Clean Technology Sector Update
Realities of Commercialization Timelines
Result in Reduced Valuations Across the Coverage Universe
TD Investment Conclusion
Valuation Multiples Have Contracted in Recent Months: The companies in our Clean Technology coverage universe have experienced notable share price weakness recently with an average share price decline of 30% since the start of November, and with our hydrogen and RNG coverage and key comparables featuring 42% and 28% respective reductions in their forward 12-month EV/sales multiples over the same time period (details on page 2). Despite the recent pullback, companies with leverage to energy transition initiatives continue to trade at relatively high multiples of near-term revenue and cash flow when compared to companies in more mature sectors with lower long-term growth expectations. That said, we've observed that the coverage universe has guided to extended timelines for near- term deliverables including the ramp up of facilities, the expectations for subsidy support and other factors, with revenues more broadly not materializing as quickly as previously expected. To this end, we believe that the decline in valuations across the sector is a function of reduced, and arguably more realistic, growth expectations. We also believe that expectations for rising interest rates and the negative readthroughs of the Omicron COVID-19 variant across multiple sectors have also negatively contributed to near-term sector valuations given the relatively higher risk profile of the sector.
Updated Estimates & NAVs Feature a Reduced Outlook: As a result of the commentary above, we are making modest changes to our 2022 and 2023 estimates and are reducing the long-term growth assumptions in our NAVs that are predicated on a 10-year discounted cash flow analysis. We are also rolling forward our NAVs to the 2022 to 2031 timeframe from 2021 to 2030 previously. As a result, most of the target prices in our coverage universe decrease with this report, but we are not making any changes to our ratings at this time. Details on page 3.
Our Sector Stance: OVERWEIGHT
TD Clean Technology Industry View & Top Pick Unchanged: We continue to prefer companies with differentiated, difficult-to-replicate products and services, with ready-to-commercialize business models and a well-articulated, plausible path to growth and profitability. To this end, our best idea in the Clean Technology space is Anaergia (ANRG-T, SPECULATIVE BUY, $40.00 target price), based on the combination of its broad intellectual property portfolio, strategic focus on municipal waste, the pursuit of a growth-focused infrastructure model, and its ready-to-commercialize business model.