October 20, 2021

Greentech’s made some modest strides the past week and is indicating some bullishness for the first time in three months. There’s still some work to be done to shake the bears loose, but we’re encouraged by recent action. We still believe the market is weighed down by a lack of progress on the proposed infrastructure and long-term spending bills. We’ve said a few times recent history shows clean energy doesn’t need Federal support to thrive, but the promise of still-murky regulatory action has investors wary of making commitments.

ADS-Tec Energy

Overview
A few brief items to illustrate the potential of our recommendation:

1. My Cabot colleague Tim Lutts recently relayed a brief story about driving his Tesla on vacation. Near midnight one night, the front desk of his hotel called: another EV driver wanted to use the charging post – could he come unplug? (He couldn’t – his car still needed to charge).
2. A headline out of China last week: “Nio CEO says Lines at Chargers Are Due to Faster than Expected EV Adoption.”
3. Charging a Tesla at one of its proprietary Supercharger stations takes about 30 minutes.
4. It takes about three minutes to fill up a 20-gallon SUV gas tank, from swiping your credit card to replacing your gas cap.

Business Model
ADS-Tec Energy is a German maker of EV chargers and energy storage. It has a definitive agreement to go public by a SPAC – European Sustainable Acquisition Growth (EUSG for the stock, the warrant is EUSGW and the unit – one share and half a warrant – is EUSGU). ADS-Tec has a unique approach that should set it apart from other EV charger makers: it focuses on maximizing the charging throughput regardless of location by using a battery storage system that can power a 320-kilowatt hour (kWh) EV charger. To charge an EV at 320 kWh to give it a charge of 100 miles range would take about 5 minutes – an experience much closer to filling a gas tank. That compares favorably against EV charging times now: 100 miles from a household outlet takes 21 hours while level 2 chargers, like the kind installed at home from producers like ChargePoint (CHPT) take 2.5 to 8 hours. A high-powered charger, like a Tesla (TSLA) Supercharger needs a grid upgrade, since a typical electrical connection can provider 30 kWh to 110 kWh. And, as noted earlier, once it has that infrastructure in place, it takes 30 minutes – but more if another car hooks up next to you.

ADS-Tech contends it’s not realistic to expect to widespread electrical grid upgrades to support fast EV chargers. It co-locates, within 300 feet of the charging post, a battery system that charges slowly from the normal electrical grid while sending out up to 320 kWh. The system – named ChargeBox – looks like this, as installed in the city of Nürtigen in Germany. The charging post is on the right, the battery pack is the white box behind the EV. Both are liquid cooled to stay operational in high heat.

No EVs yet accept a charge as powerful as 320 kWh: the Ford (F) Mach-E 3 takes 150 kWh, as do the Polestar Long Range and Audi E-tron (the model being charged in the photo). The highest charging model we know of is the Taycan from Porsche, which can accept 270 kWh. ADS-Tech Energy says it has 50 patents related to the system, from the accompanying battery to the cooling system to its inverter. The design allows a ChargeBox to be installed anywhere there’s a standard electrical wire in reach – the common 30 kWh kind.

The company also produces a mobile, 1.9-megawatt hour (MWh) tractor-trailer sized system that can charge 10 EVs simultaneously. The company pitches it as good for events and they have been sold to Porsche, based on Porsche publicity that names ADS-Tec as the supplier. In the back half 2022 the company plans to start selling a mid-sized box called ChargePost. It will be semi-mobile – that is, manufactured ready to be moved and installed as-is – offering two outlets at 300 kWh and featuring a side that can take display advertising.

As with most SPAC businesses, ADS-Tec Energy is young: it’s a carve-out of a larger, more established German business called ADS-Tec, which is owned by Thomas Speidel and has focused on electrical systems and industrial IT. Speidel’s parent ADS-Tec controls 61% of ADS-Tec Energy, with the German conglomerate Bosch owning most of the rest right now. In 2019, ADS-Tec Energy generated $21.4 million in sales, with earnings before interest, taxes, depreciation and amortization of negative $10 million (that is, a loss). Of those sales $16 million were ChargeBoxes, with the rest sales and services to businesses. Last year (calendar and fiscal years are the same), the business made $54 million in sales, with an ebitda loss of $7 million. Of those sales $46 million was EV charging. The company warns that a large customer (almost certainly Porsche) made a large order of the mobile high-power trailers in 2020 and hasn’t this year due to a lack of events. That should knock sales down to $44 million for the year, although the business should improve gross profit, to $4 million from $2 million.

Business Outlook
ADS-Tec is focusing on the European Union and U.S. markets. It plans to launch stateside in 2022. Longer term, the company plans to focus on additional storage solutions with a planned 2023 introduction of MyPowerPlant, a home battery and software package which will integrate energy storage from renewables, like rooftop solar, with energy management and the ability to output DC power for charging EVs. Bosch is expected to be a significant hardware partner on the item and the company says generally the product will allow for other renewable product management and future integration.

Other products ADS-Tec Energy is developing are other “power booster” products, scalable storage solutions like battery rack systems and self-contained trailers that can be used in utility-scale operations, such as providing supplemental power peaking and micro-grid arrangements. The business also has battery management software for optimizing charging and monitoring of systems, and leads to data mining possibilities down the road.

As with seemingly every SPAC business, the projections in years to come are exceptional – but they are, of course, just projections. The company believes next year it can generate $101 million in sales from its three divisions – EV charging, residential services and commercial and industrial services. We like that the business already has a product it is selling that has a differentiated characteristic – the ChargeBox. It has delivered 430 of them to customers and they are approved by regulators in the E.U. and U.S. Fast EV chargers already are the majority of global EV charger sales, and are expected to dominate the sector in coming years, too, for obvious reasons. We also like that the business has no China exposure, given that country’s issues with central economic planning and poor track record with Western intellectual property. Everything for ADS-Tec Energy is made in Germany, with the company suggesting that it may manufacture in the U.S. eventually, similar to how Bosch conducts business. That does expose the business to some USD-Euro currency risk.

Valuation Thoughts:

• The SPAC merger values ADS-Tec Energy at a pro forma $356 million enterprise value – that’s about a price-to-sales ratio of 7. The deal value is $580 million, with EV lowered by $224 million cash going to the balance sheet, $32 million to pay debt, $24 million to partially cash out Bosch and $20 million in fees.
• Based on filings, the share count of ADS at the merger close will be 58.78 million, of which 15.87 million will be held by the SPAC. At EUSG’s recent price of 9.91, prices are fairly valued right now to the deal value.
• However, there are 6.45 million warrants from the IPO units and private placement sales of warrants to the underwriters. This excludes, as detailed in merger agreement, SPAC sponsor warrants being converted into equity concurrently with the close.
• Diluted, there will be 65.23 million shares, giving ADS-Tec right now a market cap of $648 million, or, more accurately, $750 million when the vast majority of the warrants are exercisable at 11.50 (200,000 warrants are exercisable by the underwriters at 1). This still means ADS-Tec Energy is well-priced at about 14 times trailing price-to-sales. The recent warrant price of 1.45 means shares need to reach 12.95 for warrants to trade at breakeven, so ADS-Tec has an implied market cap of $846 million. That’s about 16 times 2020 sales, 19 times 2021 sales and 10 times next year’s projected sales.

Issues to Consider:

• Charging competitor Chargepoint (CHPT) has a $6.4 billon market cap on $97 million trailing 12 months sales: a price-to-sales ratio of 66. Volta Inc (VLTA), which is a holding in our Excelsior through its warrants, is at a 59 P/S. Blink Charging (BLNK) is at a P/S of 127.
• The SPAC merger can fall through. SPAC shareholders need to approve the deal. There is a $156 million PIPE at $10 a share including Bosch and others to help bring the deal to fruition.
• At the close: Speidel, through ADS-Tec Holding, will own 30%, Bosch 14%, SPAC shareholders 24%, the PIPE investors 27% and the SPAC sponsors 6% (percentages have been rounded). This excludes any redemptions by SPAC shareholders before the close and the exercise of any warrants, besides the founders’.
• Failure of a U.S. infrastructure plan or other policies to encourage EV charging station installation will likely be negative for shares.
• Forward price-to-sales throughout the EV charging sector are well above broad market and sector ratios, even as ADS-Tec appears cheap against its peers.
• Warrants are exercisable at 11.50 starting 30 days after the close of the merger. They expire five years later. Warrants can be called for redemption if the stock trades at 18 or higher in 20 out of any consecutive 30 trading days. There is no redemption feature at the share price of 10, as seen in some SPACs. The redemption price can be adjusted downward if shares trade below 9.20 ahead of the merger and there is significant fund raising at or below that price by the company.

Technical Analysis
EUSG has been calmer than other SPACs with no spike at all on the ADS-Tec Energy merger announcement in August. In fact, warrants slipped immediately after. This likely is from the unheralded nature of the SPAC – its sponsors and management, primarily European, generate little news interest and ADS-Tec is hardly a household name, or an eye-catching one. Normally, SPACs should experience increased volatility as the merger comes to a close, yet to date none of the names disclosed in the PIPE are the usual suspects of hedge funds that leap into PIPEs to exit upon closing. Warrants spiked yesterday with the release of the merger prospectus, which had been under confidential review at the SEC.

What to Do Now
We’re going to recommenced taking an Excelsior portfolio position in the SPAC warrants – EUSGW. They are higher risk, because they may never be exercisable and may fall in value. SPAC equity typically falls on merger closing, so we’d be more inclined to wait and chance scooping up shares on the transitional weakness as a long-term position. EUSG units are the largest capital commitment – and that is their chart produced below – but have been offering a discount on warrants. EUSGU recently traded at 10.64 compared to 9.92 for shares. That implies a 1.44 price for warrants (each unit comes with half a warrant). The warrants closed on a sharp end of day rally at 2.00 Tuesday. One can buy the unit, split the components off through your broker, and sell the shares to take capital off the table, similar to how arbitrage traders play SPACs.

With the warrants, we like the upside return potential. Theoretically, the maximum price warrants can hit is 6.50 (to reflect the redemption clause for when shares hit 18). That would be a 100% profit if we bought shares at current prices; it would be a 300%-plus profit with warrants. Warrants pulled away from our preferred entry point around 1.50 yesterday. Given volatility, we’re going to recommend setting a buy order under 1.90. BUY under 1.90

ADS-Tec Energy (EUSGW)
Revenue (2020): $54 million
EBITDA per fully diluted, post-merger share: (0.107)
All-time warrant high (intraday): 2.00
Fully diluted, post-merger market cap: $750 million
Recommendation: Buy under 1.90

The ESG Three

The ESG Three are three technically strong stocks selected from the 200 most-held stocks in environmental, social and governance focused mutual funds and ETFs. ESG fund holdings tend to be weighted toward blue-chip companies drawn from every industry which are rated highly in social and governance aspects. We screen top performers further to eliminate widely held companies we believe have clear environmental, social and/or governance problems. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.

MGM Resorts International (MGM)
What is it?
An owner and operator of casinos and hotels in the U.S. and Macau.

Why is it ESG?
It has reduced its water use about 15% in the latest three years reported. Board structure is better than peers for shareholders; however half its revenue comes from gambling. ESG funds own $22 million of shares.

Why now?
The opening of sports betting in the U.S. boosts investor sentiment, as does a cleaner balance sheet after some recent sales and acquisitions of properties.

Regions Financial (RF)
What is it?
A large consumer and commercial bank operating in the south and Midwest U.S.

Why is it ESG?
The majority-independent board is good for shareholders. Management has made strides increasing gender and ethnic diversity among its employee base. ESG funds own $163 million shares.

Why now?
A healthy economic outlook and a belief the bank (16th largest in the country) is positioning its asset mix prudently for higher interest rates.

Catalent (CTLT)
What is it?
A pharmaceutical manufacturing and development business that works with major biotechs and drug firms.

Why is it ESG?
Better than peers on environmental and governance scores, though its tendency toward acquisitions presents employee integration challenges. ESG funds own $154 million shares.

Why now?
Catalant is involved in about 80 COVID-19 programs given its manufacturing capacity and expertise.

Our Greentech Timer

It’s been some time, but the Greentech Timer is suggesting it’s an improving time to be in the market. The Wilderhill Clean Energy Index we use as a proxy for all of Greentech, is now above its 20-day and 40-day moving averages and both are trending upward. It’s ever-so-slight, so let’s temper our enthusiasm. But it’s a positive sign. Once again, support held in the low 70s in a test early this month, and the bounce higher has broken a fairly notable downtrend line that began with the June 29 peak. The solar subsector is looking even better, though in a similar state of being over the shorter MAs while under the 200-day. Other subsectors (with fewer components) – uranium, EVs, fuel cells – are also similar. Water meanwhile, has flipped from its position of being the leader most of 2021 to the laggard in Greentech.

The result is, overall, a mixed sector, which is progress. Looking at recent action another way, over the past four weeks, the performance of the 275 Greentech stocks we actively track is modestly positive: 152 stocks are higher over the period, 123 are lower. Over the past week: 207 are higher, 68 are lower.

Our Greentech Timer is bullish when the index is above the 20-day and 40-day moving average and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential).

Right now, the Timer suggests cautious optimism.

Current Portfolio

About the portfolios
Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. This gets us enough opportunities to capitalize on Greentech’s advances without risking too much money in any one position. Sell-stops are essential to long-term success to our approach. We prefer to execute sell-stops on daily closes at or below our sell-stop mark, rather than intraday lows, because closing prices are far more important than dips during mid-session. Sell-stops allow us to absorb small losses, preserving capital for big winners we let run.

Our special opportunities portfolio is named Excelsior, which is managed without consideration to the Real Money Portfolio.

SX Greentech Advisor Real Money Portfolio

SX Greentech Advisor Excelsior Portfolio

Real Money Portfolio
Aemetis (AMTX)
The California ethanol and renewable natural gas and jet fuel producer slipped back on high volume to initial support this week after getting a little ahead of itself last week. The company added former California Public Utilities Commission commissioner Timothy Simon to the board. We’re up 25% on the position. Our sell-stop is “around 14.” BUY

Aspen Aerogels (ASPN)
Shares are fine, looking bullish adnwe ramina up a little, even as shares had little movement the past week. The company will report earnings on Thursday, October 28, after the market close. Our sell-stop is “below 39.75.” BUY

Centrus Energy (LEU)
Little news-wise, as the Department of Energy continues to have its comment period for its Project Pele, the small/mobile nuclear reactor project that is highly likely to require HALEU, the more enriched uranium of which Centrus is the only American producer. Spot uranium has fluctuated a bit this past week and could be an explanation for share volatility. LEU add almost 53% from the start of trading last week to Monday’s intraday high, a fast advance that invited profit taking and got shares well ahead of natural support. We’re up nearly 55% even with the step back. Our sell-stop is “near our buy price” (34.46 for the portfolio), which provides a buffer below the 40-day moving average now. BUY

Chipotle Mexican Grill (CMG)
Chipotle reports third-quarter earnings Thursday after the market close. Consensus is for $6.32 EPS on $1.92 billion of sales. We’re up slightly on the position. Our sell-stop is “around 1,773,” right around our buy price. We expect the business to continue showing great same-store sales growth and continuing strength in digital as a long-term growth story. HOLD

On Semi (ON)
The semiconductor maker has been weaker of late but continues to hold over gap support that gets broken under 40. Resistance is at 46, a level we’d like to see cracked again soon, and then 50. We’re down slightly on the position. Our sell-stop remains “below 39.” HOLD

Trex (TREX)
Trex broke our sell-stop last week gapping below crucial support on the most volume since November. We recommended selling in last Wednesday’s weekly portfolio update. The portfolio sold at 92.53, the midpoint of the high and low for Thursday, a loss of 13%. Shares have had a mild bounce, but remain bearish. With Q3 earnings being announced November 1, they likely hold too much downside risk, since reactions in prior quarters to largely very good quarters were disappointing. SOLD

Excelsior Portfolio
With the addition of European Sustainable Growth SPAC to our special opportunities portfolio, we’re shifting from basket ratings to individual ratings. We’re adjusting our rating from BUY to HOLD on the six as a basket now that all of those have closed their SPAC mergers. Not every position will have a sell-stop.

Li-Cycle (LICY.WS)
The lithium recycler now has Wall Street analyst coverage at six firms, a positive for getting its story out to the market at large. We’re basically unchanged on our warrants on the week, up about 20% overall on the position. The warrants become exercisable on October 23 – one year from the SPAC IPO. Given the company has the option to initiate a cashless redemption if shares trade at $10 or greater for 20 of 30 days, and LICY shares have been over that mark since September 22, a notice may be coming soon – possibly as early as Monday, given the mandatory three days space between the 30-day period and when the notice will be sent. In that case we will almost certainly sell. HOLD

Navitas Semiconductor (NVTSW)
The gallium nitride semiconductor maker began trading on the Nasdaq today, as the merger with Live Oak II SPAC closed. The old ticker, LOKB, is replaced by NVTS for the shares, and the warrants now trade with the ticker NVTSW. We’re up about 10% on the position now, thanks to a rally on the deal closing. Shares are rallying sharply too, to near 15 recently. There is also an early redemption clause for shares trading over 10 for 20 of 30 days, which puts us on the clock here as well. HOLD

Origin Materials (ORGNW)
The carbon-negative plastics maker remains weak, with shares in the 6 area. Warrants are basically unchanged on the week, at 1.48. Since Origin still needs to bring a chemical plant online, it’s possible only future sales deals may move shares and our warrants. No recent news. HOLD

Ree Automotive (REEAW)
The EV chassis maker remains weak with shares in the 4 area, and warrants under 1. If we reach break-even on warrants (1.1) while shares remain down, we may recommend selling the warrant and consider a light position in the shares. For now, hold. HOLD

ReNew Energy Global (RNWWW)
We’re basically unchanged on the warrants this week, still up about 13% but shares have shed about 1.20, to the high 7s recently. We like ReNew’s position as India’s largest renewable energy owner, but a continuing divergence like that may be a reason to take our modest profit on warrants. HOLD

Volta Inc (VLTA.WS)
Volta warrants continue to be volatile, with a 17% swing – high to low – in recent sessions and we’re now underwater on them. Volta shares have slipped into the 6 area and with warrants exercisable at 11.50, there’s a divergence that may signal we should sell on the next uptick into the black for us. HOLD

Thank you for being a subscriber. Our next SX Greentech Advisor issue is published Wednesday November 3. Our next regular weekly portfolio update is October 27. We will send a special bulletin with any interim recommendations.

Contact me anytime with questions or comments at brendan@cabot.net.

The next Sector Xpress Greentech Advisor issue will be published on November 3, 2021.