Ballard Power Systems Inc T.BLDP

TD Sector Update - Cleantech Industry Valuation

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Sector Update and Q4/20 Preview

Expanding Valuation Multiples due to Increasingly Strong Macro and Making a Relative Value Call

TD Investment Conclusion

Cleantech Industry Valuation Update: The share-price performance of companies exposed to the development of the hydrogen sector as well as the broader decarbonization movement continues to be very strong due to the combination of:

1. a significant total addressable market size,

2.the current prioritization of carbon-reduction initiatives among global governments and the private sector that are mobilizing large amounts of capital, and

3. the scarce amount of opportunities for investors to gain meaningful exposure to this theme.

As a result, we can appreciate that investors are approaching valuation very differently than what is typical in other sectors and, as a result, we are increasing the terminal multiples employed in our NAV calculations (details on page 3).

Q4/20 Preview: We expect that Q4/20 reporting will largely be a continuation of Q3/20, featuring optimistic outlook/macro commentary that has not yet found its way to financial performance. Specifically, we are not expecting meaningful backlog growth in Q4/20 and note that based on past precedents, any large orders that occurred in the quarter would have already been press-released. Our focus in the quarter will be to evaluate the potential timeline of several catalysts for each of the companies in our coverage universe and view Q4/20 financial performance as a non-event. That said, we expect that COVID-19-related headwinds will continue to negatively affect near-term financial performance, given continued social-distancing guidelines and its impact on operating efficiencies. We are not making any changes to our estimates with this update.

Target Price and Rating Changes: We are increasing our target price for Xebec Adsorption (XBC-T) to $17.50 (from $12.50 previously) with an unchanged BUY rating and are moving Ballard Power (BLDP-Q) to HOLD rating (from Speculative Buy previously) with an increased target price of US$40.00 (from US$27.00 previously) in a concurrently published Action Note. Importantly, Ballard's share- price performance has been incredibly strong over the past few months and note that our revised target price of US$40.00 matches the Street-high for the name. Although both Ballard and Xebec have meaningful exposure to the hydrogen macro, we believe that there is a significant disconnect in valuation between the two names and ultimately view Xebec as a better relative call for thematic hydrogen sector exposure at this time. For investors who wish to learn more about Xebec and its recent acquisition of HyGear, a global leader in onsite hydrogen production, we refer investors to our recently published Company Insights report for more details (full report).