Nel ASA, the Norwegian hydrogen technology company, has been making waves recently. They announced a major restructuring in their Q4 2023 earnings call, revealing plans to spin off their fueling division and focus solely on electrolyzer technology. This move, hailed by some as a strategic masterstroke to unlock shareholder value, is raising eyebrows among those who delve deeper into Nel's financial performance. Could this spin-off be a cleverly disguised maneuver to address a potential cash flow crisis brewing beneath the surface?

On the face of it, Nel's Q4 2023 results appear positive. They reported a 30% revenue increase for the quarter and a whopping 80% growth for the full year, a testament to the booming hydrogen market. They proudly emphasized their robust NOK 3.4 billion cash reserve entering 2024, assuring investors of their financial stability and dismissing any immediate need for additional equity.

However, a closer look at the numbers paints a different picture. While revenue growth is impressive, the company's order intake has been steadily declining for the past three quarters. This concerning trend culminated in a meager NOK 183 million in new orders for Q4 2023, a significant drop compared to previous quarters. This decline in order intake directly impacts Nel's future revenue stream, posing a significant challenge to the company's aggressive growth ambitions.

Further fueling this hypothesis is Nel's heavy reliance on a limited number of large contracts. They acknowledge that "individual milestones on the individual contracts will lead to fluctuations between quarters," implying that their financial performance is vulnerable to the successful execution of these few, high-stakes projects. Any delay or cancellation of these contracts could have a cascading effect on their revenue and profitability.

Nel ASA: Declining Order Intake

The following chart depicts Nel ASA's quarterly order intake, highlighting the downward trend over the past year.

Nel's focus on increasing their manufacturing capacity, while seemingly aligned with their goal of capturing a larger market share, could further exacerbate their cash flow challenges. They are on track to achieve a 1.5-gigawatt production capacity by the end of 2024, a significant jump from their current output. This expansion, while necessary for future growth, comes at a steep cost. Coupled with a declining order intake, this could lead to a situation where they are saddled with significant production capacity but lack the orders to utilize it effectively.

The spin-off of the fueling division, while touted as a strategic move to streamline operations and enhance focus, could also be interpreted as a way to offload a less profitable business unit and generate much-needed cash. The fueling division, despite a 41% revenue growth in 2023, still incurred a substantial EBITDA loss, albeit significantly improved from 2022. By spinning off this division, Nel can potentially improve its overall financial performance and present a more attractive picture to investors.

A telling detail emerges when we consider Nel's commentary on their backlog. They reveal that a significant portion of their backlog, roughly 400 megawatts worth, consists of stack-only purchase orders. While they highlight the potential for additional balance of stack orders, amounting to NOK 1.5 billion, these orders remain "intrinsic" and not yet confirmed. Relying on potential future orders to bolster their backlog paints a concerning picture of their current order book and its ability to sustain their ambitious expansion plans.

Nel ASA: Key Financials

The company's optimism regarding securing future orders, based on their "high-quality sales pipeline," needs to be assessed with caution. They cite a pipeline of "tens of gigawatts" and a top 20 sales lead list averaging 450 megawatts per project. However, they also acknowledge the lengthening timeline for projects to reach final investment decisions due to rising interest rates and uncertainties surrounding public funding. This cautious approach from their potential customers casts a shadow on the feasibility of their optimistic order intake projections.

Nel's management, despite their outwardly optimistic pronouncements, appears to be aware of the potential cash flow challenges ahead. Their statement, "We will not be producing flat out to stock," while framed as a strategic decision to manage working capital, could also be interpreted as a response to the dwindling order intake. This shift away from producing for inventory suggests an underlying concern regarding their ability to secure sufficient orders to justify their expanded production capacity.

Adding further intrigue to this financial puzzle is the Iwatani Corporation of America's recent lawsuit against Nel regarding fueling equipment and services. While the company strongly denies these allegations, this legal battle could potentially further strain their financial resources and divert attention away from securing new orders and executing existing projects.

In conclusion, while Nel ASA presents a facade of robust growth and financial strength, a closer examination of their Q4 2023 results and subsequent announcements reveals a more nuanced picture. The declining order intake, coupled with ambitious expansion plans and potential legal challenges, raises concerns about a potential cash flow crunch looming on the horizon. The spin-off of the fueling division, while strategically sound, could also be interpreted as a move to address these underlying financial concerns. Investors should approach Nel ASA with cautious optimism, carefully monitoring their order intake, project execution, and cash flow management in the coming quarters. The success of their spin-off and their ability to navigate these financial headwinds will ultimately determine their future in the rapidly evolving hydrogen market.

"Fun Fact: Nel ASA delivered its first electrolyzer in 1927, nearly a century ago! This makes them one of the oldest players in the hydrogen technology space, with a deep history of innovation and experience."