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Ceres Power (OTCPK:CPWHF) has great solid cell technology but a lacklustre history of successful commercialisation.
I last covered Ceres in my September 2023 “sell” piece Ceres Power: Business Model Concerns Persist, since when the shares have crashed 52%. It has been a busy six months for Ceres strategically since then.
No-Growth Year for Revenues
Following my September piece covering the company’s interim results, a November trading update reiterated that its full-year performance would be dependent on the timing of securing new licence partners.
It noted that agreement with the most imminent licensee was “going well” but unlikely to be recognised in revenues for 2023, meaning full-year revenue was likely to come in at £20-21m, versus £22m the prior year. It reaffirmed this guidance in a further trading update in January. At that point it anticipated gross margin for 2023 of around 60%, a smidgen above the prior year.
But the big news in January came in the form of a new contract signed with Taiwanese firm Delta Electronics.
Big Shift in Sales Strategy
The headline for that contract is very impressive.
It is a global long-term manufacturing collaboration and licence agreement for both solid oxide electrolysis cell and solid oxide fuel cell stack production. The deal foresees revenue for Ceres of £43m from technology transfer, development license fees, and engineering services. Approximately half of that is expected to be recognised in 2024, which would already slightly more than match last year’s total revenues for the firm.
The company also said there is potential for further revenue from selling development stacks to Delta. Delta’s future commercial production and sales to end customers could also trigger royalties for Ceres. Technology introduction and factory building is expected to start this year and Delta’s initial production is expected to start by the end of 2026.
But, wait. What about China?
After all, Ceres had been dangling the prospect of a potentially lucrative China JV for years. As I wrote in my last piece on Ceres,
At face value, that all still sounds positive. However, the slow pace of this concerns me. Time kills all deals and it is hard to ascertain from the pace of this deal being discussed to date how enthusiastic the various parties are to complete it. Announcement that it has been signed, on attractive terms, could certainly provide a fillip to the Ceres Power share price. I also see a risk of the reverse happening. If delays continue and the deal simply fizzle out at some stage, that could send the shares down substantially.
Now Delta is a partner, what does that mean for the prospect of a China deal? The Delta announcement contained this explanation:
We were not able to conclude the planned China JV in 2023. Whilst we continue to maintain strong relationships with both Bosch and Weichai it is now our belief that the proposed JV is unlikely to be completed in its current form. However, we are evaluating other options with Weichai to address the China market. We will update the market on our progress at the appropriate time.
I see this as good and bad, mostly good.
I think it’s good because the Delta deal is a sizeable one and it has been inked. That seems more attractive to me than a China JV that has consumed management and investor attention for years despite ultimately amounting to nothing (as I previously feared would turn out to be the case).
If Ceres really can still pull something out of the bag with Weichai, good on it, but at this point it seems that it has decided to move forward elsewhere and I suspect the China opportunity will fade into memory.
Even if it means losing out on the potentially huge China opportunity, that might still turn out to be the best move for Ceres. Delta is a bird in the hand, whereas the China JV has for years remained in the bush. Meanwhile, I think the deal is also a powerful vote of confidence in Ceres’ technology that could help it in sales efforts with other customers.
I feel Ceres’ management did not show itself to be especially impressive in devoting so much effort to a China JV, ultimately probably in vain. From the opposite perspective, though, maybe something will emerge from it at some point – and management did manage to land the Delta deal, so they can’t be doing everything wrong.
Delayed Accounts
This month, the company announced a delay expected to be of “a short period” in the publication of its final results for 2023 after its auditor said it needs more time to complete the audit. That is never good and often bad.
The statement announcing the delay said,
The Company expects to make adjustments that principally relate to the timing of recognition of revenue from long term contracts. The outcome is expected to be a modest increase in revenue in 2023 relative to the £21-22 million guidance previously provided, and decreases in revenue in prior years.
Again, this raises questions about the competence and oversight of management, but until the results are published it is impossible to assess whether such adjustments are material or affect the investment case.
Things are Looking Up
An over-concentration of the sales pipeline remains a risk, in my view, but the Delta deal could be a game changer in due course.
In terms of liquidity, Ceres ended last year with cash and short-term investments of approximately £140m. its current market cap is around £270m, implying an enterprise value of £130m.
Based on its first half, Ceres has an equity free cash outflow run rate of around £45m annually. That suggests it has liquidity for three years or so.
The Delta deal could positively impact cash flows, although that remains to be seen as the statements about it so far have mentioned prospective revenues but not associated costs.
Initially the market greeted the January news warmly but the shares have since fallen back 45% since their post-news peak in the second half of January.
For now I continue to regard the company an uninvestable in the absence of a proven business model and path to profitability. The accounts delay is also a red flag for me, as always.
But that reflects my own risk profile. I think the business story of Ceres (as opposed to the technology story, which has long been strong) is now looking as promising as I can remember.
The chairman and one director have bought shares with their own money since January’s announcements, although both purchases were in the tens of thousands of pounds so while not insubstantial were not that large in the grand scheme of things, either.
With a long history of disappointment and so far no concrete results from the Delta deal, I find it impossible to value the shares and accordingly maintain my “sell” rating.
That said, I think the deal could be transformative for Ceres and 2024 may see a turnaround in its fortunes (or not) on that basis. So watch this space!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
