Ceres Power Holdings PLC – Overstretched despite reporting operating losses.

Ceres Power Holdings PLC (LON: CWR) is a FTSE AIM UK 50 Index listed Company, which develops low-cost, next-generation fuel cell technology primarily in the United Kingdom.

Investment Rationale – Expensive at GBX 790.00

• From the technical standpoint, 14-day RSI stood at 61.95, which means the stock price could decline in the short term.
• Over the past four years, CWR’s operating and net margins are in the negative zone, while the industry median for the same ratios is positive.
• Operating losses widened in H1 FY20 while the Gross margin was reduced as compared to H1 FY19.
• Covid-19 pandemic continued to disrupt the supply chain and can defer the revenue generation.

Risk Assessments

• The unavailability of substantial cash reserves after operating losses can create liquidity risk.
• Revenue streams can be deferred for a new facility at Redhill with Covid-19 disruption.
• Brexit can also disrupt the supply chain and shipments.

Recent News 

19 October 2020: Announced a strategic collaboration and licence agreements with Doosan Corporation in South Africa. The contract value will be £30 million for over 3 years. 

Interim Results for 12 months ended 30 June 2020 (as on 28 September 2020)

 (Source: Company Website)

• During FY20, revenue surged by 21% and other operating income increased to £19.9 million (FY9: £16.4 million).
• The gross margin increased to £13.8 million, with a sector-leading gross margin of 73% (FY19: 75%).
• Due to further investment in the growth area of electrolysis for hydrogen, adjusted EBITDA loss widened to £6.5 million.
• As of 30 June 2020, the order book stood at £14 million while the pipeline was robust at £54 million.

One Year Share Price Chart

Source: Refinitiv, chart created by Kalkine Group

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company prospects are upbeat with favourable market dynamics, and it is well-positioned to capitalise on future opportunities. Moreover, it has cash reserves of over £100 million, and it has invested in R&D for the expansion of pilot manufacturing at Redhill. Overall, it has a clear path to mass commercialisation of our fuel cell technology. However, the Company has reported operating losses and adjusted EBITDA loss was widened as compared to H1 FY19. Moreover, the stock is trading close to 52-week high while the technical indicator is not supporting the upside potential. Therefore, the stock appears to be overvalued and overbought at the moment.  Stock 52 week High and Low were GBX 795.00 and GBX 207.00, respectively.

Based on the factors discussed above, we have given an “Expensive” recommendation on Ceres Power Holdings PLC at the current market price of GBX 790.00 (as on 5 November 2020, before the market close at 12:37 PM GMT) while we look forward to reviewing upcoming catalysts.

AFC Energy PLC – Yet to generate revenue for proving the financial viability.

AFC Energy PLC (LON: AFC) is a Surrey, United Kingdom-headquartered manufacturer of large-scale industrial fuel cells, which develops alkaline fuel cells that use hydrogen for electricity production as a fuel source.

Investment Rationale – Avoid at GBX 17.88

• Price/Earnings, Price/Cash Flow and EV/EBITDA metrics are in a negative zone against the industry.
• In the last three months, AFC’ stock price has underperformed against the benchmark index (FTSE AIM All-Share delivered a positive return of 6.98%) by delivering a negative return of ~16.67%.
• From the technical standpoint, the 100-day simple moving average price is currently at GBX 20.05, which is higher than the current price and reflecting a downtrend in the near term.
• The Company is a non-revenue generative entity, and thus, the profitability margins have remained stagnant and declined.
• It did not declare any dividend in H1 FY20 despite the oversubscribed fundraise.
• In the absence of revenue, growth is dependent upon the availability of external funding.

Risk Assessments

• The operational performance is exposed to the global macroeconomic environment and industry conditions.
• Long production delays and outages could have a material impact on production, operating performance, and financial condition.

Recent News 

On 1 September 2020, the Company has confirmed the sale of a bespoke 100kW H-PowerTM alkaline fuel cell system to Forschungszentrum Jülich ("Jülich"). This sale is for deployment at the LLEC (Living Lab Energy Campus) showcase in Germany. 

Operational update for the year ended 31 October 2020 (as on 3 November 2020)

• During FY20, the Company signed the first commercial agreement for >£1 million in revenue contracted.
• It had also successfully completed fundraise of £31.6 million before expenses.
• The commercial pipeline has shown progress across initial key target markets at different stages of development.
• It has been working with OEMs and partners in the advancement of the H-Power system adoption.
• There were minimum interruptions to onsite activities with no furloughing or staff redundancies during COVID-19 lockdown.

One Year Share Price Chart

1-Source: Refinitiv, chart created by Kalkine Group

Conclusion

The outlook for AFC Energy is increasingly bright as regulations pertaining to diesel generation continued to tighten. Moreover, the fundraising of £31.6 million has significantly strengthened the balance sheet. However, the Company is in the development stage and do not generate any revenue for the period. The profitability margins have remained stagnant or declined. Moreover, the Covid-19 pandemic continued to impact the supply chain and integration with customers. The stock made a 52-week low and high of GBX 4.90 and GBX 39.00, respectively.

Based on the factors discussed above, we have given an “Avoid” recommendation on AFC Energy PLC at the current market price of GBX 17.88 (as on 5 November 2020, before the market close 12:55 PM GMT) while we look forward to reviewing upcoming catalysts.

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

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