Tecogen Chiller and CHP Sales Up Sharply in Second Half of 2017
Contrary to many other Letters to Shareholders, Tecogen (NASDAQ: TGEN – $2.40 & Fra: 2T1 – €1.80) this week published a very open and informative one. The Company, for example, mentioned that its order flow for both CHP and chillers units was exceptionally strong in the second half of 2017.
As the chart below indicates, unit orders for chillers and CHP units rose by more than 150% and 75% respectively in the second half of 2017, compared with the same period a year ago. Note that this is on top of already solid growth of more than 25% in the second half of 2016. Although order growth doesn’t immediately translate into higher revenues, it gives a clear indication of what is about to come.
The Company’s relationships with building owners, REITs, ESCOs, property management firms, and other major market players in the healthcare, biotech, and hospitality sectors are paying off big time. Even in the past week, Tecogen announced the sale of two InVerde e+ CHPs to a light manufacturing company in Brooklyn, NY. The two units will be added to three existing InVerde units that were installed in 2010. Once the project is complete, the facility’s total generation capacity will have increased from 300kW to 625 kW.
Another important point is that the United States Congress recently passed the budget bill that extends the 10% Investment Tax Credit (ITC) on CHP systems through the end of 2021. The credit is equal to 10% of expenditures, with no maximum limit stated. This obviously further enhances the rate of return on CHP installations. Consequently, Tecogen’s management expects the strong CHP sales to continue in 2018.
The boom in chiller sales, on the other hand, was especially supported by the cannabis indoor grow market. The Company so far received at least eight orders from this rapidly emerging industry. The amount of physical space dedicated to indoor growing is set to jump more than five-fold globally over the next five years, with the result that annual indoor farming revenue could grow by over $6 billion.
But it doesn’t stop with cannabis. The chillers are also a perfect fit for indoor growing of leafy greens, as they are extremely sensitive to both temperature and humidity. In addition, their short shelf life puts a premium on growing them close to centers of demand.
That means converting legacy industrial sites near urban centers into grow facilities. Frequently, the electrical infrastructure at these sites is outdated and cannot meet the load that indoor growing requires. As our chillers run on natural gas, they can enable growers to greatly reduce, and even eliminate, costly upgrades to the power supply.
Advancing Ultera for Gasoline Powered Engines
After the dissolution of the Ultratek JV, Tecogen has continued to advance the Ultera technology for Gasoline Powered Engines. Remember that Tecogen’s Ultera is already capable of lowering emissions of criteria pollutants, such as CO, NOx, and NMOG, to near-zero levels for natural gas-powered engines.
In January 2018, Tecogen entered into a Research and Development agreement with Southwest Research Institute, a well-known Texas R&D center. Over a four-month period, Southwest will work on optimizing the Ultera’s catalyst formations to reduce emissions even more than those achieved at AVL North America.
This will further the Company’s goal of adapting and ultimately commercializing the Ultera process into the automotive market.
$3.15 Million Note Paid Back
A final item from the Letter to Shareholders that is important to mention is the fact that on December 14, 2017, Tecogen paid back the Senior Convertible Promissory Note with Michaelson Capital through the principal payment of $3,150,000. The funds were sourced from cash generated by operating activities as well as cash received from the dissolution of the Ultratek JV.
This is a significant event, as the note was loaded with restrictive covenants and secured by Tecogen’s entire balance sheet, which restricted the Company’s ability to enter into a bank line of credit should it need any additional capital to fund its growth.
If 2017 was a good year for Tecogen, as it demonstrated sustained profitability, we believe 2018 will be even better. With CHP and chillers sales on the rise, the integrated ADG fleet that provides steady, annuity type revenues, and the blue sky potential of Ultera for fork truck and automobile applications. We can’t emphasize enough that this stock is ridiculously undervalued. Recommendation BUY.
|Smallcaps.us Advice: Buy||Price Target: $9.41||Latest Company Report (pdf)|
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