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Ceres Power Holdings plc: THE INVESTMENT CASE

Ceres Power driving higher on the back of big name development collaborations

The shares have had a 10 for 1 share consolidation, effectively multiplying the value of the shares by 10. Even so, the shares have been on a good run this year
Honda car
Honda is one of two big names from the Japanese car industry that is working with Ceres

Commercialisation milestones will provide the near-term catalyst for Ceres Power Holdings PLC (LON:CWR), the German broker Berenberg said back in July 2017.

It was not wrong. In a pre-close trading update covering the six months ended December 31, 2017, Ceres Power ticked off many of those key milestones, which have been delivered with all its current partners, including Honda, Nissan and engineer Cummins.

The momentum continued into 2018.

In January 2018, the developer of the SteelCell technology signed its fifth co-development agreement in two years, with an unnamed original equipment manufacturer (OEM).

The two companies will work together to develop prototype multi-kilowatt power systems for several potential applications.

READ: Ceres Power rises as it signs development agreement with European original equipment manufacturer

Possibly the most significant milestone, however, was the strategic collaboration with Weichai Power, one of China’s leading automobile and equipment manufacturing companies.

The partnership deal involved Weichai pumping £19.3mln into Ceres in return for a 10% stake. Weichai agreed to pay 15.08p a pop for Ceres Power’s shares – a figure that is uncannily close to Berenberg’s 12-month 15p price target when it initiated coverage of the fuel cell developer in July 2017.

(The shares are now worth 156.5p after a share consolidation that replaced 10 old shares with one new one, effectively multiplying the value of each share by 10).

Weichai not the only one interested in pumping money into Ceres

The price paid by Weichai proved attractive to others as well, enabling the company to raise an additional £20mln in July through a conditional placing and share subscription.

Meanwhile, Weichai has agreed on a further investment of £26.3mln, conditional on the signing of further commercial agreements, to increase its holding to 20% by the end of November this year.

The funds are earmarked to provide working capital to fund the business through to commercial launches with original equipment manufacturers from 2021 and to finance a new manufacturing facility in the UK to provide near-term capacity for the next three to five years.

The new facility will phase the increase in annual capacity from 1 to 3 megawatts (MW) initially, potentially growing to 10 MW over the next five years, which will provide a platform for licensing to the company's manufacturing partnerships for higher volume.

Ceres is very close to committing on a new site within commuting distance to Horsham, where its current facility will remain as its Technology Centre of Excellence.

Ceres said the funds raised will also enable the company to industrialise the five kilowatt (5kW) stack, which is the key technology platform for most of its current demand.

Let’s not forget, either, that the company has agreed to contribute to a manufacturing joint venture with Weichai Power from 2020.

So, what made everyone so keen on the company’s shares?

Berenberg’s analysts said they believe the group’s core intellectual property “is unique and scalable, using cheap, everyday materials, which could support mass adoption”.

“In the long run, we estimate that there is a market opportunity for Ceres to generate more than £1bn in revenues.”

The analysts pointed out that underlying trends support fuel cell adoption, with industry sources estimating that the market for fuel cells will grow at a compound average growth rate of circa 25% between 2016 and 2024.

They said that aside from their core benefits, fuel cells are increasingly relevant as a solution to the intermittency and capacity issues that the electricity grid will face in the coming years.

The Berenberg team believes the increased relevance is partly due to the growing proportion of renewables in the system as well as electrification driving vast energy requirements.

They believe that adoption is being driven by five key factors:

  1. a global focus around air quality driving demand for alternative power;
  2. growing proportion of renewables (solar and wind) increasing seasonal intermittency of electricity grids;
  3. electricity grids facing capacity issues in the coming years driven by electric vehicles;
  4. the technology maturing after more than a decade of global investment;
  5. cost coming down to levels conducive to mass adoption.

SteelCell technology is poised to benefit from the growth in fuel cell demand

The analysts added that, in their view, Ceres’s intellectual property and existing commercial partnerships “leave it well positioned to benefit from this market growth.”

The German broker believes Ceres’s core SteelCell technology overcomes two problems traditionally associated with other solid oxide fuel cells, namely cost, and lack of robustness.

SteelCell can use a variety of fuels - natural gas, hydrogen, biofuel - that can be manufactured from widely available materials, and is inherently the most cost-effective solution on the market.

“This scalability is Ceres’s key competitive advantage, in our view,” Berenberg said.

Berenberg believes the development partnerships and the impending commercial launches go hand-in-hand in helping profitability in the short-term, while drastically increasing the probability that the SteelCell will be commercially viable in the long-term.

Revenue is on a rising trend

The technology is still in the development stage but Ceres is not without revenues. The directors expect revenue and other operating income for the year to June 30, 2018, will be in the region of £7mln, up 70% or so year-on-year.

The board is confident that the company can maintain this trend of strong revenue growth as it secures more technology transfer and licence revenues in addition to its current engineering services and 2019 revenues are expected to be ahead of current market expectations.

The order book at the beginning of July 2018 was £5.1mln, up from £3.2mln last year, and the company said it had a strong commercial pipeline with several opportunities at an advanced stage, including a potential substantial grant award.

“The next year will be extremely exciting for Ceres Power, as it expects field trials to start across a number of applications: 5kW commercial CHP [combined heat & power] with its confidential customer starting later this year, the first 30kW system being run on a bus in China with its new partner Weichai in 2019, and it expects 10kW power-only systems to start being trialled later in 2019,” the company said.

“These initial trials will no doubt provide new challenges for the company servicing several different OEMs in different markets. The company's focus remains on getting to the SteelCell products to market under licence with leading OEMs and proving out the technology and business model in several different applications,” it added.


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Ceres Power Holdings plc Timeline

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