoo's other customers and partners in South Korea, a country poor in natural resources and where take-up of alternative energy sources is enthusiastically backed by local politicians.

"Unlike previous false dawns, there is genuine momentum in the hydrogen and fuel-cell space driven by commercial orders, and this development is evidence that AFC are very much part of it," says Dr Tom McColm, research director at Zeus Capital.

Of course, it will take time to get the deals rubber-stamped - Mr Williamson reckons about six months, maybe a little longer. Once the agreements are finalised, and before any of its KORE systems are delivered, AFC will have to adapt its technology to meet Korean codes and make sure it can be operated effectively. Only then will it begin building kit. Remember, too, that AFC will have to carefully manage any surge in volumes with manufacturing capacity.

On the cusp

South Korea isn't its only focus, though. AFC is working in the US, too, and with a number of blue chips in Europe where the company receives about €6 million of EU funding. AFC expects to take its system - currently being built in Surrey - to Germany early next year and be operational during the first quarter of 2015.

A number of finance houses will be watching closely. This is AFC's first technical demo of go-to-market technology, and if all goes well they'll be desperate to invest in more of the company's projects.

AFC is generating very little revenue and is currently burning through cash at a rate of £4-£5 million a year. It had about £5 million at the end of April and EU grants do offset additional costs, but unless it signs some lucrative licensing deals the company will likely need more money at some point. "All routes are open," says Mr Williamson. One suspects he’ll have little trouble finding further backing.

Having been a great story for a number of years, AFC is finally on the cusp of delivering commercial success. A number of hurdles and risks still remain, and it will take time to deliver the big bucks, but the chances of it doing so one day have improved immeasurably, and Mr Williamson's confidence appears not to be misplaced.

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