Ceres Power Holdings
Written by
Ceres Power Holdings |
New joint development agreement with Honda |
New JDA signed |
Alternative energy |
18 January 2016 |
Share price performance
Business description
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Analysts
Ceres Power Holdings is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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 |
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Total number of fuel cell-based CHP systems sold pa 2020-30 : 400,000 (government target) |
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Average selling price per unit with Steel Cell technology: ¥647,000 (government target) |
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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) |
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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 |
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Total number of domestic boilers sold pa: 7,000,000 |
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Average selling price per unit with Steel Cell technology: $4,500 (target price required to be competitive with conventional technology) |
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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) |
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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 |
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Total number of gensets and power appliances sold per year by partner: 6,000,000 |
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Average selling price per unit: $2,000 |
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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 |
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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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Research: Consumer
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