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Is the falling Powerhouse Energy (PHE) share price a buying opportunity?

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The Powerhouse Energy (LSE:PHE) share price hasn’t been a great performer so far in 2021. In fact, year-to-date, it’s down by nearly 40%. That’s quite disappointing given that in 2020, the PHE share price exploded by over 1,600%! But even with the recent lacklustre performance, the stock is still up by nearly 70% over the last 12 months. So, is this an opportunity to buy the business at a discount? Let’s take a look.

The future potential of Powerhouse’s (PHE) share price

Powerhouse is a waste-management and alternative energy company. Using its proprietary DMG technology, the group can convert end-of-life plastics into a usable synthetic hydrogen-rich gas. This product can ultimately be used as a fuel source for hydrogen cells. And given that the UK and other western nations are adopting hydrogen power in their pursuit of carbon neutrality by 2050, the demand for the technology is rising. That’s fantastic news for the PHE share price.

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I’ve actually explored this company before. And since then, the management team has made some notable progress. Firstly, it has successfully issued a new exclusive licensing agreement with Hydrogen Utopia International (HUI). Under this contract, HUI can deploy Powerhouse’s DMG technology across Greece and Hungary in exchange for an initial payment of €250,000 (€25,000 of which has already been received), followed by a continued licensing fee for each plant that becomes operational.

What’s more, the firm’s existing partner, Peel Group, is planning to develop a second DMG site within the UK of a similar scale to the Protos project. That means roughly another 250,000 homes could become powered by this plant, bringing the total to over 500,000 in the UK alone. Meanwhile, Powerhouse has also placed the order for a critical alloy needed to forge the DMG Thermal Conversion Chamber for the first site. While the completion of this component won’t happen until later in the year, the Protos plant remains on track to be operational by Q1 2022.

Personally, I think this is all very encouraging progress. So why has the PHE share price been falling?

The Powerhouse Energy PHE share price has its risks

The risks that lie ahead

While the DMG technology might be proven to work, its financial viability remains to be adequately tested. Powerhouse has only recently started generating revenue. But for the most part, the top-line income will remain largely restricted until the Protos plant comes on-line next year (assuming there are no delays). What’s more, the time horizon as to when this business may eventually become profitable remains unknown.

It does have some cash on its balance sheet. But due to the high initial costs of deploying its technology, the firm’s accounts payable figure has been building up. As of the latest figures published in June 2020, Powerhouse has nearly £1m in short-term obligations versus only £0.25m in cash & equivalents. Consequently, it remains dependent on external funding that may not always be available.

This liquidity risk alone may be enough to explain the weakening PHE share price. However, even after the recent decline, the valuation remains exceptionally high. Revenue for the first six months of 2020 came in at £0.1m versus today’s market capitalisation of around £220m. To me, that looks like the PHE share price may still be too high, given the underlying fundamentals. Like all valuations driven by expectations, the slightest sign of trouble could send the stock plummeting. Therefore, Powerhouse is staying on my watch list.

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Zaven Boyrazian does not own shares in Powerhouse Energy. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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