European Incentives And Cost Cuts Will Advance Hydrogen Mobility

Key Takeaways

• Government incentives and expanding partnerships are boosting demand and positioning Hexagon Purus for recurring revenue and margin improvements in zero-emission mobility markets.
  
• Cost reduction initiatives and a diversified order backlog enhance profitability, reduce risk, and provide strong forward revenue visibility amidst decarbonization trends.
  
• Prolonged demand weakness, structural cost challenges, slow market adoption, and reliance on government incentives threaten Hexagon Purus's growth prospects and path to profitability.

Catalysts

Provides hydrogen and battery energy storage solutions.

• Strengthening government policies and purchase incentives for zero-emission commercial fleets in Europe-such as covering up to 80% of the differential cost for hydrogen buses in Germany-are accelerating adoption rates and growing demand for Hexagon Purus's hydrogen mobility solutions, indicating a likely uplift in future revenue and improved earnings stability.
  
• The recent uptick in order intake and a diversified backlog, spanning applications like hydrogen transit buses, hydrogen distribution, and aerospace, enhance forward visibility and reduce customer concentration risk, likely supporting both revenue growth and margin stability.
  
• Significant cost reduction initiatives-targeting a NOK 350 million reduction and a 30% workforce cut-are lowering the breakeven point, enabling the company to achieve profitability at smaller volumes and supporting a stronger net margin profile as volumes increase.
  
• Expansion and deepening of strategic partnerships, such as the new supply agreement with Hino to provide Class 6 and 7 battery-electric trucks (leveraging existing assets with minimal extra capex), position Hexagon Purus to benefit from rising adoption of zero-emission vehicles, potentially driving incremental recurring revenue and margin improvement.
  
• Advancing urban air quality regulations and continuing investments in decarbonization and clean hydrogen infrastructure (despite some short-term delays), aligned with long-term trends, are expected to drive up the addressable market and support sustained revenue and EBITDA growth as delayed projects come online.

Hexagon Purus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hexagon Purus's revenue will grow by 35.5% annually over the next 3 years.
• Analysts are not forecasting that Hexagon Purus will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Hexagon Purus's profit margin will increase from -101.2% to the average NO Machinery industry of 8.8% in 3 years.
• If Hexagon Purus's profit margin were to converge on the industry average, you could expect earnings to reach NOK 299.7 million (and earnings per share of NOK 0.57) by about September 2028, up from NOK -1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from -0.5x today. This future PE is lower than the current PE for the NO Machinery industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.21%, as per the Simply Wall St company report.

Hexagon Purus Future Earnings Per Share Growth

Risks

• The revenue decline of 63% year-over-year, driven by significantly lower deliveries in hydrogen infrastructure and heavy-duty hydrogen mobility, signals weakening near-term demand and delayed project starts, creating a risk that structural demand may stay muted longer and resulting in prolonged revenue and earnings pressure.
  
• Persistent operating losses, negative EBITDA, and substantial cash outflows (negative NOK 197 million operating cash flow in Q2; NOK 272 million net loss) reflect high fixed costs relative to lower volumes-this threatens the company's ability to reach net margin and profitability targets if volume recovery is delayed or slower than anticipated.
  
• Management's ongoing reliance on aggressive cost-cutting, including 30% workforce reductions and NOK 350 million in cost cuts, indicates difficulty in achieving break-even at anticipated revenue levels, raising concerns about core business scalability and efficiency impacting future earnings.
  
• The future demand for hydrogen-powered heavy-duty trucks is described as "limited expectations" for the coming years due to insufficient infrastructure and hydrogen molecule availability, suggesting continued delays in end-customer adoption and restricting Hexagon Purus's addressable market and potential revenue growth.
  
• High dependence on government incentives and regulatory support-especially as EU and US policy implementation is moving "slower than expected" and federal US support is uncertain-creates risk around further policy weakening or delays, potentially undermining end-market demand and negatively impacting long-term revenue and cash flow stability.

Valuation

• The analysts have a consensus price target of NOK3.95 for Hexagon Purus based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK6.2, and the most bearish reporting a price target of just NOK1.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK3.4 billion, earnings will come to NOK299.7 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 11.2%.
• Given the current share price of NOK1.65, the analyst price target of NOK3.95 is 58.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.