No sparks at Ceres Power as profits remain elusive

Growth businesses have come off the boil this year. Even those at the top of the tree are now desperate for bottom-line growth. 

But investors have largely held on to a growth valuation for Ceres Power (CWR), the fuel cell and hydrogen company, despite its market capitalisation falling from an astonishing £2.7bn in early 2021 to £630mn. Even now, it is valued at 18 times revenue. There are no profits to use as a valuation tool. 

The company has fared similarly to sector peer ITM Power (ITM), which admitted last year its big expansion goals were wildly optimistic. Despite there not being any major setbacks, it has traced a similar path in terms of share price. One difference is that Ceres has cornerstone investors that have signed on to use its technology, both in its more established fuel cell business and in the hydrogen unit. 

Sales for the first half were split between engineering services (£4.7mn), licence fees (£3.4mn) and hardware sales (£3.2mn). Only hardware showed improvement, thanks to Bosch and Doosan licensing deals. The outlook for full-year sales has been knocked by delays to joint ventures in China between shareholders Bosch and Weichai, who hold 17.5 per cent and 19.7 per cent of the company, respectively. Ceres said this would push £13mn of sales into next year, a significant proportion given analysts had forecast £49mn in sales for the year. Consensus is now down to £35mn. Management said there remained plenty of interest in its hydrogen electrolysers (which produce hydrogen from inputs of water and electricity) and fuel cells. This includes a three-year testing project with Shell (SHEL). 

Chief executive Philip Caldwell said a downside of the company’s licensing model, as shown in the China joint venture (JV) delay, was “we’re not always involved in our own timeline” but added that the company’s relationship with its two major shareholders “remains very healthy”. 

The company did make a significant change this year – it has moved from Aim to the main boards of the London Stock Exchange. This was done to “access new pools of investment and build greater international appeal”. 

Analysts see Ceres hitting a cash profit in 2027, although sales are only forecast to increase slowly between 2024 and then. Given the income statement is unlikely to match up to the hefty valuation any time soon, we remain on the sidelines. Hold. 

Last IC View: Hold, 422p, 22 Sep 2022