RBC downgrades McPhy to “underperform” amid CEO exit, funding concerns

Investing.com -- RBC Capital Markets has downgraded Mcphy Energy (EPA:ALMCP) to "underperform" from “sector perform” with a "speculative risk" rating, following the sudden resignation of CEO Jean-Baptiste Lucas, in a note dated Tuesday. 

The price target has been slashed to €0.3 from €1.5 as analysts express serious concerns over the company’s ability to secure funding and maintain operational stability.

The downgrade reflects mounting financial pressures. With a cash balance of €39.6 million and estimated cash burn that could exceed available reserves within a year, McPhy faces a narrowing window to secure new capital. The company also holds €40.8 million in debt, raising questions about its financial resilience.

RBC outlines three possible paths forward: raising capital through markets, securing a strategic partner, or entering restructuring. 

Given current macroeconomic headwinds and investor caution around growth-oriented firms, traditional equity or debt raises are seen as unlikely. 

Analysts view a partnership as the most viable option, though note that McPhy's urgency for funding places it in a weaker negotiating position than peers.

The comparison with Norwegian electrolyser manufacturer Nel underscores McPhy's challenges. 

While Nel recently secured investment and a partnership with Samsung (KS:005930) from a position of relative financial strength, McPhy faces more immediate liquidity concerns. 

That said, McPhy's successful ramp-up of three European sites, including the launch of a Gigafactory, and a 2023 licensing deal with Larsen & Toubro (NSE:LART) highlight its operational progress and technological credibility.

Still, RBC warns that these achievements may not be enough to offset strategic uncertainty, especially following the leadership change. 

The CEO’s departure is expected to undermine investor confidence and complicate efforts to attract new funding or partners.

Revised forecasts reflect a more conservative outlook. RBC has cut revenue projections in line with lower delivery assumptions and reduced capex expectations. 

The valuation multiple has been halved from 1x to 0.5x to reflect increased business risk and uncertainty over McPhy's ability to continue as a going concern.

The competitive landscape also adds pressure. McPhy is up against firms like Nel, ITM, and Ceres, with growing threats from low-cost Chinese manufacturers in the alkaline electrolyser segment. 

Although its European base and industrial partnerships offer some advantages, the company’s position is precarious without a clear funding solution.

RBC analysts believe McPhy faces a risk of restructuring, similar to Green Hydrogen Systems, unless it quickly secures substantial funding, likely through a partnership. 

The combination of financial difficulties, leadership changes, and worsening market conditions leaves McPhy with few alternatives and considerably increases its vulnerability.