Ceres Power Holdings — Update 17 January 2016

Ceres Power Holdings — Update 17 January 2016

Ceres Power Holdings

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Ceres Power Holdings

New joint development agreement with Honda

New JDA signed

Alternative energy

18 January 2016

Price

4.31p

Market cap

£33m

Net cash (£m) at end June 2015 (including short-term investments)

18.2

Shares in issue

772.5m

Free float

51.5%

Code

CWR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(45.3)

(46.1)

(50.5)

Rel (local)

(43.1)

(41.6)

(45.9)

52-week high/low

9.90p

4.31p

Business description

Ceres Power is a developer of low-cost, next-generation fuel cell technology for use in decentralised energy products that reduce operating costs, lower CO2 emissions, increase efficiency and improve energy security.

Next event

Interims

March 2016

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Ceres Power Holdings is a research client of Edison Investment Research Limited

Ceres has signed a joint development agreement (JDA) with Honda R&D Co to develop solid oxide fuel cell stacks using Ceres’s patented Steel Cell technology. This follows on from a JDA announced in October 2014. We leave our estimates unchanged, noting that the new agreement presents opportunities to deploy the technology in additional market segments.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/14

1.2

(7.7)

(1.2)

0.0

N/A

N/A

06/15

0.3

(10.5)

(1.2)

0.0

N/A

N/A

06/16e

1.0

(12.4)

(1.4)

0.0

N/A

N/A

06/17e

2.0

(12.0)

(1.4)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Follow-on JDA shows strengthening relationship

Following a year-long evaluation of the Steel Cell technology, which concentrated on performance, robustness and ability to handle repeated power cycles, in October 2014 Ceres Power signed a JDA with Honda to jointly develop a fuel cell stack using the Steel Cell technology. This would be built in the UK and tested in Japan to deploy in 1-5kW systems. The results from this phase met the performance targets, leading to the signature of a follow-on JDA. The relationship is clearly strengthening, as this is the first time that the client has given permission to be named. Moreover, this new phase also includes a third party, which is being lined up with the intention that it may ultimately manufacture fuel cells in volume using Ceres’s proprietary process.

Follow-on JDA with Honda underpins estimates

Our model assumes that engagement with existing partners will intensify during FY16 and that discussions with potential partners will mature into evaluations and development, resulting in a ramp-up in revenues through the forecast period. This announcement supports these assumptions, so we leave our estimates unchanged.

Valuation: Additional potential revenue streams

The long-term value for Ceres lies in potential royalty streams created when energy generation systems incorporating Steel Cell technology are commercialised. Our previous analysis concentrated on potential deployments in the residential CHP (combined heat and power) segment. We estimate that, if commercialisation is successful, a 40% share of the Japanese CHP market and deployment in 20% of all boilers sold in Korea could generate c £130m annual royalty revenues. A 5% share in the EU or US boiler markets could add c £60m or c £80m royalty revenues respectively. The recent announcement refers to development for a range of potential applications, so we augment our analysis with deployment in replacement gensets, a market in which Honda is active. Deployment in 10% of Honda’s gensets and power appliances could add c £60m royalty revenues annually.

Valuation implications

Exhibit 1: Scenario analysis showing potential profits attributable to key markets

Japan

Total number of fuel cell-based CHP systems sold pa 2020-30 : 400,000 (government target)

Average selling price per unit with Steel Cell technology: ¥647,000 (government target)

Market share for products with Steel Cell technology

10%

20%

30%

40%

50%

Royalty revenues

£11.0m

£22.0m

£33.0m

£44.0m

£55.0m

Annual profit after tax

£2.5m

£7.5m

£12.5m

£17.5m

£22.5m

Korea

Total number of domestic boilers sold pa: 1,500,000

Average selling price per unit with Steel Cell technology: $5,500 (as per Japan)

Market share for products with Steel Cell technology

4%

8%

12%

16%

20%

Royalty revenues

£16.5m

£33.0m

£49.5m

£66.0m

£82.5m

Annual profit after tax

£6.6m

£14.1m

£21.6m

£29.1m

£36.6m

US

Total number of domestic boilers sold pa: 7,000,000

Average selling price per unit with Steel Cell technology: $4,500 (target price required to be competitive with conventional technology)

Market share for products with Steel Cell technology

1%

2%

3%

4%

5%

Royalty revenues

£15.8m

£31.5m

£47.3m

£63.0m

£78.8m

Incremental PAT pa

£10.4m

£20.8m

£31.2m

£41.6m

£52.0m

EU

Total number of domestic boiler sold pa: 5,000,000

Average selling price per unit with Steel Cell technology: €4,120 (target price required to be competitive with conventional technology)

Market share for products with Steel Cell technology

1%

2%

3%

4%

5%

Royalty revenues

£11.3m

£22.5m

£33.8m

£45.0m

£56.3m

Annual profit after tax

£7.4m

£14.9m

$22.3m

£29.7m

£37.1m

Global genset replacement market

Total number of gensets and power appliances sold per year by partner: 6,000,000

Average selling price per unit: $2,000

Percentage products shipped incorporating Steel Cell Technology

3%

5%

10%

15%

20%

Royalty revenues

£18.0m

£30.0m

£60.0m

£90.0m

£120.0m

Annual profit after tax

£13.3m

£21.2m

£41.0m

£60.8m

£80.6m

Source: Edison Investment Research. Note: $1.5/£; $/¥117.6; €0.91/$.

Ceres has yet to generate commercial revenues, so its value resides in the potential royalty streams generated once distributed power systems incorporating Steel Cell technology are eventually commercialised. In Exhibit 1 we present a scenario analysis exploring potential royalty revenues and profit generated in each of the key markets as commercial partners take significant share in their respective markets. Noting that the recent announcement refers to a range of potential applications in which the Steel Cell technology may be deployed, and that Honda is active in the genset market as well as the residential power generation market, we add a fourth application to our analysis.

Although it is likely that Ceres will adopt a business model in which some of the potential royalties related to single customer engagement are paid upfront as a one-off licence fee, with the payment offset against lower royalty rates, for simplicity our analysis assumes a royalty rate of 7.5% of customer sales, but no upfront licence fees. For the earnings calculation we apply cost of sales as 7.5% of licence revenue, 20% tax and model a base level of operating costs at FY17e levels (£14.0m) split equally between activities in Japan and Korea. Since it is not possible at this stage to determine the potential dilutive impact of any financing activity, we are not attempting to derive an indicative share price from this analysis.


Exhibit 2: Financial summary

£000s

2013

2014

2015

2016e

2017e

Year-end 30 April

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0,523

1,224

0,324

1,000

2,000

EBITDA

 

 

(7,937)

(6,663)

(9,716)

(11,248)

(10,791)

Operating Profit (pre amort. of acq intangibles & SBP)

 

(9,259)

(7,732)

(10,642)

(12,448)

(11,991)

Amortisation of acquired intangibles

0

0

0

0

0

Share-based payments

(414)

(856)

(1,080)

(800)

(800)

Exceptionals

(3,068)

0

0

0

0

Operating Profit

(12,741)

(8,588)

(11,722)

(13,248)

(12,791)

Net Interest

55

73

110

70

0

Profit Before Tax (norm)

 

 

(9,204)

(7,659)

(10,532)

(12,378)

(11,991)

Profit Before Tax (FRS 3)

 

 

(12,686)

(8,515)

(11,612)

(13,178)

(12,791)

Tax

1,311

1,122

1,571

1,571

1,571

Profit After Tax (norm)

(7,893)

(6,537)

(8,961)

(10,807)

(10,420)

Profit After Tax (FRS 3)

(11,375)

(7,393)

(10,041)

(11,607)

(11,220)

Average Number of Shares Outstanding (m)

292.8

536.8

753.2

772.5

772.5

EPS - normalised (p)

 

 

(2.70)

(1.22)

(1.19)

(1.40)

(1.35)

EPS - normalised fully diluted (p)

 

 

(2.70)

(1.22)

(1.19)

(1.40)

(1.35)

EPS - FRS 3 (p)

 

 

(3.88)

(1.38)

(1.33)

(1.50)

(1.45)

Dividend per share (p)

0.00

0.00

0.00

0.00

0.00

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

2,234

1,715

2,080

2,380

2,680

Intangible Assets

0

0

0

0

0

Tangible Assets

2,234

1,715

2,080

2,380

2,680

Current Assets

 

 

16,935

10,084

20,685

9,000

3,062

Stocks

0

0

0

0

0

Debtors

1,498

2,385

2,501

2,423

2,615

Cash

15,437

7,699

18,184

6,577

448

Current Liabilities

 

 

(1,350)

(1,385)

(2,013)

(1,435)

(1,717)

Creditors including tax, social security and provisions

(1,350)

(1,385)

(2,013)

(1,435)

(1,717)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(3,211)

(2,341)

(2,071)

(2,071)

(6,571)

Long term borrowings

0

0

0

0

(4,500)

Other long term liabilities

(3,211)

(2,341)

(2,071)

(2,071)

(2,071)

Net Assets

 

 

14,608

8,073

18,681

7,874

(2,546)

CASH FLOW

Operating Cash Flow

 

 

(10,016)

(8,252)

(9,182)

(11,748)

(10,700)

Net Interest

57

75

110

70

0

Tax

2,667

1,000

1,218

1,571

1,571

Capital expenditure

(42)

(520)

(1,243)

(1,500)

(1,500)

Capitalised product development

0

0

0

0

0

Acquisitions/disposals

0

0

0

0

0

Financing

12,593

(41)

19,569

0

0

Dividends

0

0

0

0

0

Net Cash Flow

5,259

(7,738)

10,472

(11,607)

(10,629)

Opening net debt/(cash)

 

 

(10,178)

(15,437)

(7,699)

(18,184)

(6,577)

HP finance leases initiated

0

0

0

0

0

Other

0

0

13

0

0

Closing net debt/(cash)

 

 

(15,437)

(7,699)

(18,184)

(6,577)

4,052

Source: Ceres Power Holdings, Edison Investment Research

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

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