Join our community of smart investors

Joint ventures power progress for Ceres

Company investing £20mn in three-way venture with shareholders Weichai Power and Bosch
March 17, 2022
  • A 1MW 'demonstrator' electrolyser will begin operating this year
  • Research and capital investment costs expected to be much higher

A heightened focus on energy security following Russia’s invasion of Ukraine means interest in alternative forms of energy is as big as it’s ever been.

For Ceres Power (CWR), a developer of fuel cell technologies, a decision taken last year to develop electrolysers to make hydrogen, couldn’t have been better timed.

“Having worked in the industry for almost 20 years, I can see the demand for hydrogen and fuel cell technologies has never been as great,” said Philip Caldwell, Ceres Power's chief executive.

He put this down to three factors: government support for low-carbon initiatives, the need for companies to act on pledges to transition to a future of net-zero carbon emissions and a shift in investing that’s providing “unprecedented levels of capital” for companies with strong environmental, social, and governance (ESG_ credentials.

It has certainly tapped into the latter – raising £179mn from equity investors in March, meaning it finished the year with £250mn of cash at its disposal. Some £146mn of this is parked in money market funds and £93mn of which is in bank deposits redeemable within a year.

Spending has ramped up, though. The company’s “investment in the future”, consisting of research, capitalised development and capital expenditure, rose by more than a third to £34.9mn last year. Research & development and capital investment is also expected to “significantly increase” this year.

It also recently agreed a three-way joint venture with its two biggest shareholders – Weichai Power and Bosch. The trio will build a plant in China to manufacture solid oxide fuel cells. Weichai, which has a 300bn renminbi (£36bn) turnover and 100,000 employees, will be the majority shareholder. Ceres is putting in £20mn for a 10 per cent stake.

On the hydrogen side, the company expects a one megawatt solid oxide electrolyser “demonstrator” project to become operational this year.

As with any investment of this nature, judging what’s deemed to be a fair valuation based on expected cash flows involves something of a leap of faith given that consensus estimates indicate the company is around five years away from generating any. Its current valuation of £1.45bn equates to more than 40 times this year's consensus sales forecast.

Broker Berenberg's price target of 1,560p is more than double the company's current valuation, which it claims is too conservative as it implies Ceres will only reach £200mn of sales by 2035. “We think it will be five times higher.”

In our view, though, a lot of potential already looks priced into its shares and we’d still like to see more progress before adding to a portfolio. Hold.

Last IC View: Buy, 1,064p, 1 Oct 2021

CERES POWER (CWR)   
ORD PRICE:736pMARKET VALUE:£1.4bn
TOUCH:735-738p12-MONTH HIGH:1,380pLOW: 481p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:148pNET CASH:£240mn
Year to 31 DecTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
2017†3.10-11.3-1.00nil
2018†6.30-11.9-0.98nil
2019†15.3-7.40-3.43nil
2020**31.7-17.3-9.12nil
202130.8-23.4-11.5nil
% change-3---
Ex-div:-   
Payment:-   
**For calendar year 2020 (from 18-month filing period). †Year end 30 Jun.