Ceres Power AGM 04/12/19

4th Dec '19 by JohnEustace

12 comments 920 reads

I attended the Ceres Power Holdings (LON:CWR) AGM earlier today, having been a modest holder for a few years.

Ceres Power is a UK based developer and licensor of solid oxide fuel cell technology. The company was spun out of pioneering research by Prof. Brian Steele at Imperial College and continues to develop and license significant world leading IP in the form of patents and trade secrets.

As an investment this is all about the future potential. It has a market cap of £357m and produces no profit. Any dividends are probably four or more years away. It has a StockRank of 27 and is classed as a Momentum Trap. So if that rules it out for you, move on now!

Fuel cells convert fuels such as natural gas or hydrogen into energy by combining them with an oxidant. If the cells are fuelled by hydrogen, the only products are energy and water - zero carbon power if the hydrogen is produced renewably. Ceres products can operate today on natural gas and switch over to hydrogen seamlessly as and when a hydrogen distribution network is built. Therefore after many years in development the technology and the company find themselves at the heart of addressing global concerns. Ceres themselves say they are surprised by the strength of interest and demand. Targeted markets include static Combined Heat and Power systems for data centres and other large buildings, range extender systems for buses and HGV’s, and EV charging stations. The solid oxide fuel cells are relatively heavy but cost effective to produce, being made from commercial grade steel and ceramics without any precious or scarce materials. They can complement renewable intermittent power generation, being suited to a decentralised grid and offering greater overall efficiency than traditional centralised gas turbines.

The business model is a licensing one. Ceres develop and license their technology to top-tier global partners like Bosch, Cummins, Honda, Doosan in South Korea, Weichai Power in China and Miura in Japan. To date they are loss making, although revenues have recently been doubling year on year and the losses are reducing. Income so far comes from joint development work with prospective partners and fees for technology transfer. Gross margins are around 50% for that work. As those partners move into production Ceres anticipate an inflection point in 3-4 years when they will be earning significant royalties at little…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Howard Adams

5th Dec '19

HI John

A very useful report, many thanks for that. I have recently re-bought a small position.

Regards
Howard

James Weston

Hi John,

Great write up, thank you.

Did you get the feel they could have a moat with their technology and IP or will others crash the party? I'm thinking of costly legal fees defending their IP.

I guess there is always the chance of one of the bigger companies making a takeover bid as opposed to trying to emulate what Ceres is doing?

phoenixnight

Thanks for attending and taking the trouble to write this report John. It's much appreciated.

MartDK

Many thanks John.

JohnEustace

Thanks for the kind words,

At the moment they believe they are ahead in solid oxide fuel cells as evidenced by them displacing competitors. But they can't just sit back and exploit their current IP - they emphasised their ongoing research efforts that will be needed to stay ahead. The technology is by no means fully mature yet and there are both technology gains and volume cost efficiencies still needed and achievable. They are careful about patent protection where needed but some of their advantage comes from know-how which they choose not to patent because putting it in the public domain would give too many clues to the competition to follow. For that reason they only partner with global scale businesses that they trust and would never get units made by contract manufacturers.

There has been quite a bit of corporate activity in the field - Phil showed a slide with £1bn invested by OEM's over the last 18 months. I see the AGM presentation is now up so I'll add a link. The licensing deals that Ceres have signed have been non exclusive so far I believe both in terms of industry application and geography. My own feel is that it seems to be a pattern of OEM's buying stakes to protect their positions and access to technology, and the share allotment resolutions that were passed at the AGM would allow for a further partner to buy in if they wanted. So I think that's more likely than an outright takeover but given the relative scale of Ceres vs the OEM's it might only take one major CEO to decide differently. I'll copy the current holdings from SharePad below.

https://www.cerespower.com/media/1763/agm_ceo-presentation.pdf

Nursemaid

Great insight and write-up.Many thanks for the effort.

NM

Thanks, I did reply but I'm not sure what happened to it so I'll try again without links or graphics.

At the moment they believe they are ahead in solid oxide fuel cells as evidenced by them displacing competitors. But they can't just sit back and exploit their surrent IP - they emphasised their ongoing research efforts that will be needed to stay ahead. The technology is by no means fully mature yet and there are both technology gains and volume cost efficiencies still needed and achievable. They are careful about patent protection where needed but some of their advantage comes from know-how which they choose not to patent because putting it in the public domain would give too many clues to the competition to follow. For that reason they only partner with global scale businesses that they trust and would never get units made by contract manufacturers.

There has been quite a bit of corporate activity in the field - Phil showed a slide with £1bn invested by OEM's over the last 18 months. (The slide pack is now up on their website). The licensing deals that Ceres have signed have been non exclusive so far I believe both in terms of industry and geography. My own feel is that it seems to be a pattern of OEM's buying stakes to protect theirpositions and access to technology, and the share allotment resolutions that were passed at the AGM would allow for a further partner to buy in if they wanted to. So I think that's more likely than an outright takeover but given the relative scale of Ceres vs the OEM's it might only take one major CEO to decide differently.

6th Dec '19

Thanks John, that's great.

I have bought shares in this company as I believe it has an excellent model and potential. Great for portfolio diversification, I am also looking closely at ITM Power.

This form of energy is closer to what the future will be in my opinion as I have never totally been sold on wind power, solar etc as there is such a need for "old fashioned" energy to build the turbines in the first place i.e. steel, concrete etc

Time will tell though!

Many thanks again for your diligence and response

Happy Investing

James

richard pugsley

"Hats Off" to the writer, a very interesting insight into Ceres and their market. Recent SP strength would suggest there's an awakening to the acceleration of demand for alternative energy going mainstream. Industrialists & financiers are starting to play catch-up. The likely outcome is the exponential demand & growth for fuel cells in order to balance the increasing need for energy against the growing pressure of global warming. Ceres seems to appear at The right place at The right time. Likely dividends in 3- 4 years is fairly low risk to me and I'm in.

29th Jan '20

Wow, this is moving at a fair clip!! I'm struggling to work out how to value it now,

ie whether to add more shares?

Any ideas?

tombuz

30th Jan '20

Late thanks to John for his excellent report alerting to me to this stock. Now my most valuable stock following increased shareholding by Bosch.

Quornwood5

16th Feb '20

Long may the sp rise,it has great potential,good report and it’s a British company,

Ceres Power AGM 04/12/19

Unlock the rest of this article with a 14 day trial

About the Author

JohnEustace

12 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...