Ceres Power still represents a leap of faith

The investment case for Ceres Power (CWR) is partly predicated on the growing appetite, mandated or otherwise, for low-carbon initiatives. Unfortunately, that hasn’t translated into positive share price performance. The market-cap of the fuel cell technology business has fallen by two-thirds over the past 12 months and is painfully adrift of the high-water mark in the early part of 2021.

This downward trend was again evident on results day, when the group detailed a steep fall in interim revenues combined with a 17-percentage point reduction in the gross margin.

At this stage of proceedings, financial performance takes a back seat to the development narrative, and analysts have taken a more bullish stance in recent times due to the potential impact of partnership deals, particularly in China.

But shareholders may take more convincing, at least judging by the share price trajectory after Ceres confirmed that it expects that it will finalise definitive agreements for its joint ventures in China in the final quarter of 2022. Heads of terms were signed earlier this year with Weichai Power and Bosch to establish a third manufacturing facility for Ceres' solid oxide fuel cell (SOFC) technology that would be worth “£30mn to Ceres in near-term license fees plus future royalties”.

The developments in China are in addition to a green hydrogen partnership established with Shell (SHEL) focusing on the development of solid oxide electrolyser cell technology. So, it’s not difficult to appreciate why some analysts are placing great store in the collaborations, certainly in view of the parties involved, but the route towards full commercialisation is likely to be tortuous – novel technological developments usually are. It is just as well that Ceres had around £220mn cash and short-term investments at the half-year mark, although the company’s headcount is on the rise, and it burnt through £44.3mn in net cash during the first six months of 2022. In addition, operating costs jumped by 52 per cent to £30.7mn from £20.2mn a year earlier.

Looking ahead, we get the usual conjectural tub-thumping over favourable outcomes linked to events such as Joe Biden signing the peculiarly named Inflation Reduction Act, a $369bn (£327bn) piece of legislation which “includes various elements that specifically support hydrogen and fuel cell businesses”. For now, “revenue in the second half of 2022 is expected to be at similar levels to the first half”, with licence fee revenue from the partnerships pencilled in for 2023. A work in progress. Hold.

Last IC view: Hold, 736p, 17 Mar 2022