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Up almost 10% today! Is green energy penny stock Eqtec a strong buy?

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According to my data provider, two City analysts think green energy penny stock Eqtec (LSE: EQT) is a ‘strong buy’.

And that’s the consensus view from analysts because only two institutions appear to be following the company.

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This penny stock has low analyst coverage

I’m not surprised by the low coverage from analysts because Eqtec is a small enterprise. At 1.38p, the penny stock has a market capitalisation of around £106m. So, it’s not an absolute tiddler.

But it’s small enough to fly under the radar of many large investment organisations. And low institutional following can sometimes produce opportunities for private investors. That’s especially true if the situation leads to low valuations.

And the Eqtec business looks like it’s on the cusp of producing positive and potentially fast-growing profits in the years ahead. The company says its gasification technology is “at the heart of leading-edge” waste-to-energy plants in Europe and North America with “emerging opportunities” in Asia and the Middle East.

Eqtec designs and builds plants with end-to-end gasification processes, control systems and equipment. And the firm’s projects aim to convert waste into clean energy from municipal solid waste, and from plant, agriculture and forestry wood biomass.

The directors reckon the company’s proprietary and patented advanced gasification technology “sets the global standard.”  And the syngas produced from waste products can be used to generate energy sources at a commercial scale, such as electricity, heat, biofuels, synthetic natural gas and green hydrogen.

The company is confident about its technology and “high-quality” syngas and reckons the business is disrupting and decarbonising the waste-to-energy industry.”

There’s no doubting the scale of the company’s ambition. And it’s certainly operating in an industry highly relevant to the needs of the modern era.

Meanwhile, July’s trading update outlined progress with several projects. And the company also pointed to an increase in pipeline opportunities that are moving into project development.

Earnings could lag revenue progress

However, despite strong operational progress, to me, the financial performance of the business looks some way behind the share price. Eqtec expects to achieve revenue of around €15m in 2021. And that means the current market capitalisation is just over eight times revenue.

Nevertheless, the company expects to achieve its first year of profitability in 2021. But I reckon earnings will likely be tiny when compared to today’s share price.

On 28 May, the company completed a placing raising a gross £16m to be used to accelerate the growth strategy. And City analysts expect revenue to shoot up to around €55m in 2022.

If achieved, an increase like that would suggest the business is growing very fast. But it’s unclear whether earnings will ramp at a similar pace. My suspicion is that earnings will likely lag behind advancing revenue.

As such, I’d classify the opportunity today with Eqtec as speculative. After all, the share price has risen by almost 180% since November 2020 and was even higher at the beginning of 2021.

I’m a little more cautious than those analysts calling Eqtec a strong buy. But I do think it’s an interesting opportunity. And I’d be inclined to nibble at the penny stock on dips and down-days to hold for the next few years as the growth story unfolds.

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Kevin Godbold has no position in any of the shares mentioned. 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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